Category Archives: Valuation

VAT: Staff costs – The San Domenico Vetraria SpA case

By Marcus Ward 24 August 2020

Latest from the courts

In the San Domenico Vetraria SpA CJEU case the issue was the treatment of the secondment of staff by an Italian parent company to its subsidiary and the reimbursement by the subsidiary company of the costs incurred. Was there a VAtable supply?

Background

The issue was whether the relevant payment represented a supply of services ‘for consideration’. The parent company seconded one of its directors to its subsidiary and a charge was made based solely on a reimbursement of actual costs. The Italian domestic court ruled that the transaction was outside the scope of VAT on the basis that there was no consideration paid or received and therefore no supply of services.

Decision

The court ruled that despite the fact that the value of the payment to the parent company was limited to the parent company’s costs this did not mean that consideration for the director’s secondment was absent. Therefore, as consideration flowed in both directions, a taxable supply took place such that VAT was due, the claim of input tax made by the subsidiary was correct and the Italian authorities were incorrect to deny credit for it.

The President of the Chamber stated in the ruling that “The amount of the consideration, in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service, is irrelevant in that regard”. It was immaterial that no profit was made, and the absence of such profit did not affect the VAT treatment.

There was a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

Commentary

This is a useful clarification/confirmation. The supply was not a disbursement (details here) so it was a supply by the parent company. More on inter-company charges here.

Planning

If the recipient company was partly exempt or unable to reclaim the input tax for any reason, the VAT would have represented a real cost. So, would there be a way to avoid this charge? The answer (in the UK at least) is yes. If the director had a joint contract of employment with both companies, there would be no supply. Also, if the two companies were part of the same VAT group, the “supply” would be disregarded, so there would be no VAT cost for the subsidiary.

VAT: New HMRC guidance on amendments to leases due to COVID 19

By Marcus Ward 7 August 2020

HMRC has published guidance: Revenue and Customs Brief 11 (2020) on how some arrangements between landlords and tenants affect VAT (and Stamp Duty Land Tax). HMRC recognises that such changes have become more frequent as a result of the COVID-19 pandemic.

As a result of the current pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. The brief provides guidance on the appropriate VAT treatment of the most common lease variations, specifically those:

which vary the amount of rent a tenant pays
where a lease extension is being agreed

As always with VAT, the correct treatment will depend on the actual agreements which the landlord and tenant enter into.

Examples

Examples of lease variations are:

period of reduced rent
rent-free period
rent holiday

In the guidance HMRC give examples of four examples of lease variations, but the main issue in all of them is what the tenant does in return for the variation; if anything.

VAT Treatment

Generally speaking, if a tenant makes no payment there is no supply, and so no change in the tax liability of the supply made by the landlord to the tenant. However, in cases where the tenant does something in return for a reduction in rent (which equates to consideration, albeit non-monetary) this is usually a supply by the tenant to the landlord. An example of this is; if the tenant agrees to carry out work to the building for the landlord’s benefit.

In such cases the rent reduction is equal to the value of that supply and the landlord must account for the VAT as though the rent was still being paid (if they have opted to tax the property).

Value of landlord’s supply

If the tenant does nothing in return for a reduction in the rent payable, output tax is only due on the reduced or deferred amount of rent received by the landlord- assuming an option to tax is in place.

Invoices

If both supplies are taxable at the standard rate, the amounts of VAT due on each supply are likely to be similar and the landlord and tenant will need to issue VAT invoices to each other. The input tax claimable is dependent on the overall partial exemption status of the parties. It is not possible to “net-off” the value of the supplies.

Commentary

There have been no changes to legislation or HMRC’s approach in these cases, but the guidance id a helpful reminder that VAT (and SDLT) must be considered in any lease variations.

VAT: Post Brexit – low value consignments. New rules

By Marcus Ward 27 July 2020

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

LVC Relief, which relieves import VAT on consignments of goods valued at £15 or less will be abolished
Online marketplaces, where they are involved in a sale, will be responsible for collecting and accounting for VAT
If no online marketplace is involved, the overseas seller will be required to register in the UK
LVC B2B sales will be subject to the new rules. However, where the business customer is VAT registered in the UK VAT will be accounted for by the customer by a reverse charge
Although the new rules mean that there will no longer be any VAT to collect at the border, Customs declarations will still be required at import, although these will be simplified
For goods imported by UK VAT registered businesses which are not covered by the provisions will be able to use postponed VAT accounting
Sales made by persons who are not in business are outside the scope of the new measures. This includes gifts and consignments sent from consumer to consumer

VAT: New government guide to imports and exports from/to the EU post Brexit

By Marcus Ward 20 July 2020

On 13 July 2020 the Government published new guidance which sets out procedures for businesses moving goods between GB and the EU from 1 January 2021. These do not cover the movement of goods between GB and Northern Ireland which are covered by different rules.

On 1 January 2021 the transition period with the EU will end, and the UK will become a “third country” and as such, it will be required to operate a full, external border, in a manner similar to the UK’s current position with the Rest of World (ROW). This means that controls will be placed on the movement of goods between GB and the EU for the first time in decades.

The principles of the so-called “Core Model” will apply to all goods movements between GB and the EU, regardless of the mode of transport of the movement.

HMRC has stated that, to afford industry extra time to make necessary arrangements, it has taken the decision to introduce the new border controls in three stages up until 1 July 2021.

The guidance covers the core process of;

customs declarations
customs duty
import VAT
safety and security declarations (imports and exports)

It sets out actions that businesses should take now (especially in light of the coronavirus position), as they will be required regardless of the outcome of continuing negotiations (which, let’s face it, are likely to amount to nothing).

Some other changes will affect only specific goods movements, eg; foodstuffs which will include the need for special certifications, entering the country via specific locations, and undergoing
additional checks at the border.

If not already in place, businesses need to:

apply for a GB eori number
apply for a duty deferment Account
prepare to pay or account for VAT on imported goods
ensure drivers have correct International Driving Permits
consider commercial arrangements
consider incoterms
obtain the Commodity Code of goods
establish the customs value of goods
consider how customs declarations to HMRC systems will be made and the use of an Customs intermediary

The EC has published a new version of the Guidance on Customs on 14 July 2020.

This a comprehensive guide is absolutely essential reading for any business which imports or exports goods cross border (transactions known as acquisitions and dispatches from/to the EU pre-Brexit). The publication demonstrates that there will be considerably more red tape and delays which will not reduce in the future. The marketability of GB goods in the EU is unlikely to increase and, if there is no alternative to importing goods from the EU, the cost and time taken to purchase will grow.

Good luck everybody!

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VAT cut for hospitality – Summer Statement 2020

By Marcus Ward 8 July 2020

In today’s Summer Statement Rishi Sunak announced that VAT will be cut from the current rate of 20% to 5% for the next six months in respect of hospitality and tourism which includes;

eat in food in cafes, restaurants, bars, pubs etc

holiday accommodation; hotels, B&Bs etc

attractions such as cinemas, theme parks and zoos etc

The cut lasts from 15 July 2020 until 12 January 2021.

Around two million people work in the hospitality sector and it has been one of the hardest hit by Covid-19 and the government has recognised that it warrants further support. It is estimated that the move will benefit more than 150,000 businesses and consumers. This should encourage more consumer spending and help UK tourism.

Updates

HMRC has updated the relevant guides:

Notice 701/14 Food products and Notice 709/1 Catering, takeaway food

Notice 709/3 Hotels and holiday accommodation

Tourist attractions

Reductions to the relevant flat rate schemes (FRS) rates have also been announced. The two most relevant categories are catering and accommodation.

Commentary

A temporary cut of the standard rate from 17.5% to 15% was put in place during the financial crisis of 2008, but, by common consent, its impact was limited. So it remains to be seen how successful this announcement will be. It is not anticipated that the cut will be passed on to end consumers, but rather used to support potentially faltering businesses.

VAT and Duty on exports and imports post Brexit – a guide

By Marcus Ward 7 April 2020

Exports and Imports – post Brexit

VAT and Duty on exports and imports

With Brexit soon to become a reality, it is important that UK business understand the importance of exporting and importing goods. As matters stand, the UK will become a “third country” and as such will need to go through all the processes that apply to non-EU countries when goods cross borders to sales and purchases to/from existing EU countries. This mainly means customs duties applying to goods that have, to date, been duty free as the EU is a single market.

Whether importing or exporting, there are important VAT and duty rules and procedures. A business must ensure that it charges and pays the right amount of VAT and duty. The first step for moving goods into, or out of, the UK will be to obtain an EORI number. Details here.

Responsibilities for importers

the importer is normally responsible for clearing the goods through UK customs and paying any taxes
the supplier needs to provide the documentation an importer needs to clear the goods through customs (and to make payment to the supplier)
now, if you are importing (even from EU countries) you are likely to have to pay import duty. This cannot be reclaimed from HMRC
a business’ responsibilities depend on what it has agreed in the contract. To minimise the risk of disputes, your contract should use one of the internationally recognised Incoterms. These are explained here
check what import duty applies – import duty is based on the type of goods you are importing, the country they originate from and their value
HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail. Your Trade Association or your import agent may be able to assist with classification. You can find reputable freight forwarders through the British International Freight Association here
an importer may need proof of the origin of the goods to claim reduced import duty for goods from certain countries
a valuation document is also normally required for imports above a set value
complete an import declaration. This is normally done using the Single Administrative Document (SAD)
pay VAT and duty to get the goods released
the VAT applicable is the normal UK rate for the imported goods when sold in the UK
regular importers can defer payment of VAT and duty by opening a deferment account with HMRC. A security payment will need to be provided and payments must be via Direct Debit
From 1 January 2021 Postponed Accounting for import VAT to be introduced for all goods including those from the EU
account for VAT on returns
HMRC will send a C79 certificate showing the import VAT you have paid
VAT on imports (supported by C79 evidence) may be claimed in the same way as reclaims of input tax incurred on purchases in the UK
import duty cannot be reclaimed

Responsibilities for exporters

- the exporter is normally responsible for clearing goods outwards through UK customs
- the customer is normally responsible for overseas customs clearance and taxes (depending on the Incoterms). Further details on how other countries handle import duties and taxes are available from the Department for International Trade
- the exporter will need to provide its customer with the documentation they need to clear goods into their country (and to pay you)
- the exporter’s responsibilities depend on what it has agreed in the contract (see Incoterms above)
- the exporter will need to provide its customer with the documents they need to import the goods into their country. These documents can also be part of the process of getting paid
- as a minimum, the seller will need documents recording details of the:

- exporter
- customer
- goods and their value
- export destination
- how the goods will be transported
- route they will take
keep copies of all documents giving details of all the sales which have been made.
record the value of your exports on your VAT return
consider any responsibility you have for overseas customs clearance and taxes. Normally, as an exporter, you will have agreed that your customer handles this. However, take specialist advice, or use an expert agent, if you are responsible – this will depend on Incoterms

Tips

freight forwarders can handle customs clearance as well as transport
exporting can be simpler if you choose to sell to a single agent or distributor in an overseas country. However, this may not suit your export strategy
exports are usually zero-rated. However, exporters must keep proof that the goods have been physically exported along with normal commercial documentation
the exporter must declare the export. This is usually done by completing a Single Administrative Document (SAD), also known as form C88

Excise duty

check whether any goods being purchased are subject to excise duty
excise duty is payable on; fuel, alcohol and tobacco products
if goods are subject to excise duty, it is paid at the same time as payments for VAT and import duty are made
VAT is charged on the value of the goods plus excise duty

Customs warehouses

If you expect to store imports for a long time it will be worth considering using a Customs warehouse.

goods stored in a customs warehouse, will not be subject to import duty and VAT until they are removed from the warehouse
storage ‘in bond’ is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods

Relief for re-exported goods

it may be possible to take advantage of Inward Processing Relief (IPR) rules so that no import duty and VAT is payable
IPR can apply to imports that you process before re-exporting them

If you import or export regularly, find out about alternative procedures

For example, businesses that import regularly and in large volumes can use processes such as Customs Freight Simplified Procedures.

Summary

If you are new to acquisitions, importing or exporting, it may be worthwhile talking to an expert. This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods, and applying the correct procedures and rates will avoid assessments and penalties being levied. Planning may also be available to defer when tax is paid on imports and acquisitions.

VAT overpayments – HMRC to consider changes

By Marcus Ward 24 February 2020

VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

VAT: Payment handling charges – The Virgin Media case

By Marcus Ward 5 February 2020

Latest from the courts

In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:

whether payment handling charges were exempt via: The VAT Act 1994, Schedule 9, Group 5, items (1) and (5)
whether the supply was separate from other media services
which VAT group member made the supply?
whether there was an intra-group supply
whether there was an abuse of rights

Background

Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).

If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?

Contentions

The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.

HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member). In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.

Decision

It was found that:

there was a single supply made to customers
the supply was made by VML as the representative member of the VAT group
the £5 handling charge was an integral part of the overall supply
if not integral, the handling charge was an ancillary supply such that it took on the VAT treatment of the substantive supply
therefore, VMPL does not make any supply to the end users of the overall service
if VMPL does make a supply, it is an intra-group supply to VML which s disregarded for VAT purposes
VMPL does not have a free-standing fiscal identity for VAT purposes
if the FTT is wrong on the above points and VMPL does make a supply of payment handling services to customers, these supplies are taxable and not exempt (per Bookit and NEC) as the supply is simply technical and administrative and does not amount to debt collection
the arrangements do not constitute an abusive practice. The essential aim of the transactions are not to secure a tax advantage so HMRC’s argument on abuse fails

Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.

Summary

This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.

VAT Notice 700/7: Business promotions – updated

By Marcus Ward 10 January 2020

Further to my articles here, here, and here HMRC have, on 30 December 2019, updated the relevant Notice which covers, inter alia; business gifts, samples and promotional schemes.

The changes are summarised here:

Technical content has been updated to take account of developments in both law and policy on vouchers
A new section has been added as a result of the changes to the treatment of vouchers issued after 1 January 2019
The definition of the meaning of a gift has been amended
An explanation of the treatment of the disposal of obsolete stock has been added

This can be a complex area of VAT, especially valuation, and care should be taken when promotion schemes are being considered.

VAT: New guidance on Cryptoassets

By Marcus Ward 9 January 2020

HMRC Guidance

Further to my articles on cryptocurrencies here, here and here HMRC have update their guidance on cryptoassets which was published on 20 December 2019.

Background

VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.

The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.

Definition

Cryptocurrency (an example being Bitcoin) is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.

Cryptoassets

For VAT purposes, bitcoin and similar cryptoassets are to be treated as follows:

exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that:

- the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and
- there is no customer for the mining service

when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
charges (in whatever form) made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the conditions outlined in VAT Finance manual (VATFIN7200), will be exempt from VAT under The VAT Act 1994, Schedule 9, Group 5, item

The VAT treatments outlined above are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions.

Bitcoin exchanges

In 2014, HMRC decided that under The VAT Act 1994, Schedule 9, Group 5, item 1, the financial services supplied by bitcoin exchanges – exchanging bitcoin for legal tender and vice versa – are exempt from VAT.

This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). The appellant planned to set up a business which would exchange traditional currency for Bitcoin and vice versa. It was not intended to charge a fee for this service but rather to derive a profit from the spread (the difference between his purchase and sell price).

Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.

The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services carried out for consideration.

The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under VAT Directive Article 135(1) (e).

A supply of any services required to exchange exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under The VAT Act Schedule 9, Group 5 item 1.

Commentary

As always, the legislation and case law often struggles to keep pace with technology and new business activities. Although the focus of the guidance is more towards direct taxes, it is a helpful summary of HMRC’s interpretation of UK and EU law and decided case law.