Tag Archives: EU-vat

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.

VAT – An important ECJ case which will affect charities – Sveda

By Marcus Ward 28 October 2015

A benefit to charities?

In the case of Sveda (C-126/14) which was recently heard by the European Court of Justice (ECJ) the issue was whether input tax was recoverable on the construction of a recreational woodland path which ended at a shop that Sveda owned and made taxable supplies from. Full case here

90% of the construction costs were met by Grant received from the Lithuanian Ministry of Agriculture on the condition that the path was made available free of charge to the public for a period of five years. There was no dispute that the grant was outside the scope income for Sveda.

The authorities disallowed the VAT claimed on 100% of the costs on the grounds there was no link to taxable supplies since free access is a non-economic activity because there was no consideration paid to use the path. Alternatively, there was a contention that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

Sveda argued that, although the path could be used free of charge, the purpose was increase taxable sales from its shop (food, drink and souvenirs). This meant there was a link between the VAT incurred and its economic activity as a whole.

The ECJ rejected the view that the input tax should be blocked in its entirety or in part. Its view was that the expenditure was incurred with the intention of carrying out an economic taxable activity, even if there was no direct link to any one specific supply and use of the path was free. The VAT was overhead VAT. No exempt supplies (that would break the chain of deduction) took place.

So, although the path was used for a non-business activity (free access) the ECJ deemed that the input tax incurred on the costs of building the path was deductible. As there was a link to economic activities the VAT is treated as overhead and, in this case, fully recoverable.

Although Sveda is a commercial company and the decision will no doubt be of assistance to commercial entities, there may be a significant impact on charities and NFP organisations. This judgment highlights the basic right to deduct VAT where a link to taxable supplies made by a taxable person can be demonstrated. It does not matter whether the link is to one taxable supply or to all the taxable economic activities. The non-business use of the asset did not prevent recovery. The outcome would no doubt have been different if Sveda was only involved in building the path and just providing free access to it without also selling items form the shop.

On a personal note, this case has echoes of one I took to Tribunal for The Imperial War Museum – with a similar successful outcome. HMRC views here

Let’s hope it will be just as useful for the taxpayer as the landmark IWM decision.

If you think you, or a charity you are aware of, or a client of yours may be affected by this decision, please contact me. This may be the case if the charity undertakes both business and non-activities. I would always counsel that a charity should have its activities reviewed from a VAT perspective. There are usually savings that could be made.

VAT Distance Selling – avoidance structure now deemed ineffective

By Marcus Ward 26 October 2015

The EC Commission’s VAT Committee has recently issued new guidelines to counter perceived avoidance of registering for Distance Selling by businesses.

In cases where the supplier is responsible for the delivery of goods B2C; typically mail-order and increasingly goods purchased online (so called “delivered goods”) the supplier is required to VAT register in the EC Member State of its customer(s) once a certain threshold is met. For full details of Distance Selling see here.

In order to avoid having to register, some business have sought to avoid their supply falling within the definition of delivered goods by splitting the sale of goods and the delivery.

The UK raised concerns about the planning and structures put in place to obviate the need to register in other EC Member States. The VAT Committee has recognised these concerns and has today issued new guidelines on Distance Sales

In addition to the current rules (set out in Articles 32, 33 and 34 of the Principal VAT Directive) a Distance Sale will have occurred when goods have been “dispatched or transported by or on behalf of the supplier” in any cases where the supplier “intervenes directly or indirectly in the transport or dispatch of the goods.” The Committee has stated that it considers that the supplier shall be regarded as having intervened indirectly in the transport or dispatch of the goods if any of the following conditions apply:

(i) The transport or dispatch of the goods is sub-contracted by the supplier to a third party who delivers the goods to the customer.

(ii) The dispatch or transport of the goods is provided by a third party but the supplier bears totally or partially the responsibility for the delivery of the goods to the customer.

(iii) The supplier invoices and collects the transport fees from the customer and further remits them to a third party that arranges the dispatch or transport of the goods.

The Committee further clarified that, in other cases of “intervention,” in particular where the supplier actively promotes the delivery services of a third party to the customer, puts the customer and the third party in contact and provides to the third party the information needed for the delivery of the goods, the seller should likewise be regarded as having “intervened indirectly” in the transport or dispatch of the goods.

Note: These guidelines issued by the VAT Committee are merely views of an advisory committee, they do not constitute an official interpretation of EC law and therefore do not bind the Commission or the Member States. However, the Committee’s views are highly influential and it is likely that Member States will review their procedures and implement these guidelines.

Distance Selling VAT registration can apply retrospectively and assessments and penalties for late registration and underdeclaration of VAT are likely. Also, with different VAT rates applicable in different Member States even if VAT has (incorrectly) been charged at the rate applicable in the Member State where the supplier belongs (rather than the customer) this will likely be at the incorrect rate and recovery of this incorrectly paid VAT will also create issues.

Please contact us if the above changes will affect your business as action must be taken immediately.

VAT – Trading in Bitcoin ruled exempt by ECJ

By Marcus Ward 22 October 2015

VAT – Trading in Bitcoin ruled exempt by ECJ

Further to my article of 13 March 2014 here

The European Court of Justice (ECJ), the highest court of appeal for EC matters, has ruled that trading in digital, such as bitcoin, is exempt. this is on the basis that they are a method of payment with no intrinsic value, like goods or commodities. They are therefore covered by the exemption relating to “currency, bank notes and coins used as legal tender” – (Article 135 (1) of the VAT directive).

This confirms that the UK authority’s approach is correct and that the VAT treatment applied in Germany, Poland and Sweden where those authorities treated the relevant transactions as subject to VAT, is erroneous.

This is good news for the UK as it is a big (if not the biggest) player in the bitcoin sector.

Changes to the treatment of cross-border movement of goods from 1 May 2016

By Marcus Ward 8 October 2015

How will goods cross EC borders post UCC?

HMRC has updated its guidance notes on the Union Customs Code (UCC) which is being introduced across the EC on 1 May 2016.

Details here

Main points

The UCC is a revision of the Modernised Customs Code (MCC) and there will be a number of changes to how goods cross EU borders.
Some transitional arrangements will operate until 2020.
Mandatory guarantees for most special procedures and temporary storage (TS) – this only applies to new authorisations.
The ability to make some movements under TS rather than national transit or Electronic Transit System (ETS) – formerly New Computerised Transit System (NCTS).
The removal of the earlier sales provisions relating to valuation – but there are some transitional arrangements.
All communications between customs authorities and economic operators must be electronic.
Valuation: The earlier sale facility will be withdrawn and replaced by a last sale only rule.
Under the UCC there will be some circumstances where the provision of a guarantee is mandatory.
Royalties and licence fees – Currently, for a royalty fee to be liable to duty it must: relate to the imported goods, and be paid as a condition of sale of those imported goods. Under the UCC, royalties and licence fees will generally be paid as a condition of the sale of the goods and should be included in the customs value.

Some procedures and reliefs will cease or change on 30 April 2016, these are:

The €10 waiver of customs duty for free circulation customs declarations – where customs duty is payable no de-minimis exemption will apply – this doesn’t affect any Community System of Duty Reliefs (CSDR) duty reliefs.
Goods being declared to Onward Supply Relief (OSR) can only be entered using a full customs declaration or the Simplified Declaration Procedure (SDP).
The use of Information Sheets for Special Procedures (INF) documents with an Entry in Declarant’s Records (EIDR).
Inward Processing Drawback (IP (D)) and Low Value Bulking Imports (LVBI) authorisations will no longer be valid and these authorisations can’t be used to import goods regardless of any expiry dates shown on your authorisations.
Processing under Customs Control (PCC) authorisation holders will be given an Inward Processing (IP) authorisation number which must be used for new importations after 30 April 2016.
Type D customs warehousing authorisation holders will be given a new authorisation number with a prefix of C (for type D authorisation), or E (for a type E warehouse with type D rules of assessment) – these must be used for entries to customs warehouses after 1 May 2016, the normal debt rules of assessment will apply.
Goods being declared to LVBI will only be entered using an SDP authorisation.

System changes

HMRC expects that some changes to economic operators’ systems will be needed. However this will depend on which authorisations are held and what procedures or processes individual businesses use. A plan for the major IT changes is already in place.

Economic Operator Registration and Identification (EORI)

There are no changes to the EORI process. It is a requirement for all economic operators (such as businesses) involved in international trade to be registered and to have an EORI number. You’ll need to have an EORI number to be able to apply for any customs authorisations, approvals or decisions. For details on EORI see here