Tag Archives: vat

VAT – Where do I belong?!

By Marcus Ward 16 November 2015

The concept of “belonging” is very important in VAT as it determines where a supply takes place and thus the rate applicable and the country in which is due. (The so-called “Place Of Supply, or POS). It is necessary, for most supplies, to establish where both the supplier, and the recipient belongs. Because this is a complex area of VAT it is not difficult to be overpaying tax in one country, not paying tax where it is properly due, or missing the tax issue completely.

A relevant business person `belongs’ in the relevant country. A `relevant country’ means:

the country in which the person has a business establishment, or some other fixed establishment (if it has none in any other country);
if the person has a business establishment, or some other fixed establishment or establishments, in more than one country, the country of the relevant establishment (ie; the establishment most directly concerned with the supply); and
otherwise, the country of the person’s usual place of residence (in the case of a body corporate, where it is legally constituted).

A person who is not a relevant business person `belongs’ in the country of his usual place of residence. The `belonging’ definition applies equally to the recipient of a supply, where relevant.

Business establishment is not defined in the legislation but is taken by HMRC to mean the principal place of business. It is usually the head office, headquarters or ‘seat’ from which the business is run. There can only be one such place and it may take the form of an office, showroom or factory.

Fixed establishment is not defined in the legislation but is taken by HMRC to mean an establishment (other than the business establishment) which has both the technical and human resources necessary for providing and receiving services on a permanent basis. A business may therefore have several fixed establishments, including a branch of the business or an agency. A temporary presence of human and technical resources does not create a fixed establishment in the UK.

Usual place of residence. A body corporate has its usual place of residence where it is legally constituted. The usual place of residence of an individual is not defined in the legislation. HMRC interpret the phrase according to the ordinary usage of the words, ie; normally the country where the individual has set up home with his/her family and is in full-time employment. An individual is not resident in a country if only visiting as a tourist.

More than one establishment. Where the supplier/recipient has establishments in more than one country, the supplies made from/received at each establishment must be considered separately. For each supply of services, the establishment which is actually providing/receiving the services is normally the one most directly connected with the supply but all facts should be considered including

for suppliers, from which establishment the services are actually provided;
for recipients, at which establishment the services are actually consumed, effectively used or enjoyed;
which establishment appears on the contracts, correspondence and invoices;
where directors or others who entered into the contract are permanently based; and
at which establishment decisions are taken and controls are exercised over the performance of the contract.

However, where an establishment is actually providing/receiving the supply of services, it is normally that establishment which is most directly connected with the supply, even if the contractual position is different.

VAT groups

A VAT group is treated as a single entity. This also applies when applying the ‘place of belonging’. As a result, a group has establishments wherever any member of the group has establishments.

This is an area which often leads to uncertainty, and therefore VAT issues. It is also an area where VAT planning may; save time, resources and avoid unexpected VAT costs, either in the UK or another country.

For more on our International Services

The penalty regime……the dark side of VAT

By Marcus Ward 12 November 2015

VAT Penalties

I have made a lot of references to penalties in other articles over the years. So I thought it would be a good idea to have a closer look; what are they, when are they levied, rights of appeal, and importantly how much could they cost if a business gets it wrong?

Overview

Broadly, a penalty is levied if the incorrect amount of VAT is made, either by understating output tax due, or overclaiming input tax, or accepting an assessment which is known to be too low.

Amount of penalty

HMRC detail three categories of inaccuracy. These are significant, as each has its own range of penalty percentages. If an error is found to fall within a lower band, then a lower penalty rate will apply. Where the taxpayer has taken ‘reasonable care,’ even though an error has been made, then no penalty will apply.

An error, when reasonable care not taken: 30%;
An error which is deliberate, but not concealed: 70%;
An error, which is deliberate and concealed: 100%.

Reasonable care

There is no definition of ‘reasonable care’. However, HMRC have said that they would not expect the same level of knowledge or expertise from a self-employed person, as from a large multi-national.

HMRC expect that, where an issue is unclear, advice is sought, and a record maintained of that advice. They also expect that, where an error is made, it is adjusted, and HMRC notified promptly. They have specifically stated that merely to adjust a return will not constitute a full disclosure of an error. Therefore a penalty may still be applicable.

What the penalty is based on

The amount of the penalty is calculated by applying the appropriate penalty rate (above) to the ‘Potential Lost Revenue’ or PLR. This is essentially the additional amount of VAT due or payable, as a result of the inaccuracy, or the failure to notify an under-assessment. Special rules apply where there are a number of errors, and they fall into different penalty bands.

Defending a penalty

The percentage penalty may be reduced by a range of ‘defences:’

– Telling; this includes admitting the document was inaccurate, or that there was an under-assessment, disclosing the inaccuracy in full, and explaining how and why the inaccuracies arose;

– Helping; this includes giving reasonable help in quantifying the inaccuracy, giving positive assistance rather than passive acceptance, actively engaging in work required to quantify the inaccuracy, and volunteering any relevant information;

– Giving Access; this includes providing documents, granting requests for information, allowing access to records and other documents.

Further, where there is an ‘unprompted disclosure’ of the error, HMRC have power to reduce the penalty further. This measure is designed to encourage businesses to review their own VAT returns.

A disclosure is unprompted if it is made at a time when a person had no reason to believe that HMRC have discovered or are about to discover the inaccuracy. The disclosure will be treated as unprompted even if at the time it is made, the full extent of the error is not known, as long as fuller details are provided within a reasonable time.

HMRC have included a provision whereby a penalty can be suspended for up to two years. This will occur for a careless inaccuracy, not a deliberate inaccuracy. HMRC will consider suspension of a penalty where, given the imposition of certain conditions, the business will improve its accuracy. The aim is to improve future compliance, and encourage businesses which genuinely seek to fulfil their obligations.

Appealing a penalty

HMRC have an internal reconsideration procedure, where a business should apply to in the first instance. If the outcome is not satisfactory, the business can pursue an appeal to the First Tier Tribunal. A business can appeal on the grounds of; whether a penalty is applicable, the amount of the penalty, a decision not to suspend a penalty, and the conditions for suspension.

The normal time limit for penalties to four years. Additionally, where there is deliberate action to evade VAT, a 20 year limit applies. In particular, this applies to a loss of VAT which arises as a result of a deliberate inaccuracy in a document submitted by that person.

These are just the penalties for making “errors” on VAT returns. HMRC have plenty more for anything from late registration to issuing the wrong paperwork.

Assistance

My advice is always to check on all aspects of a penalty and seek assistance for grounds to challenge a decision to levy a penalty. We have a very high success rate in defending businesses against inappropriate penalties. It is always worth running a penalty past us.

VAT Flat Rate Scheme – beware the hidden costs

By Marcus Ward 5 November 2015

VAT Basics

Anything that makes VAT easier and that can even reduce the amount payable must be a good thing….right?

The Flat Rate Scheme (FRS) was introduced to simplify VAT accounting for small businesses (with an annual turnover under £150,000) and does away with the concept of input and output tax. Instead a flat rate is applied to a business’ VAT inclusive turnover. This means a business in the FRS cannot reclaim any VAT incurred on its purchases, but a lower (than 20%) rate of VAT is applied to its VAT inclusive income.

Additionally, there is an option to only account and pay VAT when the business itself has been paid by its customers; doing away with VAT bad debt issues and improving cashflow.

Now this certainly has its attractions in terms of reducing the administrative burden and some business find that it reduces the amount of VAT payable. However care should be taken to select the appropriate business category/rate. A simple exercise to compare VAT declared under the “normal” rules to that due under the FRS is clearly prudent. But, as with all things VAT, there can be a catch.

The two drawbacks to the scheme

1) If a business incurs a significant amount of input tax then, unless the flat rate percentage benefit outweighs the loss of input tax, then the FRS is not for them.

2) If a business makes any supplies at the zero rate, or that are exempt, or outside the scope of VAT this income is also included in the turnover for the FRS. The result is then that VAT has to be accounted for on sales that would be VAT free under the normal VAT rules.

This is a bad thing!

Examples of businesses which need to be particularly aware are ones which:

– Export goods or services

– Provide goods or services cross-border to other EC member States

– Sell books, food, or children’s clothes

– Build new homes

– Provide transport

– Let property

– Are charities or Not For Profit entities

– Provide financial or insurance services or brokerage

– Provide health and/or welfare services

– Provide education and/or training

– Offer subscriptions to membership organisations

– Provide sport services

– Are usually in a repayment position with HMRC

(This list is not exhaustive).

The FRS should certainly be considered for smaller businesses especially start-ups; since a first year discount is available for those that are in their first year of VAT registration. These get a one per cent reduction in the flat rate percentage until the day before their first anniversary of becoming VAT registered.

It is important for advisers to consider whether a client would benefit from being in the FRS, or indeed, whether continuation of the scheme remains advantageous to the business.

The VAT flat rates

The VAT flat rate you use depends on the type of business. If the rate changes, a business must apply the new rate from the date it changes. Also, if the nature of a taxpayer’s business changes it is important to review its FRS position.

The applicable rates here

The detailed rules of the FRS here

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 – Do as HMRC say…. and if you do… they may still penalise you!

By Marcus Ward 23 October 2015

Can you rely on a VAT ruling received from HMRC when they have been provided with full information in writing? You would like to think so wouldn’t you? And in the past, you have been able to.

However, the long standing protection from assessments for deemed underdeclared VAT as a result of incorrect advice or actions by HMRC has been withdrawn. This was commonly known as “Sheldon Statement” protection.

HMRC now state that there are some circumstances in which their primary duty is to collect tax according to the statute and it may mean that they can no longer be bound by advice they have given.

Despite all their publicity of their National Help Line and Advice Centre, plus the clearance procedures introduced to assist taxpayers with their obligations, HMRC can still renege on their advice!

Even if you are fortunate enough to actually get a decision from HMRC (which is increasingly difficult and frustrating) you can’t rely on it.

This makes it even more important to avoid errors and the increased risk of VAT penalties and interest.

This leaves the question as to whom businesses can rely on for accurate, cost effective VAT saving advice and guidance on getting VAT right? The answer, clearly, is to contact their friendly local VAT consultant…

VAT e-audits: A warning

By Marcus Ward 15 October 2015

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

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

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

These issues are summarised here

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

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

As the severe motto has it: Comply or die!

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

VAT and sales promotion vouchers – Latest

By Marcus Ward 5 October 2015

HMRC has appealed to the Upper Tribunal against the First-Tier Tribunal’s decision in the Associated Newspapers matter. The FTT decided that Associated Newspapers could recover input tax incurred on vouchers given away in its sales promotion schemes.

A previous decision by the FTT that no output tax is due on the vouchers when given away as part of a sales promotion is subject to an appeal and both cases will be heard together this week.

This is likely to have a significant impact on the VAT treatment of vouchers and sales promotion schemes and will be watched with interest by many businesses. The outcome may also affect staff incentive schemes where vouchers are provided.

The interaction between vouchers and VAT has had a turbulent past and the matter is complex. I hope that we obtain some clarity from the courts before too long.

VAT – Proof of evidence of Intra-EC supplies

By Marcus Ward 23 September 2015

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