Tag Archives: zero-rate

VAT – A Christmas Tale

By   17 December 2018

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities.  May I explain what I do and then you can write to me with your advice?  If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.

First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them.  Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply?  I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts.  He says that if I give them away regularly and they cost more than £150 I might have to account for VAT.  Is that right?

My next question concerns barter transactions.  Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return.  If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks.  Have I made a supply and what is the value please?  My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me.  Lots of children ask me for a ride on my airborne transport.  I suppose I could manage to fit twelve passengers in.  Does that mean my services are zero-rated?  If I do this free of charge will I need to charge air passenger duty?  Does it matter if I stay within the UK, or the EU?  My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges?  After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home.  Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT.  Please comment.

May I also ask about VAT registration?  I know the limit is £85,000 per annum but do blips count?  If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover.  May I be excused from registration?  If I do need to register should I use AnNOEL Accounting?  At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing.  I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable.  These are not clothes that I would choose to wear except for my fairly unusual job.  If lady barristers can claim for black skirts, I think I should be able to claim for red dress.  And what about my annual haircut?  That costs a fortune.  I only let my hair grow that long because it is expected of me.

Insurance worries me too.  You know that I carry some very expensive goods on my transport.  Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example.  My parent company in Greenland takes out insurance there and they make a charge to me.  If I am required to register for VAT in England will I need to apply the Reverse Charge?  This seems to be a daft idea if I understand it correctly.  Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

Excise Duty: Your Christmas drink of choice, or perhaps not

By   17 December 2018

Advocate General (AG) Manuel Sanchez-Bordona has released his opinion in the Bene Factum case (The link is to Lithuanian, so you ‘may” need to translate…).

A curious matter and one which brings into focus the drinking habits of people across the EU. Now, as those who know me will be aware, I am not adverse to a good single malt, nor a decent claret, but I do wonder sometimes where people draw the line.

Background

It transpires that in Lithuania people who choose not to drink, or cannot afford, even the cheapest alcoholic items have turned to drinking perfume and mouthwash which contain isopropyl alcohol. This has a similar effect on the human body to what most people would regard as being from more usual beer, wine or spirits etc. Sounds delicious eh?

Issue

The issue was whether these products where subject to Excise Duty, or, as the appellant contended, they were duty free as cosmetic products.

Decision

The AG found that isopropyl alcohol is almost unpalatable to most people. The fact that Bene Factum held out, advertised and marketed to people to drink the products did not affect the fact that the main purpose of the goods was for their use as cosmetics and mouthwash. What must be considered is Excise Duty depends on an objective classification to determine whether it is intended for human consumption. This classification is not affected by the fact that Bene Factum actively encouraged people to drink these products rather than use them for cosmetic purposes.

Consequently, the goods where not subject to Excise Duty. Good news for Lithuanian alcohol connoisseurs! It remains to see if the court follows this opinion, in most cases they do, but one never knows.

Commentary 

If there is anybody out there who is getting ready for their Christmas party, looks at some cosmetic products and considers taking a swig, I make the following comments:

  • Probably best to stick supermarket own brand booze if money is an issue
  • I expect that these things taste absolutely terrible (although I have not sampled them)
  • I tend to stick to things that are to be applied externally doing just that with them without ingestion
  • If you can’t decide whether to gargle with something or drink it, I counsel spitting it out
  • If these goods come to the UK, at least they will be even cheaper being duty free. I am not sure that is a good thing.

VAT: EC adopts short term fixes

By   5 December 2018

The European Council (EC) will adopt short-term fixes to the current VAT system.

The EC agreed three short legislative acts aimed at adjusting some of the EU’s VAT rules in order to fix four specific issues pending the introduction of a new VAT system. These relate to:

  • call-off stock. The text provides for a simplified and uniform treatment for call-off stock arrangements, where a vendor transfers stock to a warehouse at the disposal of a known acquirer in another member state
  • the VAT identification number. To benefit from a VAT free treatment for the intra-EU supply of goods, the identification number of the customer will become an additional condition
  • chain transactions. To enhance legal certainty in determining the VAT treatment of chain transactions, the texts establish uniform criteria
  • proof of intra-EU supply. A common framework is established for the documentary evidence required to claim a VAT exemption for intra-EU supplies

These adjustments are due to apply from 1 January 2020.

In parallel, discussions are ongoing on a definitive VAT system to replace the current ‘transitional’ VAT arrangements, applied since 1993. Pending introduction of the new system, the four short-term quick fixes are proposed.

EC clamp down on yacht and aircraft VAT abuse

By   8 November 2018

The European Commission (EC) has stepped up its agenda to tackle tax avoidance in the yacht and aircraft sectors by implementing infringement proceedings on tax breaks being applied in the pleasure craft industries of the Isle of Man. These provisions can generate major distortions of competition, as highlighted by last year’s ‘Paradise Papers’ leaks.

The EC has sent a formal notice to the UK in respect of the Isle of Man’s abusive VAT practices relating to sales and leasing of aircraft.

Background

Input tax is only deductible when it relates to business use of an asset. The EC says that supplies of aircraft, including leasing services, intended expressly for private use, should not be effectively VAT free. The EC believes that the UK has not taken sufficient action against abusive VAT practices in the Isle of Man on supplies and leasing of aircraft. This perceived abuse is facilitated by UK national rules which do not comply with EU law.

Broadly, arrangements are made such that a (seemingly) artificial leasing businesses is put in place and through which individuals rent their own jets from themselves. The most high-profile example of this structure is one used by Lewis Hamilton for his private jet.

Features of such arrangements are said to be:

  • Users of the scheme recover 100% of import VAT when it appears that an adjustment should be made for the proportion of the amount of private use intended for the aircraft
  • VAT should be declared and paid to any European Member States whose airports are used for leisure flights.
  • The leasing businesses set up for jets usually appear to be a letterbox companies with no real economic purpose. Consequently, it is unlikely that such entities should be entitled to reclaim VAT from the Isle of Man.

It is understood that the Isle of Man government has called in the HMRC which will review of 231 tax refunds issued to private jet owners since 2011 valued at circa $1billion of VAT.

Representatives of the EC are due to visit the Isle of Man this month. Similar action is being taken against Italy in respect of the lease of yachts and excise duty rates for motor boats.

What happens next? 

The UK now has two months to respond to the arguments put forward by the EC regarding VAT on aircraft. If the UK authorities do not act within those two months, the EC will send a reasoned opinion. If the UK does not act within the next two months on the reasoned opinion the EC may bring the case before the Court of Justice of the EU.

Pierre Moscovici, the Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft. Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the Commission is taking action to clamp down on rules that try to circumvent EU law in these areas.”

For More Information

On the general infringements procedure, MEMO/12/12.

On the EU infringements procedure. 

Commentary

We do not design, sell or advocate such schemes. Our view is that these and similar structures are, quite rightly, open to attack from the relevant authorities. They do not reflect well on those that put these structures in place nor those that benefit from them. Using a leasing scheme as such is not necessarily abusive. However, if one takes the other elements in the targeted schemes into consideration, such as the absence in motive of setting up those companies and the fact that those companies do not seem to have any substance, it is likely to lead to the action we see from the EC and its view that these schemes are abusive.

How Brexit will impact on these and similar situations remains to be seen.

VAT e-books to be reduced rated?

By   10 October 2018

The EC will put forward a proposal to permit EU Member States to introduce a reduced rate for the supply of e-books to bring them into line with traditional books (which, uniquely, are zero rated in the UK). Details of the latest court decision and reasoning here and an ECJ decision on the matter here

What are e-books for this proposal?

e-book is short for “electronic book.” It is a digital publication that can be read on a computer, e-reader, or other electronic device. e-books are available in several different file formats. There are many types of e-book formats, all of which support text, images, chapters, and page markers . An e-book may be a novel, magazine, newspaper, or other publication. However, the electronic versions of magazines and newspapers are often called “digital editions” to differentiate them from electronic books. It is likely that digital editions will be included in the proposed reduce rate proposal.

Timeframe

It is likely that the proposal will be adopted quite quickly once the formalities have been completed, so watch this space.

HMRC stance

Previous cases have underlined HMRC’s position that they view traditional physical books and online supplies as two different supplies, even if the content is similar, or even identical. It will be interesting to see how they react to the EC’s adoption of these proposals, especially in the current political environment.

Action

If you, or your clients, supply e-books, it is important to monitor this position. Failure to respond to any changes may mean too much VAT being accounted for and an EU-wide commercial competitive disadvantage. We will report on the latest on e-books as soon as possible any final decisions are made.

VAT – Land and property issues

By   4 October 2018

Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. These often result in large penalties and interest payments plus unwanted attentions from the VAT man. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • apportionment of VAT rates
  • partial exemption
  • charity use
  • relevant residential use
  • the place of supply (POS) of services (which will be increasingly important after Brexit)
  • and even seemingly straightforward VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance

For more information, please see our Land & Property services

VAT and Customs Duty – Impact of No-Deal Brexit

By   4 October 2018

HMRC has published guidance on the likely implications of a No-Deal Brexit. The guidance states that it is “unlikely” that the UK will leave the EU without a deal, however, in the recent political climate, observers comment that a No-Deal scenario is increasingly likely (to put it conservatively). Consequently, business must be in a position to deal with a No-Deal from 29 March 2019. The guidance may be summarised as follows:

Current position

  • VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods are acquisitions (EU) or imports (non-EU)
  • no requirement to pay VAT when goods from the EU arrive in the UK. A business acquiring goods from the EU accounts for VAT on the goods in its next VAT return, offsetting input tax against output tax (acquisition tax, a simple “reverse charge” bookkeeping exercise)
  • no Customs Duty on goods moving between EU Member States
  • goods that are exported by UK businesses to non-EU countries and EU businesses are UK VAT free
  • goods that are supplied by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds
  • for services the place of supply (POS) rules determine the country in which a business needs to charge VAT

From 29 March 2019 with a No-Deal Brexit

  • the UK will continue to have a VAT system
  • the government will attempt to keep VAT procedures as close as possible to the current systems
  • acquisitions from the EU will become imports
  • imported goods from the EU (or elsewhere) will be subject to VAT deferment
  • Customs and Excise Duty formalities will now be required for EU imports
  • UK businesses supplying digital services are likely to be required to register for the one stop shop (MOSS) in a country within the EU
  • the rate of input recovery for providers of financial services (FS) and insurance may be improved
  • Low Value Consignment Relief (LVCR) is likely to be abolished for goods entering the UK as parcels, whether from within or outside the EU.
  • no requirement to comply with existing Distance Selling rules (exports of goods to individuals will be UK VAT free)
  • EC Sales Lists will not be required
  • Businesses need to take steps to examine their import and export procedures (!)

I have paraphrased some of the guidance for clarity and technical accuracy and the above points are not direct quotes. 

Commentary

The apparent good news is that UK businesses importing goods from the EU will not have to pay VAT on the date that the goods enter the UK, but rather, will be able to account for the VAT later via a deferment system, presumably similar to the one in place for current non-EU imports. Helpful for cashflow, but an unwanted additional complexity, especially for small businesses. A concern is that HMRC cannot deal with the documentation requirements even before Brexit see here

A big negative for UK business is the fact that customs declarations and the payment of any other duties will now be required for imports from the EU – in the same way as currently applies when importing goods from outside the EU. Consequently, for goods entering the UK from the EU

  • an import declaration will be required
  • customs checks may be carried out
  • customs duties must be paid.

This is an additional complication and a cost to a business which is currently able to bring goods into the UK from the EU without any of these declarations, payments or inspections. This is likely to lead to additional delays at the border and will certainly increase administration and costs. Whether this will encourage UK businesses to purchase more goods from UK suppliers remains to be seen. It is worth mentioning that HMRC has also said that UK  importers need to take steps apply for an Economic Operator Registration and Identification Number (EORI) for businesses which do not already have one. Details here

Brexit may provide a ray of sunshine for FS and insurance suppliers (well for VAT anyway, the commercial impact may be somewhat different). In the event of a No-Deal Brexit, for UK FS and insurance providers, input VAT deduction rules in respect of services to the EU may be changed. Although no details are provided, it appears to me that input tax attributable to these supplies will be treated similarly to those currently provided to recipients outside the EU. Which will broadly mean that those supplies which would be exempt if provided in the UK would provide full input tax recovery if the recipient belongs anywhere outside the UK. This will be very good news for The City.

LVCR currently relieves goods worth under £15 which come into the UK from outside the EU from UK VAT. Its abolition means that all goods entering the UK as parcels sent by overseas businesses will be liable for VAT (unless they are zero-rated from VAT) if the value is under £15. An unwelcome and apparently unnecessary change.

Generally

It is prudent for businesses to consider how their imported goods will be classified and how they will submit import declarations in the result of a No-Deal Brexit. HMRC suggests that importers may want to consider looking at suitable commercial software and, or, engaging a commercial customs broker, freight forwarder or logistics provider. We advise contacting the relevant providers sooner, rather than later, to establish what you, or your client’s business may require. Of course, all of the above will increase the potential of a business receiving penalties and interest if it gets it wrong.

If you would like to discuss any of the above, please contact me, or a member of my team. Readers that know me, may admire my restraint in commenting, politically, on Brexit…

As I often find myself saying recently – good luck everybody.

VAT – When is chocolate not chocolate (and when is it)?

By   4 September 2018

Latest from the courts

In the First Tier Tribunal (FTT) case of Kinnerton Confectionery Ltd the issue was whether a product could be zero rated as a cooking ingredient, or treated as standard rated confectionary (a “traditional” bar of chocolate.)

Background

The product in question was an allergen free “Luxury Dark Chocolate” bar. It was argued by the appellant that it was sold as a cooking ingredient and consequently was zero rated via The Value Added Tax Act 1994, section 30(2) Schedule 8. HMRC decided that it was confectionary, notwithstanding that it could be used as a cooking ingredient.

Decision

The judge stated that what was crucial was how the chocolate bar was held out for sale. In deciding that the chocolate bar was confectionary the following facts were persuasive:

  • the Bar was held out for sale in supermarkets alongside other confectionery items and not alongside baking products
  • it was sometimes sold together with an Easter egg as a single item of confectionery
  • although the front of the wrapper included the words “delicious for cakes and desserts”, it contained no explicit statement that the Bar was “cooking chocolate” or “for cooking”
  • the back of the wrapper made no reference to cooking. It also stated that the portion size was one-quarter of a bar. Portion sizes are indicative of confectionery, not cooking chocolate
  • Kinnerton’s website positioned the Bar next to confectionery items, and did not say that it was cooking chocolate, or that it could be used for cooking
  • neither the wrapper nor Kinnerton’s website contained any recipes, or any indication of where recipes could be found
  • the Kinnerton brand is known for its confectionery, not for its baking products. All other items sold by Kinnerton are confectionery, and the brand is reflected in the company’s name
  • the single advertisement provided as evidence positioned the Bar next to confectionery Items, and did not say that the Bar was “cooking chocolate”; instead it made the more limited statement that it was “ideal for cooking”
  • consumers generally saw the Bar as eating chocolate which could also be used for cooking 

Commentary

Clearly, the FTT decided that consumers would view the chocolate bar as… a chocolate bar, so the outcome was hardly surprising. This case demonstrates the importance of packaging and advertising on the VAT liability of goods. Care should be taken with any new product and it is usually worthwhile reviewing existing products. This is specifically applicable to food products as the legislation is muddled and confusing as a result of previous case law. This extends to products such as pet food/animal feedstuffs which while containing identical contents have different VAT treatment solely dependent on how they are held out for sale. And we won’t even mention Jaffa Cakes (oops, too late).

VAT – Catering at a university campus; exempt?

By   3 September 2018

Latest from the courts

In the First Tier Tribunal (FTT) case of Olive Garden Catering Company Ltd (OGC) the mian issue was whether catering which was provided to the University of Aberdeen (UOA) students was an exempt supply. The specific issue was whether the catering was a supply “closely connected to education” which in turn depended on which entity was actually making the supply to students. For exemption to apply, OGC would need to be a principal in purchasing the food and other goods and an agent of UOA (pictured above) in delivering the catering (the exemption could not apply to a supply by OGC to the students).

Background

The central issue was whether the supply of food and staff by the appellant to UOA was a single supply of catering services at the standard-rate for VAT purposes (HMRC’s case) or that the main supply was for food at the zero-rate, with the supply of staff being a separate supply and eligible for staff wages concession which was the appellant’s stance. I comment that the procurement as principal and the delivery of catering as agent is common practice in the education sector and this case focussed on whether the relevant documentation actually reflected the economic reality.

Decision

The HMRC internal VAT manual VTAXPER64300 sets out the general principles for determining the VAT treatment of supplies made under a catering contract, which in turn depend in some situations on the capacity in which the caterer supplies its service, whether as principal or agent in the agreement. Of relevance in this case were the following statements:

(1) In general, it has been established practice that agency contracts are most often used in the education sector.

(2) Under agency contracts for the provision of catering it is accepted that:

  • The client makes a taxable supply of catering to the consumer, or the catering is subsumed within an overall exempt supply, eg; of education
  • VAT is not charged to the client on wages of the catering staff employed at the unit
  • VAT is charged on any management fee plus taxable stock and other services
  • Schools may only exempt supplies which are closely related to the overall provision of education

(3) This contributes to fair competition with in-house providers, and the contract catering industry acknowledges the value of that.

In respect of the contract for the supply of catering services, UOA was the principal and OGC was the agent by reference to the control exercised over; menu specifications, pricing, and the premises in which catering was carried out. The relevant contracts set out that the terms were set by UOA and were indicative of its status as the principal in the catering contract. The judge stated that the catering contracts between UOA and OGC appeared to be an agency contract with OGC acting as the agent. Consequently, the food produced OGC and served by its staff at UOA’s halls of residence was potentially a supply of food in the course of catering that can be subsumed within the overall exempt supply of education by UOA.

Commentary

A win for the appellant, but only after comprehensive consideration of all points and the substantial detailed documentation by the judge. There has been a run of Tribunal cases on the agent/principal point (not just in education and which I have covered in previous articles) and this case serves to demonstrate that each case will be determined on its merits. There can be no blanket VAT treatment and certain factors will point one way and others to a different VAT treatment. In my experience, HMRC are always eager to challenge agent/principal treatment and it is an area which has an enormous tax impact on a business. I always recommend that any contracts/documentation which cover potential agent/principal issues are reviewed to avoid unwanted attention from HMRC. Slight adjustments to agreements often assist in reaching the desired tax treatment. Don’t leave it to chance!

VAT – Place of supply of professional services flowchart

By   23 August 2018

A question I am often asked by my legal and accountant clients is “Do we charge VAT on our invoices?” The main issue with this general question is the place of supply (POS). Consequently, I have produced a simple flowchart which covers most situations and applies to all providers of professional services. Of course, this being VAT, there are always unusual or one-off queries, but this chart, with the notes should address the most common issues.

Place of supply Of Services Flowchart

POS services flowchart

Notes to flowchart

As always, nothing in VAT is as simple as it seems. So I hope the following notes are of assistance.

Place of belonging

If the services are supplied to an individual and received by him otherwise than for the purpose of any business carried on by him, he is treated as belonging in whatever country he has his “usual place of residence”.

If the services are in respect of an individual’s business interests, then more complex rules on the place of belonging may apply.  The issue is usually where more than one “establishment” exists.  In these cases, the rule is the place of belonging is the “establishment” at which, or for the purposes of which, the services are most directly used or to be used.

A guide to belonging here 

Property rental in the UK

Property rental is treated as a business for VAT purposes.  We must decide whether a rented property here creates a business establishment in the UK for the landlord.  If a person has an establishment overseas and owns a property in the UK which it leases to tenants; the property does not in itself create a business establishment.  However, if the entity has UK offices and staff or appoints a UK agency to carry on its business by managing the property, this creates a business establishment (place of belonging) in the UK. VAT Act 1994 s. 9 (5) (a).  In these cases, the professional services would likely be UK to UK and be standard-rated.

Difference between business and non-business:

Services provided to an individual are likely to be non-business unless the services are linked to that individual’s business activities, eg; as a sole proprietor.  Therefore, an individual’s tax return is, in most cases, likely to be in the recipient’s non-business capacity (although it may be prudent to identify why a UK tax return is required for a non-UK resident individual, ie; what UK activities have taken place and do these activities amount to a business or create a business establishment?)

This is an area that often gives rise to uncertainties and differences in interpretation (particularly when deciding which establishment has most directly used the services).  It may be helpful to reproduce a specific example provided by HMRC:

Example

“A UK accountant supplies accountancy services to a UK incorporated company which has its business establishment abroad.  However, the services are received in connection with the company’s UK tax obligations and therefore the UK fixed establishment, created by the registered office, receives the supply.”

As always, please contact us should you have any queries.