Category Archives: Technology

VAT – Latest from the courts; use and enjoyment provisions

By   25 April 2016
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Telefonica Europe Plc and Telefonica UK Limited 

The VAT Use and Enjoyment provisions set out an additional layer of rules which establish the place of supply of certain services. They apply to; telecommunications and broadcasting services; electronically supplied services (for business customers); hired goods; and hired means of transport. Broadly, effective use and enjoyment takes place where a recipient actually consumes the services, regardless of any contractual arrangements, payment, or beneficial interest. The intention of this provision is to correct instances of distortion which remain as a result of considering only where the provider and the customer belong. HMRC give the example of supplies such as telecommunications services which are actually consumed outside the EC, to be subject to UK VAT. Of course, the converse is that it would be distortive for there to be no EC VAT on such services where they are consumed in the UK.

In the Upper Tribunal case of Telefonica Europe Plc and Telefonica UK Limited the dispute involved the way in which the appellant calculated the value of its mobile telephone services which were used and enjoyed outside the EC (and thus UK VAT free). Over a number of years Telefonica had an agreement with HMRC whereby the amount of outside the EC supplies was calculated by reference to revenue, ie; comparing call, text and data income relating to non-EC supplies to total income.

HMRC subsequently formed the view that this method of calculation was distortive because higher charges were made to non-EC users than EC consumers.  HMRC proposed a “usage methodology” which used call times, texts sent and volume of data used. As may be expected, this resulted in a lower percentage of supplies that were outside the scope of UK VAT thus increasing HMRC’s VAT take.

The appellant contended that the usage methodology was contrary to EC and UK VAT legislation.  Not surprisingly, the UTT rejected this argument, deciding that Telefonica had not established that HMRC’s proposal was unlawful.

So then the outcome would be expected to be that the usage methodology should be used, but no.  It was decided that the most accurate method would be one based on the time a customer has access to the network outside the EC; which differs from both the usage and revenue methods. 

This type of dispute is quite common and also appears regularly in partial exemption situations. There are nearly always alternative ways to view apportionment calculations and it pays to obtain professional advice; not only to ensure that a fair result is achieved, but as assistance with negotiations (which may avoid having to go to Tribunal).  

VAT e-audits: A warning

By   15 October 2015
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The increase in the sophistication and use of data analysis software has enabled HMRC and tax authorities worldwide to increase the number of indirect tax VAT e-audits.

This has led to an increase in, and higher quantum of; assessments, penalties and interest.  The use of more automated resources means that HMRC is capable of auditing a greater amount of information from a greater number of businesses.

Even greater care must be taken now with recording and reporting transactions and the application of calculations such as partial exemption.  The need for accurate and timely records has never been more important. It’s crucial that the basics of compliance are taken care of, as well as seeking advice and reviews on specific issues.

These issues are summarised here

Please contact us if you feel that your VAT systems need to be checked, or if you have any doubts about the accuracy of your business’ indirect tax reporting.

We offer a full range of reviews, from a straightforward healthcheck to a full report on a business.

As the severe motto has it:  Comply or die!

VAT – Are e-books books? Update on ECJ’s decision 5 March 2015

By   5 March 2015
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Books are zero rated for VAT purposes, but only (currently) if they are of the traditional dead tree variety. The zero rating does not extend to e-books which are standard rated for VAT. There has been a long standing argument between EC Member States (and between other interested parties) that similar content should not be taxed at different rates solely depending on the method of delivery. This argument is about to be tested in the courts. The UK is not permitted by the EC to extend its current zero rating for printed matter, however, it is expected that the contention in this case will be that the inclusion of new products will not extend the zero rating, but rather the development of technology has created a supply that should be covered by the existing zero rating legislation.

If it is accepted by the courts that all types of book should attract the same rate of VAT, it may mean that the rate will be equalised upwards. So, by the end of the year we could be looking at VAT of 5% being added to books, newspapers and other printed matter which was hitherto VAT free – A “tax on learning” as previous protests had it when there was a threat to tax free books.

UPDATE

The European Court of Justice (ECJ) has today ruled that France and Luxembourg must raise their reduced VAT rates on sales of  e-book. This will conclude ongoing disputes (see above) between EC countries over whether e-books may be treated similarly to printed books at the nil or reduced rates.  The UK and Germany were the main protagonists in challenging those Member States where e-books have been treated the same as printed versions.

Initially, Luxembourg and France began reclassifying e-books at the same rate as printed books – 3% and 5.5% in 2012. Subsequently, Italy and Malta joined them at the start of 2015, reducing the rates to 4% and 5%.

These rates where challenged by the UK and Germany who asked the EC to impose rules to ensure that e-books could not take advantage of the printed book rates.  Today, the ECJ published its ruling, stating that since e-books do not have the same physical characteristics as printed books and therefore cannot benefit from the printed book reduced VAT rules.

This decision does seem to go against common sense,but the ECJ’s hands were somewhat tied by the VAT rules which were introduced before e-books existed.

VAT implications of renewable energy sources

By   15 January 2015
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If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

 Further…

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows Member States to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

MOSShop opens!

By   7 October 2014
0

Just a reminder that the Mini One Stop Shop (MOSS) will open on 20 October 2014.

The MOSS is for suppliers of digital services to customers across the EC.

Official notification here

A full explanation of MOSS and digital supplies here

We advise that any provider of; telecoms, broadcasting and electronic services seeks specialist professional advice before the changes come into effect.  We have many clients that are involved in cross-border provision of digital services so are ideally placed to assist with whatever query you may have on this issue.

VAT implications of renewable energy sources

By   8 July 2014
1

If you own land and install solar panels (which we shall use as an example, although the rules apply equally to any way of generating renewable power), it is relatively straightforward; as you are either consuming the power, or are the provider supplying electricity back to the National Grid.

Where the position may get slightly more complicated is where a solar panel business buy the ‘space’ to install energy producing equipment from someone else. Many businesses are renting the roof space from others upon which to install the solar panels. The businesses may pay the roof owners with ‘free’ electricity in return for renting out this space. Supply of electricity to the owners of the site

For a solar panel business leasing a site, the supply of electricity to the owners of that site is deemed to be a supply of goods.

The business installing the solar panels is the taxable person (if they are, or should be registered for VAT) and they are supplying the owners of the site with a ‘cheap’ supply of electricity in the course of the furtherance of their business.

The supply of electricity for domestic use is a reduced-rate supply under Group 1 of Schedule 7A VATA 1994. The reduced rate of VAT is 5%. If the site owner is using the electricity for domestic purposes then the reduced rate of 5% should apply. If the electricity is being used for business purposes then the supply becomes standard-rated at 20%. However, if there is mixed use, then so long as more than 60% of the use is domestic then the whole supply will be treated as ‘qualifying use’ ie; domestic, and the 5% will apply to the entire amount. Generally speaking, VAT charged at 5% is fully or partly irrecoverable by the recipient.

So in this scenario, the land owner is providing something in exchange for this electricity use; the land owner is giving the solar panel business the use of his land. Therefore this is ‘consideration’ for a service; even if it is ‘non-monetary’ consideration.

This means that the solar panel business will have to calculate a value for this consideration and then charge 5% (or 20%) VAT as necessary, on this amount if they are VAT registered.

The value placed on this non-monetary consideration is not usually a concern for the land owner making the supplies of this land, as this land supply is itself exempt from VAT.

The supply of the land
This is a supply of land by the owner of the site. Unless the land has been ‘opted to tax’ (OTT) then this supply will be exempt from VAT. If the land has been OTT by the landowner – the parties will need to look at the valuation of the (non-monetary) consideration as this will be subject to VAT at 20%. If there is no OTT and the supply is exempt; for a non-VAT registered person, this will have no impact, and this income will not be included in taxable supplies which count towards the VAT registration threshold. If a VAT registered entity makes exempt supplies of land, consideration must be given to his partial exemption position.

VAT consequences of the Feed-In Tariff
In recognition of the higher cost of producing electricity in this manner, people participating in the Feed in Tariff scheme will receive payment under a “generation tariff”. This payment is not consideration for any supply and it is therefore outside the scope of VAT.

Supply of electricity to the electricity board
In addition to the Feed-In Tariff there is the additional income which you may receive from the electricity board ie; the “Export Tariff”. These payments are “consideration for supplies of electricity by people participating in the Feed in Tariff scheme to the electricity company, where they are made by taxable persons in the course of their business”. The export tariff is not outside the scope of VAT and therefore it is a supply of electricity made in the course of the furtherance of your business to the electricity supplier. It will attract standard rated VAT as it is not the supply for domestic use.

Update

A recent Court of Justice of the European Union (CJEU – the EU’s highest court) case has ruled in favour of the taxpayer after he argued that solar panels installed on his house constituted a business for VAT purposes. This is good news for any people who supply any energy into the grid and are paid a feed-in tariff (FiT) for doing so.

It means that anyone receiving the FiT can VAT register and reclaim (at least some) VAT incurred on the purchase and installation of solar panels plus input tax incurred on any other goods and services relating to the panels.

The supply and installation of “energy saving materials”, including solar panels, is currently subject to a reduced VAT rate of 5% in the UK. The European Commission is currently challenging this policy, arguing that the tax incentive goes beyond the scope of the law. The VAT Directive only allows member states to apply reduced VAT rates to a limited number of goods and services, which are specified in an annex to the directive. So the cost of buying and installing solar panels may increase in the future.

It is anticipated that HMRC will need to deal with “thousands” of extra registration applications resulting in significant additional VAT repayments.

Are e-books books?

By   21 May 2014
0

Books are zero rated for VAT purposes, but only (currently) if they are of the traditional dead tree variety. The zero rating does not extend to e-books which are standard rated for VAT. There has been a long standing argument that similar content should not be taxed at different rates solely depending on the method of delivery. This argument is about to be tested in the courts. The UK is not permitted by the EC to extend its current zero rating for printed matter, however, it is expected that the contention in this case will be that the inclusion of new products will not extend the zero rating, but rather the development of technology has created a supply that should be covered by the existing zero rating legislation.

If it is accepted by the courts that all types of book should attract the same rate of VAT, it may mean that the rate will be equalised upwards. So, by the end of the year we could be looking at VAT of 5% being added to books, newspapers and other printed matter which was hitherto VAT free – A “tax on learning” as previous protests had it when there was a threat to tax free books.

Treatment of transactions using Bitcoin and other similar cryptocurrencies

By   13 March 2014
1

HMRC have issued Revenue & Customs Brief 09/14 here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm
This provides guidance on the direct tax and VAT treatment of income received from, and charges made in connection with, activities involving Bitcoin and other similar cryptocurrencies. Bitcoin operates via a peer to peer network, independent of any central authority or bank. All functions such as issue, transaction processing and verification are managed collectively by this network.

The advent of cryptocurrencies such as Bitcoin is a new and evolving area. Bitcoin may be held as an investment (i.e. for trading with recognised currencies) or used to pay for goods or services at merchants where it is accepted. In the UK, there are already a number of outlets, including pubs, restaurants and internet retailers, that accept payment by Bitcoin.

In summary, the VAT treatment of Bitcoin activities will generally either be outside the scope of VAT or exempt from VAT (under Article 135(1)(d) of the VAT Directive), depending on the specific transaction involved. However, VAT will be due in the normal way on transactions involving any goods or services sold in exchange for Bitcoin or other similar cryptocurrency.

In the UK, as is the case with any other currency, the value of the supply of goods or services on which VAT is due will be the £sterling value of the cryptocurrency at the point the transaction takes place.

Please contact us if you would like more specific advice.

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