Tag Archives: business

VAT – Proof of evidence of Intra-EC supplies

By   23 September 2015
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A B2B supply of goods from one Member State to another (a dispatch) is VAT free (with the recipient dealing with acquisition tax in the Member State of receipt). However, in order to VAT free treatment to apply evidence that the goods have moved cross-border must be provided and satisfy the authorities in the Member State of dispatch.

The level of evidence and type of documents required to support the right to VAT free treatment varies significantly between Member States. This has led to confusion and difficulties for businesses.

As a result the EC VAT Expert Group* have, this week, produced a paper (paper 46) named “‘Proof of evidence of Intra-EU supplies’” Here: 46 – Proof of IC Supplies

As well as identifying the wide discretion afforded to Member States as to the type of documents required, it notes that this discretion and lack of clarity often leads to disproportionate compliance burdens for businesses involved in the cross border supply of goods. This also results in the fundamental principle of fiscal neutrality and the free movements of goods being impaired.

In summary

 The Group’s findings may be summarised:

  •  Diversity of documentation

Most Member States rely on a myriad of documents which may not be listed in national legislation. Such diversity is a problem and may require businesses to provide documentary evidence that cannot be reasonably obtained. This practice does not reconcile with principles established by the ECJ. The paper adds that tax authorities tend to focus on certain formalities and not permit alternative evidence.

  •  Local initiatives

The paper notes that based on Article 131 of the VAT Directive, and often in light of the fight against fraud, tax authorities are introducing local initiatives. The compatibility of these with the EC framework may be questioned and is causing increasing burdens and costs on legitimate taxpayers.

  •  Importance given by tax authorities to the “knowledge test”

The paper considers that the level of demand from tax authorities to document intra-EC trade should not be upgraded because of fraud cases. Documentary evidence is of a type fraudsters would typically provide. The wide margin of interpretation left to tax authorities and judges regarding concepts such as “good faith” means that further guidance may be required. This, however, should not extend up to a requirement for suppliers to show evidence to authorities that their customers acted in good faith.

  •  Diversity of practices; timing versus legal certainty

The diversity of approaches across EC Member States generates costs and increase risks for businesses operating in different Member States.

Conclusion

The paper considered some recent ECJ case law on cross-border transactions and concluded VAT free treatment should be granted to the supplier when:

1)    It demonstrates that the transaction meets the substantive criteria of that provision, namely that it is entered into with another taxable person in a Member State other than that in which dispatch or transport of the goods begins. This would be done with the supplier holding at least three non-contradictory documents or elements certifying the transport or dispatch to another Member State.

2)    In this context, a reasonable customer assessment could be expected from taxpayers when tax authorities audit whether the transactions are taking place in the context of fraud and/or abuse.

Next Steps

It is recommended that new guidance could be adopted in an Implementing Regulation or an explanatory note to the relevant Articles in the VAT Directive could be prepared by the Commission.

It will be interesting to see if these recommendations are adopted.  It would make life a lot more straightforward for businesses who trade cross-border in the EC.  Although the UK has one of the most practical regimes in this respect, even genuine movements of goods from the UK can result in an unexpected and unwelcome VAT charge because of a lack of specific documentation.

* The VAT Expert Group assists and advises the European Commission on VAT matters. Details here 

Announcement

By   11 September 2015
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MASTER LOGO - LARGE:Layout 1Marcus Ward Consultancy Ltd is pleased to announce the acquisition of the professional services practice of the consultancy called: VATAdvice.  This longstanding and highly regarded practice based in Cambridgeshire is owned by Les Howard a well-known face in the VAT world.  Les will continue his VAT support for charities and involvement with the Tax Tribunal.

Director Marcus Ward commented “There is a definite synergy between the two companies and I am pleased that I can continue to help Les’ clients with the highest level of service that I know they have been accustomed to.  This will expand the practice’s existing offering to accountancy and legal firms. We are able to continue to offer VAT advice in the specific areas of; land and property, international transactions, and not for profit bodies as well as dealing with any other VAT issues. We are happy that Les has chosen us to carry on looking after his numerous clients and we aim to make the handover as smooth as possible for all of them”.

Marcus Ward Consultancy Ltd was formed two years ago to help businesses through the increasingly complex VAT regime. It has grown quickly in London and East Anglia and has clients across the world. It is a professional practice committed to providing the highest quality indirect tax advice in a timely and understandable way.  It has expertise in both EC and UK legislation and over 25 years of indirect tax experience.

It is extremely commercially minded and works on the principle of “Leave VAT to us and you can concentrate on growing your business”.

It prides itself in defending businesses against unfair attacks from HMRC.

Enquires: marcus.ward@consultant.com

Telephone: 07748 117935

 

Charities and VAT

By   7 September 2015
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Overview

Surely charities don’t have to pay taxes?

This is a common myth, and while charities do enjoy some VAT reliefs, they are also liable for a number of VAT charges.

Charities have a very hard time of it in terms of VAT, since not only do they have to contend with complex legislation and accounting (which other businesses, no matter how large or complicated do not) but VAT represents a real and significant cost.

By their very nature, charities carry out “non-business” activities which means that VAT is not recoverable on the expenses of carrying out these activities.  Additionally, many charities are involved in exempt supplies, eg; fundraising events, property letting, and certain welfare and educational services, which also means a restriction on the ability to recover VAT on attributable costs.

These two elements are distinct and require separate calculations which are often very convoluted.  The result of this is that charities bear an unfair burden of VAT, especially so since the sector carries out important work in respect of; health and welfare, poverty, education and housing etc.  Although there are some specific reliefs available to charities, these are very limited and do not, by any means, compensate for the overall VAT cost charities bear.

Another issue is legal uncertainty over what constitutes “business income” for charities, especially the VAT status of grants.  It’s worth bearing in mind here the helpful comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.

Many charities depend on donations which, due to the economic climate have fallen in value at a time when there is a greater demand on charities from struggling individuals and organisations.

What can be done?

  • Ensure any applicable reliefs are taken advantage of.
  • If significant expenditure is planned, ensure that professional advice is sought to mitigate any tax loss.
  • Review the VAT position to ensure that the most appropriate partial exemption methods and non-business apportionment is in place.
  • Review any land and property transactions. These are high value and some reliefs are available. Additionally it is possible to carry out planning to improve the VAT position of a property owning charity.
  • Review VAT procedures to ensure that VAT is declared correctly. Penalties for even innocent errors have increased recently and are incredibly swingeing.
  • Consider a VAT “healthcheck” which often identifies problems and planning opportunities.

We have considerable expertise in the not for profit sector and would be pleased to discuss any areas of concern, or advise on ways of reducing the impact of VAT on a charity.

More detail on VAT and Charities for guidance

Business activities

It is important not to confuse the term ‘trading’ as frequently used by a charity to describe its non-charitable commercial fund-raising activities (usually carried out by a trading subsidiary) with ‘business’ as used for VAT purposes. Although trading activities will invariably be business activities, ‘business’ for VAT purposes can have a much wider application and include some or all of the charity’s primary or charitable activities.

Registration and basic principles

Any business (including a charity and NFP entity or its trading subsidiary) that makes taxable supplies in excess of the VAT registration threshold must register for VAT. Taxable supplies are business transactions that are liable to VAT at the standard rate, reduced rate or zero rate.

If a charity’s income from taxable supplies is below the VAT registration threshold it can voluntarily register for VAT but a charity that makes no taxable supplies (either because it has no business activities or because its supplies or income are exempt from VAT) cannot register.

Charging VAT

Where a VAT-registered charity makes supplies of goods and services in the course of its business activities, the VAT liability of those supplies is, in general, determined in the normal way as for any other business. Even if VAT-registered, a charity should not charge VAT on any non-business supplies or income.

Reclaiming VAT

This is a two stage process. The first stage in determining the amount of VAT which a VAT-registered charity can reclaim is to eliminate all the VAT incurred that relates to its non-business activities. It cannot reclaim any VAT it is charged on purchases that directly relate to non-business activities. It will also not be able to reclaim a proportion of the VAT on its general expenses (eg; telephone, IT and electricity) that relate to those non-business activities.

Once this has been done, the remaining VAT relating to the charity’s business activities is input tax.

The second stage: It can reclaim all the input tax it has been charged on purchases which directly relate to standard-rated, reduced-rated or zero-rated goods or services it supplies.

It cannot reclaim any of the input tax it has been charged on purchases that relate directly to exempt supplies.

It also cannot claim a proportion of input tax on general expenses (after adjustment for non-business activities) that relates to exempt activities unless this amount, together with the input tax relating directly to exempt supplies, is below the minimis limit.

Business and non-business activities

An organisation such as a charity that is run on a non-profit-making basis may still be regarded as carrying on a business activity for VAT purposes. This is unaffected by the fact that the activity is performed for the benefit of the community. It is therefore important for a charity to determine whether any particular transactions are ‘business’ or ‘non-business’ activities. This applies both when considering registration (if there is no business activity a charity cannot be registered and therefore cannot recover any input tax) and after registration.  If registered, a charity must account for VAT on taxable supplies it makes by way of business. Income from any non-business activities is not subject to VAT and affects the amount of VAT reclaimable as input tax.

‘Business’ has a wide meaning for VAT purposes based upon Directive 2006/112/EC (which uses the term ‘economic activity’ rather than ‘business’), UK VAT legislation and decisions by the Courts and VAT Tribunals.  An activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge made is less than cost. If the charity makes no charge at all the activity is unlikely to be considered business.

An area of particular difficulty for charities when considering whether their activities are in the course of business is receipt of grant funding.

Partial Exemption

The VAT a business incurs on running costs is called input tax.  For most businesses this is reclaimed on VAT returns from HMRC if it relates to standard rated or zero rated sales that that business makes.  However, a business which makes exempt sales may not be in a position to recover all of the input tax which it incurred.  A business in this position is called partly exempt.  Generally, any input tax which directly relates to exempt supplies is irrecoverable.  In addition, an element of that business’ general overheads are deemed to be in part attributable to exempt supplies and a calculation must be performed to establish the element which falls to be irrecoverable.

Input tax which falls within the overheads category must be apportioned according to a so called; partial exemption method.  The “Standard Method” requires a comparison between the value of taxable and exempt supplies made by the business.  The calculation is; the percentage of taxable supplies of all supplies multiplied by the input tax to be apportioned which gives the element of VAT input tax which may be recovered.  Other partial exemption methods (so called Special Methods) are available by specific agreement with HMRC.

My flowchart may be of use: partial exemption flowchart 

De Minimis

There is however relief available for a business in the form of de minimis limits.  Broadly, if the total of the irrecoverable directly attributable (to exempt suppliers) and the element of overhead input tax which has been established using a partial exemption method falls to be de minimis, all of that input tax may be recovered in the normal way.  The de minimis limit is currently £7,500 per annum of input tax and one half of all input tax for the year.  As a result, after using the partial exemption method, should the input tax fall below £7,500 and 50% of all input tax for a year it is recoverable in full.  This calculation is required every quarter (for businesses which render returns on a quarterly basis) with a review at the year end, called an annual adjustment carried out at the end of a business’ partial exemption year.  The quarterly de minimis is consequently £1,875 of exempt input tax.

Should the de minimis limits be breached, all input tax relating to exempt supplies is irrecoverable.

Summary

One may see that this is a complex area for charities and not for profit entities to deal with. Certainly a review is almost always beneficial, as are discussions regarding partial exemption methods.

Please click here for more information on our services for charities.

VAT Reliefs for Charities. A brief guide.

By   3 August 2015
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Charity and Not For Profit entities – a list of VAT reliefs.

Unfortunately, charities have to contend with VAT in much the same way as any business. However, because of the nature of a charity’s activities, VAT is not usually “neutral” and becomes an additional cost. VAT for charities often creates complex and time consuming technical issues which a “normal” business does not have to consider.

There are only a relatively limited number of reliefs specifically for charities and not for profit bodies, so it is important that these are taken advantage of. These are broadly:

    • Advertising services received by charities;
    • Purchase of qualifying goods for medical research, treatment or diagnosis;
    • New buildings constructed for residential or non-business charitable activities;
    • Self-contained annexes constructed for non-business charitable activities;
    • Building work to provide disabled access in certain circumstances;
    • Building work to provide washrooms and lavatories for disabled persons;
    • Supplies of certain equipment designed to provide relief for disabled or chronically sick persons;

There are also special exemptions available for charities:

    • Income from fundraising events;
    • Admissions to certain cultural events and premises;
    • Relief from “Options to Tax” on the lease and acquisition of buildings put to non-business use.
    • Membership subscriptions to certain public interest bodies and philanthropic associations;
    • Sports facilities provided by non-profit making bodies;

The reduced VAT rate (5%) is also available for charities in certain circumstances:

    • Gas and electricity in premises used for residential or non-business use by a charity;
    • Renovation work on dwellings that have been unoccupied for over two years;
    • Conversion work on dwellings to create new dwellings or change the number of dwellings in a building;
    • Installation of mobility aids for persons aged over 60.

Although treating certain income as exempt from VAT may seem attractive to a charity, it nearly always creates an additional cost as a result of the amount of input tax which may be claimed being restricted. Partial exemption is a complex area of the tax, as are calculations on business/non-business activities which fundamentally affect a charity’s VAT position. I strongly advise that any charity seeks assistance on dealing with VAT to ensure that no more tax than necessary is paid.  Charities have an important role in the world, and it is unfair that VAT should represent such a burden and cost to them.

I have to charge myself VAT?!

By   1 July 2015
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I have to charge MYSELF VAT?!

How comes?!

Well, normally, the supplier 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. Don’t get caught out!

Here are just some of the situations when you have to charge yourself VAT:

Purchasing services from abroad

These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ procedure must be applied. Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax. 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 creating a level playing field between purchasing from the UK and overseas.

Accounting for VAT and recovery of input tax.
Where the reverse charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
      1. account for output tax, calculated on the full value of the supply received, in Box 1;
      2. (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
      3. include the full value of the supply in both Boxes 6 and 7.
Value of supply: The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply: The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.

Purchasing goods from another EC Member States

Something similar to reverse charge; called acquisition tax, applies to goods purchased from other EC Member States. These are known as acquisitions (they are imports if the goods come from outside the EC and different rules apply). The full value of the goods is subject to output tax and the associated input tax may be recovered by the business acquiring if the goods are used for taxable purposes. If you‘re not already registered for VAT in the UK and acquire goods worth £82,000 or more in the UK from other EC countries, you will have to register for VAT in the UK on the strength of the value of the acquisition tax. A business will also have to complete an Intrastat Supplementary Declaration (SDs) if its acquisitions of goods from the EC exceed an annual amount – currently £1.5 million.

Intrastat_flow_diagramMore details on Intrastat Supplementary Declarations here

Deregistration

Any goods on hand at deregistration with a total value of over £1,000 on which input tax has been claimed are subject to a self supply. This is a similar mechanism to a reverse charge in that the goods are deemed to be supplied to the business by the business and output tax is due. However, in these circumstances it is not possible to recover any input tax on the self supply.

Flat Rate Scheme

There is a self supply of capital items on which input tax has been claimed when a business leaves the flat rate scheme (and remains VAT registered).

Mobile telephones

In order to counter missing trader intra-community fraud (‘MTIC’), supplies of mobile ‘phones and computer chips which are made by one VAT registered business to another and valued at £5,000 and over are subject to the reverse charge. This means that the purchaser rather than the seller is responsible for accounting for VAT due.

Land and buildings…. and motor cars

There are certain circumstances where land and buildings must be treated as a self supply… but that is a whole new subject in itself… as is supplies in the motor trade.

Even if the result of a self-supply or reverse charge is VAT neutral HMRC is within its rights to assess and levy penalties and interest in cases where the charge has not been applied; which always seems unfair.  However, more often than not simple accounting entries will deal with the matter…. if the circumstances are recognised and it is remembered to actually make the entries!

VAT – Retrospective input tax claim opportunity for charities and not for profit bodies.

By   22 June 2015
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The Upper Tribunal has decided In the University Of Cambridge case that costs incurred on running its endowment fund relate to the university’s overall economic activity in general and consequently it is possible to recover an element of it.  The full judgement here

This will impact on all charities and similar bodies which have non-business activities that support their business activities. 

Please contact us if your charity is in a similar position because if past input tax claims have been restricted as a result of HMRC’s interpretation (which is highly likely) it is possible to make a claim which covers the last four years’ VAT costs.

VAT on Crowdfunding?

By   28 May 2015
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The EC is has begun an investigation into whether VAT should apply to crowdfunding activities.

An alternative is for the Commission to consider whether crowdfunding should be covered by the exemption for financial services.  In my view this seems unlikely.

So what could the outcome be if VAT is applicable to crowdfunding?  Well, a large number of UK projects will face a 20% VAT liability on investor returns. This is especially relevant to the popular “rewards crowdfunding”, where payments by investors are made in return for products or services to be developed as a result of the fundraising. These rewards projects may include; films, albums, or software development, which are offered “free” or at a reduced rate. It would appear that in these cases, consideration is flowing in both directions.

The Commission may also decide that crowdfunding intermediary services offered by many platforms will become liable to VAT.

The current position is that the Commission has now referred the question of crowdfunding to the EU VAT Committee.

More on this subject as soon as we have it.

VAT – The Future for the EC Digital Single Market

By   11 May 2015
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VAT – The Future for the EC Digital Single Market

The EC has announced its plans for its VAT digital single market in respect of online sales. Full details are here and here.

The highlights are:

• Extension of MOSS to intra-EC and third country online B2C sales of goods.

• Introduction of a new EC-wide VAT threshold to help start-up businesses.

• Ending current distance selling thresholds.

• Allowing for domestic controls, including a single audit of cross-border sales.

• Removal of the VAT exemption for the import of small consignments form third countries.

• Removal of barriers to cross-border sales eg; geo-blocking and costs.

This is likely to have a huge impact on the way businesses deal with VAT on sales of goods to individuals overseas. If the introduction of MOSS is anything to go by, we may be in for a bumpy ride.

VAT – Business Entertainment Flowchart. What input tax may I recover?

By   11 May 2015
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VAT – Recovery of input tax incurred on entertainment

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable.  The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EC involvement and case law.  Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances.  It seems reasonable to treat entertaining costs as a valid business expense.  After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings.  However, HMRC sees things differently and there is a general block on business entertainment.  It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT.  It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

I thank my friend and colleague Leila Ong for help with this, and also with the series of presentations we have recently carried out and which, amongst other subjects, covered business entertainment. Should you require VAT training or presentations, don’t forget our comprehensive service here which can be tailored to your needs.

VAT -Business Entertainment Flowchart

Business Entertainment flow chart

Download here: VAT Business Entertainment Input tax recovery flowchart

VAT Planning Overview – The Four “A”s

By   23 March 2015
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To a degree, VAT planning may be considered as something of an abstract concept.  It may be straightforward, or very complex, but what does all successful VAT planning have in common?  What process should be applied in order to get the right solution and to ensure that nothing is missed?   Well this is my technique and it helps me to focus on what is necessary:

The planning process may be broken down into four distinct elements:

Planning process – The four As

  • Ascertainment
  • Analysis
  • Alternatives
  • Action

One must initially obtain all relevant information and consider the appropriate legislation, case law and HMRC documents etc – Ascertainment

In my experience, the most difficult part of this is obtaining all of the relevant information.  It is not always clear if you have received everything available – so it is often difficult to establish what is relevant and what is not.  The skill is asking the right questions of course.  Any competent VAT adviser should be able to “get the answer” if (s)he has the full picture.

Then one must analyse the information – Analysis

Whether it is reading contracts closely, considering EC legislation, reviewing audit trails, searching case law, looking at documentation or carrying out calculations a full analysis is vital in the process of delivering accurate, useful and relevant advice.

The next step is to use the analysis to construct some various alternatives on how to proceed – Alternatives

The most appropriate solution may present itself immediately, or various structures may need to be considered in detail in order to find some workable alternatives.  It is important not to miss anything at this point and to communicate properly with one’s client.  Consideration is required of a client’s attitude to, inter alia; complexity, risk, time invested and tax in general in order to properly tailor VAT advice.

Finally, consideration is given to the alternatives and a decision made on what action to take – Action

This is another point at which good communication with one’s client is important.  The client needs to understand the technicalities, the risks, the impact on business, the resources required etc in order to make an informed decision.  A good adviser will also be aware of the appropriate level of assistance required with implementation. I also find it helps if the worst case scenario is explained in each alternative and the level of resistance form HMRC one is likely to encounter.  I also always bear in mind that most people do not “speak VAT jargon”, spend their waking hours studying indirect tax legislation or reviewing VAT cases, so clear and straightforward English is needed! (Also, I find my diagrams and flowcharts created at meetings a help, even if just to amuse clients with my artistic skills!)

© Marcus Ward Consultancy Ltd 2015