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January 2024

ERP Systems and Tax Engines Managing VAT Compliance

ERP Systems and Tax Engines  – Managing VAT Compliance

By Customs Duty news|VAT news, Uncategorized, VAT news

Regardless of whether your business uses a relatively straightforward accounting systems such as Xero/QuickBooks, or a more sophisticated ERP system such as Oracle/SAP, there are some basic principles that apply to the management of VAT compliance and creating an effective VAT determination process to ensure that you are managing VAT risk appropriately.   The benefit of this is that the tax or finance team has confidence the correct amount of VAT is being paid at the correct time, and the compliance burden is reduced if the VAT compliance tools and systems are being used effectively.

There is an increasing array of VAT analytical tools and automation software to manage VAT compliance but these are only effective if the underlying master data is accurate and comprehensive.  For example the underlying sales and purchase transactions need to be coded correctly for VAT purposes with an appropriate tax code, and the customer master data should flag their VAT registration/business status to ensure the appropriate VAT rules can be applied.  If not, any analysis of the data using a VAT analytical tool is likely to miss key areas of risk or throw up so many exceptions that the VAT compliance burden may feel as though it is increasing rather than decreasing.

In this article we will take a look at best practice in relation to VAT compliance to enable the business to reduce the amount of time spent in preparing VAT returns but also increase the level of comfort achieved for the tax or finance team in relation to the accuracy of the data being reported to the tax authorities using ERP Systems and Tax Engines.

 

What are ERP Systems and Tax Engines?

Enterprise Resource Planning (ERP) systems and Tax Engines are critical components of modern business operations, each serving distinct but interconnected functions within a company’s infrastructure. The integration of ERP systems and Tax Engines is crucial for maintaining accurate financial records, optimising tax planning, and ensuring compliance. Let’s look at each one in more detail.

ERP Systems:

ERP systems are comprehensive software solutions designed to streamline and integrate business processes across various departments within an organisation. These systems provide a centralised platform for managing core functions such as finance, human resources, supply chain, manufacturing, sales, and customer relationship management.

Key features of ERP systems include:

Integration: ERP systems consolidate data from different departments into a single, unified database, facilitating seamless communication and collaboration across the organisation.

Automation: They automate routine tasks, reducing manual effort and minimising errors. This automation enhances efficiency and enables employees to focus on more strategic initiatives.

Data Analysis: ERP systems offer robust reporting and analytics capabilities, allowing businesses to gain insights into their operations, identify trends, and make informed decisions.

Scalability: ERP systems are scalable, meaning they can adapt to the evolving needs of businesses as they grow and expand into new markets or industries.

Tax Engines:

Tax Engines are specialised software solutions designed to manage and automate tax-related processes within an organisation. They ensure compliance with local, national, and international tax regulations while optimising tax strategies to minimise liabilities and maximise savings.

Key features of Tax Engines include:

Tax Calculation: Tax Engines accurately calculate taxes based on relevant regulations, including income tax, sales tax, value-added tax (VAT), and customs duties.

Compliance: They keep abreast of ever-changing tax laws and regulations, ensuring that businesses remain compliant with all applicable tax requirements.

Reporting: Tax Engines generate comprehensive reports and filings, simplifying the tax reporting process and providing visibility into tax liabilities and obligations.

Integration: Tax Engines seamlessly integrate with ERP systems and other financial software, enabling real-time data exchange and ensuring consistency across financial and tax-related processes.

 

Reconciled Numbers versus Accurate VAT Coding of Transactions

Preparing an accurate VAT return is not solely about whether the numbers add up and reconcile with the data in the wider financial systems – this can be a relatively easy achievement and in our experience, particularly in larger businesses, this part of the VAT compliance pipeline should ideally be completed by the finance team before the data is passed to the VAT team or whoever is responsible for reviewing and filing the return.  The route to having real certainty of the accuracy of VAT returns lies in ensuring the transactions are taxed correctly – there is little value for example in ensuring that the total value of zero rated sales being reported is accurate in terms of reconciled values, if the actual individual sales transactions do not qualify for zero rating.  This cannot be determined by a review of the values in isolation, and any robust VAT risk management framework should include a review of a sample of individual sales and purchase transactions to test accuracy.

 

Tax Codes

In our experience gained from being embedded within the tax and finance teams of large businesses, tax codes are the holy grail to making the life of the VAT/finance team easier in terms of VAT  compliance.  This is because they are a hugely effective mechanism to flag and categorise transactions into groups which describe the VAT treatment applied.  This sorting process facilitates the completion of the VAT return itself but more importantly enables a focused set of checks to be carried out on the transactions with each tax code on a VAT return.

The VAT Consultancy is often asked to advise on the optimum number of tax codes for a business.  This ultimately depends on the complexity of the purchase and sales transactions.  However as a minimum it is typically useful to have separate codes for purchases and sales.  In addition it is wise to have a range of codes that bear 0% VAT so that a distinction can be made between the following:

  • zero rated (separate code for goods and services if relevant to allow for specific checks to be made to each)
  • exempt
  • outside the scope (intra VAT group, on the high seas, salaries, tax)

Most accounting systems including the most straightforward ones have tax codes, and the key is to ensure that the description attached to each code is clear and readily understood by those using the codes outside of the VAT team.  Training should be provided in the use of the codes to reduce the risk that they are used incorrectly.  This applies regardless of whether a tax code is assigned automatically during the tax determination process, or manually when the default has to be overridden eg for a non-standard transaction with a customer/supplier.

 

Tax Rates

The system needs to have up to date tax rates for each jurisdiction and these should be locked down so that they cannot be manually amended for individual transactions and so that they cannot be amended without sign off by the tax team or a senior member of the finance team.

 

High Quality VAT Reports

It can be surprisingly difficult to obtain a high quality reports from the systems to assist the VAT team in producing an accurate VAT return.  This typically applies more often when the business has an ERP system in place as opposed to a more straightforward accounting system.   Where possible however the tax team would be well advised to work with the finance team to ensure it has a bespoke report that enables it to sort and filter data appropriately to prepare the VAT return as efficiently as possible whilst carrying out appropriate credibility checks.  A report showing the following data headings in addition to other fields should enable credibility checks to be carried out:

  • invoice date and tax point date (to ensure the transaction is reported in the correct period)
  • invoice number (to ID the transaction for a deeper review of the invoice)
  • customer and supplier full legal entity name including suffix eg GmbH, SA (this helps with high level sense checks on the VAT treatment)
  • customer and supplier country location (essential to test the correct VAT treatment)
  • customer and supplier VAT ID (the best indication of business status which impacts VAT treatment – for all customers, not just EU)
  • transaction value (net, VAT, total)
  • description of goods/services provided (to enable the correct Place of Supply VAT rule to be identified and checked)
  • tax code (to facilitate sorting for credibility checks)

 

Data Mining Tools

There are lots of data mining tools in the marketplace which aim to quickly identify transactions falling outside of programmed parameters with a view to identifying VAT errors.  These tools can be a very effective way of reviewing the accuracy of VAT returns provided they are used effectively and enable the team preparing the return to focus on the high risk transactions and high risk errors.  It is good practice when using such tools to monitor the amount of time taken to work through all of the exceptions generated and the resulting VAT adjustments that have been identified as a result.  Otherwise there is a risk that too much time is spent reviewing exceptions that do not materially alter the VAT or net sales values on the VAT return.  For example spending half a day reviewing variances in the net purchase value to re reported in box 7 of the UK VAT return does not add a significant amount of value compared to spending the same amount of time checking underlying source documents ie sales invoices or supplier invoices to test accuracy.

Follow up is also key here.  Exceptions leading to adjustments should be prioritised for remediation, otherwise the same issue will reappear next VAT return period. It is all too easy for busy finance and tax team members to de-prioritise this action but the short term pain in  resolving pays dividends.

 

Role of the VAT Team

The team responsible for reviewing and signing off the VAT return should focus on carrying out credibility checks on the data that has ideally been prepared by a separate finance team.  This is so that they can focus on determining whether the transactions have been taxed accurately as opposed to focusing on making sure that the data reconciles although clearly both are ultimately important.

 

VAT Credibility Checks

These should consist of a mix of generic VAT credibility checks that apply to all businesses and also a range that are specific to the VAT risk profile of the business in question.  In all cases the credibility checks should involve the reviewing of a sample of underlying source documents ie invoices, as even a small sample from the total typically generates queries and identifies errors if errors have been made.  It also provides an opportunity to reach into other areas of the business to check eg that proof of export evidence is available within the logistics team.  Such checks mimic the approach HMRC might take during a VAT audit.

One of the key points often overlooked in relation to VAT return review and the credibility checks is that there is no segregation in relation to the specific checks carried out by the various people in the VAT return review chain.  Assuming there is more than one person involved, this means that checks can be duplicated or not carried out at all.

Equally important is documenting the findings of the checks carried out to evidence that they have been carried out.  Documented evidence within the VAT return workbook helps evidence to the tax authority that checks have been carried out.  This can be helpful where an error has been made and HMRC are deliberating over whether to apply a ‘careless behaviour’ penalty.  Evidencing a robust control environment with appropriate credibility checks can assist in demonstrating ‘reasonable care’ with VAT risk management

 

Tax Engines and ERP Systems

Tax engines are bolt on software which runs alongside the ERP system.  It is fair to say they are  typically of most value in the US where the sales tax system is extremely complex and has multiple layers of different taxes and rates within the same state.  In a VAT jurisdiction this is less critical and ERP systems such as SAP and Oracle already automate the VAT calculation in the same way.   It is fair to say that the primary benefit of the actual tax engine itself lies in the fact that the provider of the tax engine will be responsible for updating the VAT rates rates if these change.  Therefore the risk of a rate change being missed diminishes.  Nowadays of course tax engines include lots of other VAT diagnostic tools which can be useful in helping manage VAT risk as outlined above.

 

Summing up Tax Engines and ERP Systems 

The monthly or quarterly completion of VAT returns can consume a significant amount of resource in the finance and tax team but the variety of automation tools available can ease this burden, provided the customer and supplier and other master data is in good shape before they are implemented.  The VAT Consultancy has a great deal of experience of working with businesses to streamline VAT processes and ensure that VAT risk is being effectively managed by the ERP or other VAT accounting system.

 

Get in contact

At The VAT Consultancy we support in the design, implementation and testing of ERP and accounting systems used to report VAT. Stripping away the complexity of the ERP system down to the core processes impacting VAT determination.

Contact us today to schedule a consultation and discover how we can tailor our expertise to suit the unique needs of your business. Let The VAT Consultancy be your ERP system partner, guiding you towards efficiency, compliance, and sustainable growth.

VAT Rules for Commercial and Residential Properties

A Walk Through VAT & Property Rules

By Uncategorized|VAT news, VAT news

The VAT treatment of property transactions is generally perceived to be a very complex area of the tax. In this article we have provided an overview of the VAT treatment of construction/conversion services and the sale of land and property for both residential and commercial buildings. However, the information set out below is high level and we recommend that specific property  VAT advice should be sought due to the complexity of the rules and the high values involved.

VAT on Construction Services – Residential Property

Within the UK VAT at 20% is generally applied to the supply of construction services. However, there are a number of VAT reliefs available for certain types of construction or domestic property development (renovation/conversion works):

Construction

The 0% rate of VAT will apply to the construction of new “dwellings”.

A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied –

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.’

If these conditions are not met, then the construction services will be liable to VAT at 20%.  Only the actual construction work is zero rated and other services related to the property are excluded as follows:

  • Professional services e.g. architects (unless provided under a single design and build contract)
  • Goods on hire e.g. plant/machinery

Building materials

Zero rating applies to both the construction services and the supply of certain building materials which are installed by the building contractor. HMRC’s Notice 708 provides a list of which items qualify as building materials and can be zero rated and which do not.   Generally speaking the materials need to be incorporated into the building for zero rating to apply.

Energy Saving Materials (“ESM”)

With effect from April 2022, the installation of certain qualifying ESMs in (or in relation to ‘residential accommodation’) is subject to a temporary zero-rate until 2027 when the rate will revert to the previous 5% reduced rate.  ESMs include;

  • insulation for walls, floors, ceilings, roofs or lofts or for water tanks, pipes or other plumbing fittings
  • draught stripping for windows and doors
  • central heating system controls (including thermostatic radiator valves)
  • hot water system controls
  • solar panels
  • wind and water turbines
  • ground source heat pumps
  • air source heat pumps
  • micro combined heat and power units
  • boilers designed to be fuelled solely by wood, straw or similar vegetal matter

Residential and charitable buildings

VAT Zero rating also applies to the construction of certain other types of residential building e.g. care homes, student accommodation (known as relevant residential purpose (“RRP”)) and certain buildings used by charities for non business purposes (known as relevant charitable purpose (RCP)). In order to obtain zero rating for these types of buildings, the contractor will need to obtain a certificate from their customer to confirm the building will be used for a qualifying purpose (RRP or RCP). Any change in use of these buildings within 10 years of completion may result in a VAT charge to the user if the new use is non qualifying use.

Zero rating also applies to certain construction works for use by disabled persons, e.g. ramps, door widening, bathrooms etc. A detailed list of qualifying works is set out in HMRC’s Notice 701/7.

There are also special rules for certain conversions for Housing Associations.

Reduced VAT Rate and Residential conversions/alterations

Unless a relief applies, conversion, alteration or refurbishment work on a residential property is standard rated.  However the lower VAT rate of 5% applies to certain residential conversion works:

  • this includes residential property which has not been lived in for at least two years prior to the work commencing. Evidence will need to be obtained to prove the “empty homes” status;
  • the 5% reduced VAT rate also applies to residential conversions which involve a changed number of dwellings e.g. a house being converted into flats and vice versa. The rules here are complex and specific advice should be taken from a property VAT specialist.

Do it yourself VAT refund Scheme

There is a VAT refund scheme for DIY housebuilders who are building new homes for their own private occupation or constructing a new charity building, for a charitable or relevant residential purpose.

The scheme allows VAT recovery on qualifying building materials only. This puts individuals in the same position as a business constructing a new dwelling who would benefit from zero rating by the contractor. There are specific time limits and documents needed (e.g. planning permission etc) to be submitted with the form or online via the Government Gateway account.

Domestic Reverse Charge (“DRC”)

The DRC was implemented with effect from1 March 2021 as an anti-avoidance measure in the construction industry.  It is aimed at preventing VAT being charged and collected but not remitted to HMRC. It works in conjunction with the Construction Industry Scheme (“CIS”) which is also an anti- avoidance scheme for direct tax.

The DRC applies to any building contractor who is both VAT registered and CIS registered. If the services provided fall within the CIS, the contractor does not charge VAT on his invoice for construction services, instead the customer accounts for the VAT due under the reverse charge procedure and recovers this on the same VAT return in accordance with the normal VAT recovery rules. However, the DRC does not apply to the end user e.g. the consumer who employs a contractor to undertake works to which VAT applies (either 20% or 5%). In this case, VAT is chargeable in the usual way by the contractor.   These new provisions are fairly complex and business impacted need to put processes in place to ensure that the rules are applied appropriately.  Specialist property VAT advice should be taken for areas of uncertainty

 

VAT and the Sale of Land or Property

As with construction services above, there are complex VAT rules in respect of the sale of land and property.

Land

The supply of land is typically VAT exempt but with some exceptions – see below under “Buildings” section.

Land includes any buildings, civil engineering works, walls, trees, plants and any other structure or natural object in, under or over it as long as they remain attached to it.

Supplies of land include the grant of an interest in, right over or licence to occupy land in return for a payment or ‘consideration’:

  • Interests in land include surrenders and assignments;
  • Rights over land include easements, wayleaves, rights of entry etc;
  • A licence to occupy exists where there is a right to occupy a defined area on an exclusive basis, for an agreed period of time, e.g. the provision of a specific area of office accommodation, such as a bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, rest rooms, leisure facilities etc.

There are special rules for free supplies e.g. gifts of land/property which are not covered here but specialist property VAT advice is recommended.

Buildings

The sale of, or lease of, a building can be zero-rated, standard-rated, exempt from VAT or outside the scope of VAT depending on the circumstances.

(The law is set out in Schedule 9, Group 1, VAT Act 1994). This provides for VAT exemption for the sale of building, but there a number of exceptions to the VAT exemption, including the supply of;

  • Hotel and holiday accommodation – standard rated
  • Parking – standard rated
  • moorings/pitches for camping – can be standard, zero or exempt
  • Sporting rights/letting of sports facilities – exempt for certain supplies
  • Freehold sales of new/partly completed commercial buildings (less than 3 years old) – standard rated
  • Freehold sales and long leases in dwellings and other residential buildings (RRP/RCP) – zero rated subject to certain conditions being met
  • Transfer of going concerns – outside the scope of VAT if the conditions are met
  • Non residential buildings converted to new dwellings/relevant residential buildings (RRP/RCP) – zero rated. (Non-residential buildings include residential buildings that have not been lived in for at least 10 years)

Each of the above categories has specific and detailed rules regarding the correct VAT treatment.

 

Option to Tax

This is also known as an Election to Waive Exemption.  The supply of land and/or commercial property which would otherwise be VAT exempt, can be subject to VAT if the owner opts to tax their interest in the property. The option to tax does not apply to residential property. (The law is contained in Schedule 10, Para 2, VAT Act 1994. Guidance in HMRC Notice 742A).

Once opted to tax, all supplies of the property including rent and future sales, are liable to VAT at 20% and the option is generally irrevocable for 20 years, with a few minor exceptions.  An option to tax may affect the marketability of a property if the tenant or buyer is unable to reclaim VAT on rent/sale price (e.g. a bank). As such, the decision to opt to tax is a significant one for any business. Landlords entering into leases of tenanted property should ensure the lease allows for VAT to be added to the rent rather than the rental value being deemed to include VAT.

The advantage of opting to tax is that VAT on costs related to the property is recoverable in full, e.g. a landlord may undertake an office refurbishment and the VAT incurred on the cost of this would be a significant cost if he didn’t opt to tax the building as the leasing out of the building would be VAT exempt.  Input tax may be restricted under the rules for partial exemption.

An option to tax is a two step process : firstly making a decision to opt and secondly notifying the option to tax to HMRC.  If the business has previously made exempt supplies of the property, permission may be needed from HMRC prior to opting, although there are a number of scenarios where permission is automatically granted. An option must be notified to HMRC within 30 days of being made on form 1614A. it is not possible to backdate an option to tax.

HMRC will send an email acknowledging receipt of the option to tax. This email should be kept safely as proof of an option to tax being made. In our experience, many businesses involved in sales of property do not know if there is an option to tax in place and this makes the sale process more difficult than it should be, particularly if there will be a Transfer of a Going Concern (see below).

 

Option to Tax Disapplication Rules

These are very complex anti avoidance rules which mean that certain options to tax, even if made, will disapply in practice an in those cases the supply will revert to being VAT exempt, impacting VAT recovery on costs.

In general terms, these rules apply to certain supplies to charities and where there is exempt use of a building, connected parties and the property is within the Capital Goods Scheme (“CGS”). The CGS applies to any property on which VAT is paid and the value is £250,000 or more (it also applies to property refurbishments costing more than £250,000). The CGS runs for 10 years from the date of purchase or the date of first use of the refurbished property.

 

Transfer of a Property Business as Going Concern (TOGC)

For VAT purposes, the sale of a commercial tenanted property is treated as the transfer of a property letting businesses and as such, the sale may be VAT free under the TOGC rules, even in cases where the seller has opted to tax his interest in the property. There are additional TOGC conditions for property which has been opted to tax.  The benefit of TOGC treatment is that the sale is outside the scope of VAT. This provides a significant cashflow advantage but more importantly, Stamp Duty Land Tax is calculated on a VAT inclusive basis. Therefore, TOGC treatment will reduce the SDLT payable.   Where land or buildings transfer as part of a wider TOGC of any business, if the vendor has opted to tax the land/property, the purchaser must also opt and notify HMRC prior to the transfer.  The vendor solicitors are likely to ask for evidence that this has been actioned by the purchaser as it impacts on the availability of the outside the scope VAT relief for the TOGC.

 

Other Property VAT Issues

Property transactions give rise to a number of very specific VAT issues and the most common areas of difficulty we come across are:

  • Determining the taxable person to be VAT registered e.g. scenarios involving joint owners, oint ventures, limited partnerships, beneficial interest holders
  • Supplies between landlords and tenants – e.g service charges, rent free periods, inducements, lease variations etc
  • Managing agents
  • Barter transactions
  • Supplies involving VAT groups
  • Timing and notifications of options to tax
  • Overage payments

This article only scratches the surface of the depth of detail within the VAT legislation and guidance for land and property.

Conclusion

The VAT treatment of land and property transactions is complex, subject to frequent change due to a significant amount of litigation, changes in VAT legislation or HMRC policy.

We recommend that any business involved in property matters should seek advice from a property VAT specialist on a timely basis ie well before a property transaction is due to complete.

As can be seen from the above there are many issues to consider in relation to land and property VAT and The VAT Consultancy is well placed to assist, being a land and property VAT specialist with over 20 years experience in providing property VAT advice to businesses and their advisors.

Get in contact

Whether you’re a land owner, property developer or provide construction services, our team is dedicated to assisting you in navigating land and property VAT.

Contact us today to schedule a consultation and discover how we can tailor our expertise to suit the unique needs of your business.

VAT for Travel Agents

Travel VAT – VAT for Travel Agents

By Customs Duty news|Featured|Uncategorized|VAT news, Uncategorized|VAT news, VAT news

At The VAT Consultancy, we recognise that the travel industry has a huge number of complex VAT rules to get to grips with, particularly given the majority of the transactions the business is dealing with are international so a knowledge of cross border VAT is essential.  For businesses acting as travel agents (Online Travel Agents – OTAs, or Bricks and Mortar), there is a key VAT risk to manage, namely that of being able to demonstrate that the business is acting as a ‘disclosed agent’ rather than a ‘tour operator’ for VAT purposes.  The challenge may even come even earlier than this, in the sense the business first needs to establish which of these ie agent or principal, it is, and the answer to this can differ for VAT purposes to the regulatory or commercial position.

This article aims to walk you through the key travel VAT considerations and issues faced by businesses in the travel sector acting as disclosed agents.    For travel VAT advice relating to TOMS (the tour operator’s margin scheme), which is relevant to travel businesses acting as principals please see attached article: Read more about the impact of TOMS here.

The following captures the issues to be considered in determining which capacity the business is acting for VAT purposes and how this can be supported/evidenced:

  • Agent or Principal

this is the fundamental question a travel agent needs to answer to determine the correct VAT treatment to apply to its activities.  The starting point is to firstly consider the capacity in which the business believes it is acting from a legal and risk perspective and to ensure that this is reflected in the relevant legal documentation.  There are essentially two aspects to the legal documentation, being the contracts in place with the underlying providers of travel arrangements eg hotels, car hire companies, and also the traveller facing documentation which from a legal perspective will be in the form of the website terms and conditions that the traveller is asked to accept before finalising bookings.

  • Contracts

these should clearly indicate the fact that the underlying travel provider is acting as the principal in providing the travel services to the traveller.  This effectively means for VAT purposes that they are selling the travel arrangement in their own name to the traveller.  The contract should also make it clear that the travel agent is simply acting as a disclosed agent in making arrangements for the contract and that the travel agent is not buying in the travel arrangements or on selling them in their own name

  • Website Terms and Conditions

the customer facing website will typically have terms and conditions which make it clear to the traveller that they will be legally contracting with the underlying provider of the travel arrangements rather than with the travel agent, come out with the travel agent simply making the relevant arrangements for the travel to take place in its capacity as disclosed agent

  • Supporting Documentation

in addition to having a clear contractual position as set out above, it is vital that the business also issues supporting documentation ie invoices/booking confirmation documentation that supports this structure:

VAT invoices

VAT that invoices must be issued to B2B customers and as this is a requirement under VAT legislation.  The invoices should show the correct value of the commission earned by the travel agent.  This is important to support the substance of the business being a disclosed agent, and it should show the value of the underlying supply that has been made by the travel provider to the traveller and also the value of the variable or fixed commission earned by the disclosed agent.   This is important so that the underlying travel providers have visibility of the final selling price of the services they are providing directly to the traveller

With regard to the traveller themselves, it is not necessarily to provide a VAT invoice to the traveller and in many cases the business will not have revenues from the traveller.  Instead a booking confirmation document will likely be emailed to the traveller or will be available to them via an online portal.  This document should clearly show the identity of the underlying travel providers and also make it clear that the travel agent is acting in an agency capacity in line with the terms and conditions on the website.

 

Travel VAT Revenue Streams

Having determined that the business is acting as a disclosed agent, the next consideration for VAT purposes is one of whether the revenue stream is B2B or B2C.

B2B

If the business has B2B revenue this means it will typically be receiving a commission from the underlying provider of the travel arrangements eg the hotel or the car hire company for arranging the travel in question.  This commission will either be fixed percentage of the value of the underlying travel being arranged or more commonly it will be a variable commission which allows the travel agent to fix the selling price to the final customer above the net rate provided by the travel provider.  This amount is retained as commission.  In terms of the VAT treatment of commission, this is referred to as intermediary revenue and follows the general VAT rule.  This means that, for UK established travel agents, commissions from overseas travel providers will not be subject to UK VAT.  Instead the overseas travel provider will self assess local via under the reverse charge mechanism where applicable and will fully recover this VAT where the underlying travel provider is in the UK, UK VAT should be charged although there is scope for the commission to be zero rated if the arrangements relate to travel that will take place outside of the UK.

Having B2B revenue as a travel agent is neutral from a VAT perspective as the VAT is charged to the underlying travel provider who can recover this VAT in full and therefore there is no sticking VAT cost.  In addition there is no overseas VAT registration liability for the travel agent.

B2C

If the business has revenue from the traveller it has B2C revenue for VAT purposes and the VAT treatment of the fees is different to that set out above for revenues from businesses.  If the travel agent charges service fees to the traveller for arranging the travel, the VAT treatment is driven by the location of the travel being arranged. If this is within the UK, UK VAT would be chargeable unless the travel is zero rated passenger transport (eg flights, trains). If the travel arrangements take place in the EU, the business would be required to register for VAT overseas and account for VAT at the local rate applying to the location of travel under the One Stop Shop (OSS) mechanism.  This would be at the VAT rate applying to the arrangement being made, so either a reduced or standard rate is likely to apply.  Fees relating to arranging travel taking place outside the UK/EU is not subject to UK/EU VAT.  Technically there may be an overseas VAT registration requirement in the country in question, but in practice travel businesses do not VAT register in multiple countries worldwide outside the UK/EU.  This is due to the fact that the VAT compliance burden and cost would be unmanageable given travel arrangements being sold typically take place in a significant number of countries worldwide.

 

Travel VAT – Other Revenue Streams

Travel agents frequently have other sources of revenue outside of the mainstream commission for arranging travel.  The VAT treatment of this revenue can vary depending upon the nature of the services in question and care should be taken to ensure the correct treatment is applied, with travel VAT specialists being consulted for areas of uncertainty.  Examples of such revenue include override commissions, marketing overrides, commission from financial services (eg foreign currency exchange, virtual credit card payments – VCCs and insurance commissions).   It is important that the business has a good awareness of the impact of having such revenues where any of the revenue is exempt from VAT as opposed to zero rated as this means the business may need to restrict the amount of VAT it recovers on costs under partial exemption rules.  VAT advice should be taken from VAT advisors if required.

Cancellation Fees

The VAT treatment of these has changed significantly over the years and now in the majority of cases these are treated as revenue for the services that would have been provided they therefore carry the same VAT treatment.  Where they are charged to the traveller for cancelling an overseas trip they would be regarded as additional revenue for travel agency services and therefore if the travel is overseas they can be VAT free in line with the VAT treatment outlined above.

Amendment Fees

Where charges are made to the traveller to amend bookings, these services are basic travel agency services and therefore also fall to be treated as intermediary services as set out above.   If  there is a variable Commission agreement in place with the underlying travel provider that allows all fees charged including these to the traveller to be treated as variable commission, these amendment fees would be B2B rather than B2C.

 

Travel VAT Risk Profile

Historically the largest risk faced by UK and EU established travel agents lay in the fact that the tax authorities would frequently challenge their status as agents as opposed to principals and would try to take the view that the tour operators margin scheme (TOMS VAT) applied to their activities, meaning a sticking VAT cost would arise.  However the UK tax authorities have historically been largely unsuccessful during such VAT litigation and therefore the current position for OTAs and travel agents is as set out above.  Since Brexit the VAT risk profile for UK based travel agents has reduced as TOMS VAT no longer applies other than on UK travel HMRC therefore are less interested in trying to prove that a business selling overseas travel is acting as a tour operator.  This risk instead would likely come from an EU tax authority in the event they had visibility of the activities.  However provided the business has appropriate infrastructure and substance to support the disclosed agency status, such a challenge should not arise.

As can be seen from the above there are many issues to consider in relation to travel VAT and The VAT Consultancy is well placed to assist, being a travel VAT specialist with over 20 years experience in providing travel VAT and TOMS VAT advice to businesses in the industry.

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Whether you’re a tour operator, travel agent, or a business providing related services, our team is dedicated to assisting you in navigating travel VAT.

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VAT and Selling Services Cross Border

VAT and Selling Services Cross Border – a Guide

By Customs Duty news|Featured|Uncategorized|VAT news, Customs Duty news|VAT news, VAT news

Selling services cross-border brings with it a number of complex VAT considerations for a business.   Understanding these complexities is critical as this enables you to ensure the business is paying the correct VAT in the correct location.  This means the business is compliant and reduces the risk of errors and penalties from the tax authorities as well as reducing the number of queries from B2B or B2C customers about the amount or type of VAT charged.  Being compliant is critical when due diligence is being carried out in the event of the business looking to sell or to seek additional funding – depending on the circumstances, an unidentified under-declaration of VAT overseas can derail this process.

Being VAT registered in the right place is important to the bottom line as it means the business is able to recover the VAT credits it is entitled to and so that it is able to declare VAT on sales where appropriate, regardless of whether the customers are businesses, not for profit organisations or consumers.

The VAT rules for sales to businesses and consumers differ and these are set out below.  The VAT rules in this article are based on UK and EU principles but are broadly relevant and give an overview of key risk areas further afield although local rules should be checked.

 

VAT Rules for Services – an Overview

The complexity with VAT and services in the first instance lies in two areas and these differ from the VAT rules for goods.

Place of Establishment

Whereas the VAT rules for sales of goods are based on the physical location of the goods when sold, the rules for services are essentially based on the location of the business when providing the services in question.   This may or may not be clear.  Where the business only has offices, staff, technology/equipment and management in a single country, the position is clear.  Where this level of resource is present in a number of countries, it is necessary to look to the establishment that is ‘most closely connected’ to the services being provided.   In the first instance this basically means determining where the staff and technology etc is located that enables the businesses to provide the services in question.   Establishments could be permanent or fixed establishments and for VAT purposes, either is capable of being an establishment for VAT purposes meaning the business effectively has a ‘footprint’ in a particular country, creating a potential need to VAT register.  Hiring staff from an agency or having staff working virtually from home in a particular country can also constitute an establishment for VAT purposes.  Post Covid in some industries it is less common for staff to be working permanently from a fixed office space and therefore this area has become more complex.

Type of Service

The UK and EU VAT rules distinguish between different types of service, with different VAT rules applying to each category.  There is a ‘general VAT rule’ applying to the majority of services but a number of important exceptions to these rules that can change the location in which the VAT is due.

B2B or B2C Customer? the VAT rules for services also differ depending on whether the customer is B2B or B2C.   For VAT and services, the test as to whether a customer is acting in a B2B or B2C basis is based on whether they are receiving the services ‘for business purposes’.  This will normally be clear and the best evidence of business status is to seek the VAT registration number.  If the organisation does not have a VAT registration number, alternative evidence of this status can be accepted.  Businesses should put a process in place when onboarding new customers to ensure they capture relevant information or evidence to support the VAT status.  This is particularly important when operating in an area where not for profit organisations are customers.  Where the customer is a not for profit organisation that might have a mix of business and non business (eg charitable) income, they can be treated as a business.  Using services for private purposes also counts as ‘non business’.

 

VAT General Rule

If a service does not fit into one of the exception categories below, it will be subject to VAT under the ‘general VAT rules’.   These state the following:

  • Where the customer is B2B based on the B2B VAT rules set out above, local VAT would be charged to business customers established in the same country. Where the business customer is overseas, no VAT would be charged, and instead it is likely the business customer would be required to self assess local VAT under the reverse charge (see below).  This would apply in the EU and UK and in the majority of other countries worldwide that have VAT/GST type systems although local rules should be checked.  The logic behind this VAT rules which was introduced in 2010 in the EU/UK, is that is means local VAT is not charged to a business overseas that would otherwise be able to obtain a refund of such VAT through the overseas refund mechanisms.    Generally speaking VAT should not form a cost on a B2B level so having the customer self assess VAT removes the need for overseas refund claims to be filed on this type of service;
  • Where the customer is B2C, the supplier of the services should charge local VAT regardless of the location of the customer. This VAT will form a cost as B2C customers cannot reclaim VAT.

 

Exceptions to the General VAT Rule

If the business is providing services that fit into one of the categories set out below, they are subject to these rules rather than the general VAT rules set out above:

 

Land Related Services

Rather than accounting for VAT based on where the business is established, if the services fall into the ‘land related’ category, they will be subject to VAT where the land in question is located.  This means the business is likely to have to VAT register in this location so that local VAT can be charged and accounted for.  Generally speaking, if the customers is a business customer, they may be required to self assess the VAT under the reverse charge mechanism rather than the overseas supplier VAT registering.   For B2C customers who cannot self assess local VAT, the overseas business would need to VAT register and charge local VAT.

The complexity in this area lies in defining what are land related services (this can differ slightly from country to country) and in determining the VAT rate applicable as there are exemptions and reduced rate VAT reliefs that might apply to land related services.   In broad terms, land related services are those which relate directly to a specific piece of land, property or installed equipment as opposed to generally relating to land.  Land related services include the following:

  • Surveying, valuing or assessing property (onsite or remotely)
  • Construction (or demolition), repair, agricultural services
  • Providing accommodation (hotels, campsites, apartments etc)
  • Property management
  • Estate agency services (including land)
  • Drafting plans for a building, obtaining planning permission
  • On site security
  • Installation of equipment/machinery that becomes permanently fixed to the building
  • Granting the right to use a specific area of land

Once the services do not relate to a specific piece of land/property, and instead are more general (eg general lease related contractual advice, design work for multiple locations), they are not land related and will either be subject to the general VAT rule or one of the other exceptions below.

Services Subject to VAT where Performed

For B2B customers, the services falling into this exception are limited to charges for admission/entrance to an event including services ancillary to this.  This includes seminars, workshops, trade shows, sporting events and ancillary services would include eg charges for the use of cloakroom facilities.  It does not include agency arrangements for such events.

For B2C sales, more services are included, namely those falling within the area of cultural, artistic, sporting and entertainment services.  This includes entertainers performing at events, tours, entrance fees for sporting competitions.  It also includes repair /valuation work on goods

Restaurant services fall under this rule for B2B and B2C customers.

Hire of Means of Transport

The first step here is to be sure whether what is being hired out is a means of transport.  However for the purposes of simplicity here we will assume cars, yachts, bikes, aircraft, and lorries.

The next step is to work out the duration of the hiring agreement – for VAT this is carved up into short or long term.  For most modes of transport short term means 30 days or less, with long term being more than 30 days.  For vessels, this rule changes and short term means 90 days or less.

The rule for B2B and B2C is the same where the hire is short term – it is subject to VAT where the transport is located when it is handed over to the customer.

For long term hire for B2B customers, the services are subject to VAT under the general VAT rule above ie where the customer is established, regardless of where the vehicle is provided to the customer.  However this rule is subject to the ‘use and enjoyment rule’ below.

Passenger and Freight Transport

Passenger transport is defined as services where the customer is transported from A to B in a mode of transport ie they are not required to drive themselves.  Similarly freight transport is defined as services where goods/packages/mail is transported from A to B in a mode of transport ie the customer is not required to drive the vehicle themselves in order to transport the goods.  If they are, this would be the hire of a means of transport rather than passenger/freight transport – see above.

For B2B sales, these are subject to VAT under the general VAT rule above.  However from a UK perspective, UK VAT would not apply if the services are used outside the UK (overseas VAT would likely apply instead so a VAT registration may be needed in the overseas location).

For B2C sales, VAT is due where the transport takes place in accordance with the distance travelled if cross border.  Overseas VAT registration liabilities may therefore arise.

Zero and reduced VAT rates apply to passenger and freight transport in many countries so advice should be taken to ensure the correct rate is applied.

 

Professional/Technical/Financial and Intellectual Services

These services include consultancy, accountancy, software, financial services and advice, legal services when provided to B2C customers (B2B sales of such services are subject to the general VAT rule).  From a UK perspective, sales to UK B2C customers would be subject to UK VAT whilst those to overseas customers would not be subject to UK VAT (such sales to EU customers would be subject to EU VAT under the OSS mechanism).  For EU established businesses supplying these services, such sales to EU customers would be subject to the rate of VAT applying in the EU supplier location, whilst sales to non EU customers would not be subject to VAT.

Intermediary Services

This category includes disclosed agents /brokers ie businesses bringing together someone selling services or goods and a customer.   The agent’s revenue stream is typically a commission or fee for arranging the underlying sale (and is often but not always based on a % of the value of this sale).  B2B sales are subject to the general VAT rule set out above whilst B2C intermediary services are subject to VAT where the underlying sale being arranged takes place.  For example if a fee is charged to a B2C consumer for arranging an overseas hotel in the EU, the fee would be subject to overseas VAT.

Electronic Services

These services include the following:

  • images or text eg photos, screensavers, e-books and other digitised documents, for example, PDF files
  • music, films and games downloads
  • online magazines
  • website supply or web hosting services
  • distance maintenance of programmes and equipment
  • supplies of software and software updates
  • advertising space on a website

For B2B sales the services are subject to the general VAT rule set out above but subject to the use and enjoyment rule set out below.   For B2C sales, from a UK supplier perspective they are subject to UK VAT if supplied to a UK customer and are VAT free otherwise but EU VAT would be due on such sales to EU customers at the rate in the customer country under the non Union OSS scheme  For EU suppliers of electronic services, EU VAT is due on sales to EU customers at the rate applying in the customer’s country, and no VAT is due on sales to non EU customers.

 

Use and Enjoyment VAT Rule

 This is a rule that applies to certain services and scenarios and overrides the VAT treatment set out above.  The purpose of this rule is to ensure the services are subject to VAT where they are actually used/consumed ie where the services are enjoyed.  From a UK VAT perspective, the location test is UK versus non UK use, whereas for EU based suppliers, the test is EU versus non EU use.  This can create overseas VAT registration obligations for a supplier.   The services subject to this rule in the UK are as follows:

  • Hire of means of transport
  • Hire of goods
  • Telecoms Services (B2B only)
  • Electronic Services (B2B only)
  • Radio and Broadcast TV Services
  • Repairs to goods under insurance claim (B2B only)

Within the EU the use and enjoyment rule is in some countries applied to a broader range of services eg marketing, so local rules should be checked.

 

Reverse Charge

The reverse charge is a system whereby the B2B customer is responsible for self assessing local VAT when they purchase services from overseas.  This applies to most services unless they are exempt or zero rated when purchased from a domestic supplier or unless they are already taxed by the supplier on the basis they fall into one of the exceptions above (eg land related).  NB it is possible that a double taxation scenario could arise if a country taxes a services under the use and enjoyment rules and a reverse charge is also due in the customer country on a different basis.  This arose historically in Spain where marketing services are taxed under the use and enjoyment rule but were also subject to the reverse charge in the UK under the basic reverse charge rule applying to marketing services.   The customer is liable to self assess the VAT and can recover this VAT on the same VAT return following the normal VAT rules for deducting VAT on costs – ie if they are ‘fully taxable’ and can recover VAT on business costs in full, they can recover the reverse charge VAT.  For businesses that are partly exempt, they will only recover the relevant proportion of the reverse charge VAT.

It is important to note that reverse charge VAT can also be due on intercompany charges cross border.  If a business has a branch structure rather than subsidiaries overseas, complexity arises in terms of when/how the reverse charge is due so specialist VAT advice should be taken in this case.  This is particularly important for partly exempt businesses as the reverse charge VAT forms a cost and is therefore presents a high VAT risk if overlooked.

 

Specialist VAT Advice

This article demonstrates the broad range of VAT rules applying to sales of services cross border and it is important that businesses are able to apply these accurately to ensure their VAT position is accurate and optimised.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces.  We provide global VAT and customs duty advice and VAT compliance services.  To discuss how we can help contact us today.