Tag Archives: EU-vat

VAT Distance Selling Q & As

By Marcus Ward 11 July 2016

VAT Distance Selling: What is it and how will it affect my business?

Q – My internet business is expanding and I am now selling goods all over the EC. Does this create any VAT issues?

A – It could do; if you are selling to individuals (or any other non-business entity) then you should be charging UK VAT regardless of where your customer belongs in the EC. However, when these type of sales reach a certain limit, you will be required to VAT register in each Member State in which the threshold is breached. These are called the Distance Selling rules and apply in situations where the seller is responsible where the supplier is responsible for the delivery of goods B2C; typically mail-order and increasingly goods purchased online (so called “delivered goods”).

Q – What are those limits?

A – Each Members state sets its own limit. However these may be broken down into two categories:

€ 35,000 (or near equivalent in domestic currency) Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Italy.

€ 100,000 (or near equivalent in domestic currency) Austria, Germany, Luxembourg, Netherlands, UK.

Q – What are the practical implications?

A – Each Member State has different rules for VAT registration and filing of returns. All dealings, save for a few Member States, are undertaken in the language of that country, so broadly, there could be 27 sets of rules and many languages to master in order to comply with the Distance Selling rules! Additionally, we find that some business are unaware of these rules, or discover the impact of them after the limits have been reached. This creates penalties for late registration and filing in nearly all Member States. However, mitigation (along the lines of “reasonable excuse” in the UK) in varying degrees is available in some countries. We have found that it is possible, via negotiation to have penalties reduced or removed after making full disclosure of past turnover. As one may expect, the approach varies from country to country.

Q – Do I have any choices?

A – Yes, although it is not necessary to register until the thresholds set out above are breached; it is possible to VAT register there on a voluntary basis rather than accounting for UK VAT. The considerations are usually; the VAT rate in the Member State concerned (compared to the UK) and; administrative simplification, ie; not having to change over from UK VAT to another Member State’s VAT regime when the limit is reached.

Q – But what if I have accounted for UK VAT on these sales already, what can be done about that? I don’t want to have to pay VAT twice to different authorities.

A – In our experience, HMRC do repay UK VAT overpaid if overseas output tax is due, but this sometimes becomes a struggle and HMRC require full explanation and precise evidence to support a repayment.

Q- Do these rules affect sales made to customers outside the EC?

A- No, these are usually zero rated as exports.

Q So I need to identify the location of all of my customers and monitor sales to ensure I comply with the rules and to identify whether to charge VAT, at what rate, and to which authority?

A – Yes, I am afraid so!

Please contact if you would like us to deal with overseas authorities on your behalf, or you would like assistance with technical issues or with language matters

VAT After Brexit

By Marcus Ward 27 June 2016

There have been many articles anticipating what would happen to Indirect Tax if the UK left the EU. Now the deed has been done we thought it would be a good idea to summarise what we actually know. This can be done very succinctly; “not very much”.

UK VAT legislation derives from the Euro-wide Principal VAT Directive (“PVD”) and consequently has the largest European dimension of any tax.

There are many factors which will impact on the future of VAT in the UK. The main one being which model the UK follows for trading with the EU, or whether it can negotiate a completely new model. Very broadly, and without going over ground that I’m sure has been covered many times since the vote, the four options are:

Membership of the EEA
Negotiated bilateral agreement
Advanced Free Trade Agreement
WTO membership

Each option is likely to result in differing VAT scenarios for trade, reporting and compliance. Until we understand what agreements will be made, it is likely that VAT life will go on in much the same way as it has done without the need for businesses to make any changes. Without a crystal ball it is impossible to say what the implications for Indirect Tax are, however, it is more than likely that any business which is involved in the following areas should be prepared for significant changes in the future:

Dispatches to the EU or acquisitions from the EU. It is likely that these will become exports and imports
Supplies of services to the EU or the purchase of services from the EU
Expenses incurred in the EU
Distance Selling
Triangulation
Financial services and insurance
Tour Operators’ Margin Scheme (TOMS)
MOSS supplies
Outsourcing and offshoring

It is likely that a domestic government may wish to reverse certain ECJ decisions imposed on the UK with which it disagrees. Leaving the EU will allow the UK freedom to set its own VAT rates and introduce its own legislation, although, practically and politically, it is not anticipated that the UK model will differ too sharply from the existing rules. At this stage however, this is mainly guesswork.

So, with a lot of negotiations in prospect, we are holding fire until we have more concrete information. It could be a bumpy ride, but one which isn’t about to start for some time.

In the meantime, we will keep you informed about any proposals and the introduction of any definite changes.

Watch this space!

VAT – Latest from the courts: A round up of partial exemption

By Marcus Ward 20 June 2016

The partial exemption calculation

The calculation is required to quantify the amount of input tax a partly exempt business is able to claim. A partly exempt business is one which makes a mixture of taxable and non-taxable (eg; exempt) supplies. Input tax attributable to exempt activities is not recoverable.

With certain businesses HMRC accept that the usual “partial exemption standard method” based on taxable turnover versus exempt turnover is either impractical, distortive, or inappropriate. In such cases the business submits an application for a partial exemption special method (PESM). This may be based on many various factors such as; floorspace, staff numbers, transaction counts, management accounting etc (or any combination). If HMRC accept that the proposal is fair and reasonable, a formal agreement will be entered into by both parties.

The question in this case was when a PESM is agreed with HMRC is there a requirement to round up figures to a whole percentage point?

According to the CJEU decision in Kreissparkasse Wiedenbrück the answer is no. It was decided that, via EC legislation, in cases where there is a PESM agreement in place there was no obligation to round up.

The view was that as a significant amount of PESMs are “sophisticated” (compared to the partial exemption standard method) they achieve a more accurate allocation of input tax between taxable and exempt activities and rounding would counter this accuracy.

Full case here

Please contact us if your business is partly exempt and you either have a PESM in place, are in the process of agreeing one, or feel that your input tax recovery is suffering by the use of the standard method.

VAT Latest from the courts – what is a business?

By Marcus Ward 8 June 2016

In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean: The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation, Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system. The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid. The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational. The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here

VAT – Latest from the courts; use and enjoyment provisions

By Marcus Ward 25 April 2016

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 – Overseas Holiday Lets; a warning

By Marcus Ward 8 February 2016

It is important to understand the VAT consequences of owning property overseas. It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £82,000 pa. and this is only likely if a number of properties are owned.

However, other EC Member States have nil thresholds for foreign entrepreneurs meaning that if any rental income is received, VAT registration may be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT there. Failure to comply with the domestic legislation of the relevant Member State means; payment of back VAT and interest and fines being levied. It is also not a good idea to provoke the interest of overseas tax authorities. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. Such claims may be restricted if the home is used for own use.

It should be noted that, unlike other types of rental of homes, holiday lettings are always standard-rated. Also, the letting of holiday homes is always treated as a business activity unless lettings are very infrequent. If lettings are a one-off or rare, evidence should be retained to evidence this fact. There is no set number of times a property can be let before it is treated as a business, and the interpretation may differ between different Member States. Details of taxable supplies and being in business here

Given that every EC Member State has differing rules to the UK, it is crucial to check all the consequences of letting property overseas.

A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”

If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.

Please contact us for further details. We have experience in dealing with overseas VAT matters on our clients’ behalf.

VAT legislation – relationship between EU and UK law. A guide

By Marcus Ward 22 January 2016

As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?

It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.

History

Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU. When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.

Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.

Intention

The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:

Harmonisation of VAT law
Harmonisation of content and layout of the VAT declaration
Regulation of; accounting, providing a common legal accounting framework
Common framework for detailed description of invoices and receipts
Regulation of accounts payable
Regulation of accounts receivable
Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system.
Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

EU Legislation as part of UK Legislation

EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.

Direct effect

The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” (Case: Becker). Also in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.

Primacy of EU Directives over UK legislation

A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.

Interpretation of UK law

If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (Case: English-Speaking Union of the Commonwealth).

Legal principles

In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.

Examples of some of these are the principle of:

Equality of citizens
Subsidiarity and proportionality
Non-discrimination on grounds of nationality
Fiscal neutrality
Legal certainty and the protection of legitimate expectations.

Practical application for most taxpayers

Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly. However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.

UK VAT Registration For Overseas Businesses – A Guide

By Marcus Ward 5 January 2016

When must an overseas business register for VAT in the UK?

This question is increasingly being asked by overseas entities which do business in the UK. So what are the requirements, and what choices are there?

Compliance

An overseas business must VAT register in the UK if:

• it makes any taxable supplies of goods and services in the UK in the course of furtherance of his business. These supplies could be of any description, but commonly are the sale of goods which are physically located in the UK and the operation of certain events that take place in the UK.

• the business is registered for VAT in another EC country, and it sells and delivers goods in the UK to customers who are not VAT-registered;so-called ‘distance sales’ (details here) and the value of those distance sales exceeds the relevant threshold (currently £70,000).

• it acquires goods in the UK directly from a VAT-registered supplier in another EC country and the total value of the acquisitions exceeds the acquisitions threshold.

• it makes a claim under the EC 8th Directive or EC 13th Directive and subsequently supplies the relevant goods in the UK.

If these tests are met, a supply is made in the UK. It does not matter in which country where the business “belongs” or where it’s staff or technical resources are located. A guide to the place of belonging here.

For VAT purposes, the UK includes the territorial sea of the UK (ie waters within twelve nautical miles of the coastline).

There is no need to register if the only UK supplies are those on which the customer is liable to account for any VAT due under the ‘reverse charge’ procedure.

An overseas trader may also be registered if:

• he has started in business but is not yet making taxable supplies, provided he can show the intention of making taxable supplies in the future as part of his business; or

• his turnover is below the threshold, provided he can prove to HMRC that he is carrying on a business for VAT purposes and making taxable supplies.

Consequences of registration

An overseas business which is registered or required to be registered for VAT in the UK must account for VAT in respect of those supplies and acquisitions taking place in the UK. It is also liable to VAT on imports of any goods into the UK and on the acquisition in the UK of excisable goods or of new means of transport from another EC country. It also usually means that any VAT incurred in the UK may be recovered as input tax. This is particularly relevant if import VAT is incurred on importing goods into the UK.

Registration options available

An overseas trader who is not normally resident in the UK, does not have a UK establishment and, in the case of a company, is not incorporated here, and which is required or entitled to be registered in the UK can normally choose between three registration options:

(1) It may appoint a VAT representative who will be jointly and severally liable for any VAT debts. The overseas trader must still complete a VAT registration form. In addition to this, both the overseas trader and the VAT representative must complete a Form VAT 1TR. It is understood that, in practice, very few businesses are prepared to provide the services of a VAT representative because they are unwilling to become liable for any VAT debts of the overseas trader.

(2) It may appoint an agent to deal with the VAT affairs. The agent cannot be held responsible to HMRC for any VAT debts and HMRC reserve the right not to deal with any particular agent. (In some cases, HMRC could insist that a tax representative is appointed although this cannot now be done where the overseas trader is based in a country where certain mutual assistance arrangements exist.) The overseas trader must still complete a VAT registration form. In addition, HMRC will need a letter of authority. A suggested letter of authority approved by HMRC is:

(Insert principal’s name) of (insert principal’s address) hereby appoints (insert name of UK agent or employee) of (insert address of UK agent or employee) to act as agent for the purpose of dealing with all their legal obligations in respect of Value Added Tax.

This letter authorises the above-named agent to sign VAT return forms 100 and any other document needed for the purpose of enabling the agent or employee to comply with the VAT obligations of the principal.

Signed (insert principal’s signature)

Date (insert date)

(3) It may deal with all the VAT obligations (including registration, returns and record-keeping) itself. To register, the overseas business should contact the Aberdeen VAT office at Ruby House, 8 Ruby Place, Aberdeen, AB10 1ZP (Tel: 01224 404807/818). This is known as a Non-Established Taxable Person (NETP) registration.

Summary

There can be confusion around this matter, not only from a technical aspect, but with an overseas business’ unfamiliarity with the UK authority’s requirements and also possibly language and communication problems. Additionally, the practical aspects of identifying the need to VAT register in the UK and the completion of forms etc can delay matters. Of course, just like any other VAT registration, there are penalties for not registering, or not registering at the appropriate time. There is also the reluctance of certain overseas businesses to deal with UK VAT at all. Unfortunately, a head in the sand attitude just stores up problems for the future. We have been called on to firefight on this topic a number of times, and it rarely ends well.

VAT Compound Interest – Latest

By Marcus Ward 24 November 2015

Proposed introduction of a new tax.

The Littlewoods case is slowly making its way through the court system with the CJEU ruling that there is a right to the taxpayer of adequate indemnity in respect of tax incorrectly collected via a mistake of law. There are myriad claims to which this will apply, especially “Fleming” claims where they covered a significant period of time a number of years ago.

HMRC has now applied to Supreme Court’s decision for permission to appeal the decision and we expect the Supreme Court’s verdict within the next month.

HMRC appear very concerned that it will ultimately be required to pay large amounts of interest to taxpayers who have suffered as a result of HMRC applying the relevant law incorrectly. Consequently, it has announced that the Summer Finance Bill 2015 will impose a 45% corporation tax charge on compound interest. There will be no right of set off or deduction for other losses. HMRC will withhold the corporation tax from any payment of interest made. This will take effect on 21 October 2015 (although the relevant legislation will not become law until 2016 indicating that HMRC is indeed running scared).

It is understood that there are a number of parties currently working on ways to challenge the legality of the proposed legislation.

Action

Claims already submitted

No immediate action is required, although it may be beneficial to review the basis of the claim, how it was made and what the status of it is currently.

New claims

For businesses which have received repayments due to HMRC error, it may be worthwhile reviewing the position to determine whether a claim for compound interest is appropriate and if so, to make a claim as soon as possible. We would, of course, be happy to advise on this and assist where necessary.

VAT – EC Commission drops plans for standard return

By Marcus Ward 4 November 2015

The European Commission (EC) has, this week, announced that it is to drop plans to introduce a standard VAT return across all 28 Member States.

The original idea was to assist businesses which are required to submit returns in different jurisdictions in different languages by harmonising the information required and standardising the methodologies across Member States.

Although the intention is/was laudable, it would have likely increased complexity for the UK VAT return which is one of the most straightforward.

The changes to VAT reporting was due to be introduced in 2017.

The original plan has met with little support and the Commission has decided to focus on other harmonisation measures.