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November 2012

Accession of Croatia to the EU 1 July 2013 – A checklist

By Uncategorized|VAT news No Comments

Croatia is set to join the EU on 1 July 2013 and this section of the article aims to highlight key impacts for businesses:


Transitional Period – Imports and Exports or Intra Community transactions?
  • The logic here is usually a ‘like with like’ approach – any movement of goods into or out of Croatia starting prior to the switchover date but ending afterwards is categorised in the same way both ends ie an export and an import or vice versa as opposed to an export and an acquisition
  • Assuming the same rules apply as for previous EU accessions, businesses will need to be able to manually ring-fence transactions straddling the cutover period so that they are in a position to apply a different VAT treatment to that programmed into the systems, otherwise eg acquisition tax would automatically be applied to the receipt of goods from Croatia post 1 July whereas import VAT and potentially customs duty are to be accounted for via an import entry
P&L Impacts – Changes to VAT and Duty liability for certain transactions
  • There are a number of scenarios where an additional VAT cost will arise for the business with the change to Croatia becoming an EU Member State
  • EU established businesses making certain B2C supplies (electronic services, telecommunication services etc) will need to start accounting for VAT on their sales to individuals in Croatia going forward – this has an impact on pricing decisions raising the question of whether the business will bear the additional VAT cost or pass it on in part or full
  • EU travel businesses using the tour operator’s margin scheme (TOMS) to account for VAT will need to account for VAT on Croatian holidays/trips.  Croatia is a popular destination and with brochure prices and sourcing costs likely already agreed for 2013, the question arises as to whether businesses have taken this additional VAT cost into account when budgeting
  • For businesses operating in the VAT exempt finance and insurance sectors where VAT recovery on costs is dictated by the location of the counterpart (ie EU or non EU), there is a negative impact in Croatia becoming an EU Member State as VAT recovery on direct costs is inhibited and overhead VAT recovery further restricted
  • EU established etailers and mail order companies selling delivered goods to private individuals will need to start accounting for VAT on sales to individuals in Croatia and will also need to monitor the distance selling threshold for sales into this country.  Consideration should be given to the impact on pricing of a switch from a zero rate of VAT currently (as an export), to the UK VAT rate (20% assuming standard rated products are sold) post accession, to the Croatian VAT rate of 25% when the distance selling threshold there is breached
  • On a more positive note a customs duty liability will no longer arise on transactions in goods involving Croatia and other EU Member States – in addition there will be no requirement to complete import and export declarations which reduces costs from freight forwarders
  • Croatia will adopt EU VAT principles and as such it is likely some cross border services purchased historically with Croatian VAT may become VAT free/subject to the reverse charge
  • Businesses incurring  Croatian VAT eg on business travel, will be able to recover this via an 8th or 13th Directive reclaim
Cashflow Impacts – largely positive
  • There will no longer be a requirement to lodge guarantees to defer import VAT and duty on imports
  • There is a positive impact in the switch to accounting for acquisition tax on the VAT return rather than funding import VAT.  Import VAT funding can present a significant cost for businesses importing into countries such as the UK where there is no simplification in the form of a plafond type arrangement
Compliance and Systems – Changes
  • Systems changes are required to ensure Croatia’s status as an EU Member State with the associated VAT treatment is updated
  • Customer standing data and invoice templates will need to be change to ensure the customer’s Croatian VAT registration number is logged and shown on invoices
  • There will be an increased compliance burden in the form of the need to record transactions on Intrastat declarations and EC Sales Lists – whilst import and export compliance costs reduce, VAT compliance costs for additional reporting increase, and as these reports are frequently completed by in-house teams as opposed to third parties such as freight forwarders, there may be an impact on resource depending on the volume of Croatian transactions


First published in Tax Journal on Friday  23rd November 2012 as part of their “Special Report, VAT and the EU”.  If you would any further advice or assistance on this or any other VAT issue, please contact Julie Park on 01962 735350.

Fraudulent credit card transactions – possibility of reclaim?

By Uncategorized|VAT news No Comments

The UK Tax Tribunal has referred an appeal by Dixons against HMRC to the European Court of Justice (CJEU).  The issue is whether VAT should be accounted for on credit card transactions which are found to be fraudulent, for example where a credit card has been cloned, or obtained dishonestly by the person using it.

HMRC argues that there has been a supply at the point the card is accepted for payment.

Dixons argues that the payment, which is ultimately made from the card provider, is compensation akin to that received under an insurance policy and therefore not consideration for a supply.  This is on the basis that the retailer pays a fee to the card provider which contractually covers the retailer should they perform the necessary checks and the transaction still turns out to be fraudulent. The case is not considering the VAT treatment of charge backs (i.e. where a retailer has to pay money to the card company as it has not met its obligations when accepting the card).

What does this mean for retailers?

If Dixons are successful with their argument, the value of the cash retained by the retailer in these circumstances is not consideration for a supply and therefore the VAT accounted for as part of Daily Gross Takings (DGT) should be reduced.

As the Tax Tribunal has referred the issue to the CJEU they must feel there is merit in the arguments being presented.  It is therefore recommended that any business which accepts credit cards at the point of sale considers what the value of the compensation received from the card provider is over the past four years to establish if it is worthwhile making a protective claim.

Additionally, it presents an opportunity for retailers to consider their retail schemes and whether they are maximising the DGT adjustments that they could be making as we often see businesses where standard or even bespoke adjustments agreed with HMRC in the past are not being made, resulting in too much output tax being accounted for.

Leisure industry

Whilst the CJEU referral is fundamentally about  the supply of goods to customers, the case also raises the question of whether suppliers in the leisure industry who have supplied services eg cinemas, ticket agencies, and it is later discovered that the transaction is fraudulent, also have an opportunity to make a claim.  Again, it may be worthwhile considering whether a protective claim could be submitted.

It should be noted that it is likely that the issue could take a few years to resolve.  However, by making a protective claim now businesses are ensuring that they can maximise the claim for the past as it is only possible to go back four years from the current date for historic claims, and if businesses wait until the decision is made, older periods will then be out of time.

If you would like to discuss this further please contact Sean McGinness on 01962 735 350.

VAT Rate Shopping – Is this Avoidance?

By Uncategorized|VAT news No Comments

There has been much coverage in the mainstream press and TV recently on the subject of perceived tax avoidance.  The focus more recently has been on the amount of corporate tax and VAT businesses pay.   The articles often demonstrated a lack of understanding about the fact that major multinationals have complex supply chains that include third party manufacturers, distributors etc, each taking a profit.  Trying to make a connection between retail sales values in a jurisdiction such as the UK and the amount of corporation tax paid is therefore nonsensical.

A similar lack of understanding has arisen with VAT rate shopping.  A number of B2C online businesses have been named for properly establishing in Luxemburg or France to take advantage of a reduced rate for certain sales of electronic services and infraction proceedings are looming against the Member States.    Arguably this is an illogical approach given there is still such variance between standard rates within the EU – no level playing field regardless of how much tinkering is done around the edges.

The fact remains that businesses are free to properly establish themselves where they see  fit within the EU and further afield.  The suggestion that businesses should account for VAT where their customers are located is not unreasonable, but until the VAT system taxes transactions in this way as opposed to the place of establishment, it is a little naive to think businesses will risk being uncompetitive if operating online globally.  VAT is arguably a cost etailers need to manage, and if they are able to reduce this by a few percentage points and still operate the business effectively in an overseas location, it is not difficult to see why they would do this.

The mechanics by which VAT is accounted for must be fit for purpose.  Even if this is eventually achieved within the 27 EU Member States with a ‘one stop shop’, the EU is only a relatively small part of a much wider world, with VAT type systems pretty much everywhere but the US.  Businesses still need to consider the question of how to account for VAT in the other 80+ countries worldwide where they may be trading, and they face an insurmountable VAT burden .  For example, an online hotel bedbank businesses selling hotel rooms in every country worldwide potentially faces the following:

– VAT rules saying the supply is taxed where the hotel is located, regardless of where the business is etablished

– Multiple VAT registration liabilities – if it operates with a different legal entity selling global hotel rooms to consumers in its jurisdiction, the corporate group as a whole could technically be faced with 80+ VAT registrations worldwide per entity

– If the group has say 5 entities to cover broad global regions, 400 VAT registrations

– Each of the 400 registrations filing  up to 12 returns per annum.

In practice it is unlikely such a scenario would arise but it demonstrates perfectly the fact that current VAT rules worldwide have not kept pace in a suitable way for a B2C online business.  In summary they currently face being non competitive if not in a Member State with a low VAT rate, being non compliant depending on what they sell, or faced with a significant compliance burden. Until this changes, B2C businesses will surely  continue to treat VAT as a P&L hit and seek to manage it in the most effective way possible, meaning they have a competitive business that contributes tax revenues.

First published in Tax Journal on Friday 2nd November 2012. If you would any further advice or assistance on this or any other VAT issue, please contact Julie Park on 01962 735350.