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A New Year : A New Rule for the Supply of Transport

By Uncategorized|VAT news No Comments

The New year brings with it a new VAT rule for the B2C supply of the long-term hire of a means of transport.

With the exclusion of the long-term hire of a pleasure boat, the place of supply for VAT purposes will change from the place where the supplier has established his business to the place where the customer belongs. Long-term hire means 30 days or more for all transportation with an exception of the long-term hire of a vessel (in which case the period is 90 days or more).

What are the New Rules?

Where the supplier and the customer belong in the same country this will mean that there will be no change to the current VAT treatment applied – the supplier will continue to charge local VAT.

– However, where the customer belongs in another EU Member State this will mean that the supplier will have a requirement to register and charge local VAT in the country in which the customer belongs.

How do I determine where my customer belongs?

The customers’ place of belonging is his usual place of residence.

– The usual place of residence of an individual is not defined in the VAT legislation.

– HMRC interpret the phase according to the ordinary usage of the words – meaning the country were the individual has set up home with his  family and is in full-time employment.

– An individual is not resident in a country if only visiting as a tourist.

With the intending changes to the personal tax residency rules that are also due to come into play next year, suppliers affected by the change will need to carefully consider the evidence obtained to support its customers usual place of residence. This will obviously have a knock-on effect to how the supplier will account for VAT and its wider compliance obligations.

Please let us know if you would like to discuss this issue in more detail. You can call us on 01962 735350.

HMRC Success in Med Hotels Case – What is the impact for the sector?

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The Court of Appeal has released its decision in the Secret Hotels 2 Ltd (formally the Medhotels) case – the Upper Tribunal decision has been overturned, with the Court of Appeal reaching the same conclusion as the First Tier Tax Tribunal.

The appeal, heard in July 2012, concerned whether the bed bank operated as an disclosed agent or principal, the latter making it liable for VAT under the Tour Operator Margins Scheme (‘TOMS’). In making its decision the Court of Appeal placed particular weight on the following facts and concluded that MedHotels was not simply supplying agency services but was itself buying in and re-supplying the services in its own name.

1)      MedHotels dealt with holidaymakers in its own name in respect of the use of its website and in the services of its local handling agents;

2)      MedHotels dealt with holidaymakers in its own name (and not as an intermediary) in those cases where the hotel operator was unable to provide accommodation offered;

3)      MedHotels dealt with matters of complaint and compensation in its own name and without reference to the hotel operator;

4)      MedHotels used the services of other taxable persons (the hotel operators) in the provision of the travel facilities marketed through its website;

5)      MedHotels did not provide the hotel operators located in other EU countries invoices in respect of its commission making it impossible for hotel operators to comply with their obligations to account for local VAT on the full selling price of the product; and

6)      MedHotels treated deposits and other monies which it received from holidaymakers and their agents as its own monies – it did not enter those monies into a client suspense account nor did it account to the hotel operator for those monies.

Travel businesses operating on a similar model to MedHotels are at risk of challenge by HMRC if their fact pattern is similar. For those business operating tight margins the application and additional VAT payable under TOMS could be enough to wipe out all profit obtained from the sale of EU holiday products.

Although the case specifically refers to the sale of hotel accommodation, the same principles are likely to apply to other travel products sold on the same basis (such as the sale of flights on an undisclosed agency basis). Businesses caught by this decision should therefore look at the wider picture and not just at the sale of hotel accommodation.

In light of this decision some travel business may have no option but to consider mitigating their VAT position. For those providing passenger transport, the UK Transport Company concession may be of benefit if not already implemented.  Others may be forced to consider more radical options such as off-shoring the business to a non-EU location. For non-EU established business supplying TOMS products, there is a clear competitive advantage to those who are supplying the products from an EU establishment as the EU Commission continues to try and agree a way in which the current loophole (allowing such sales to be VAT free), can be plugged. Clearly any business migration has to be supported by robust implementation to ensure the requisite functions have exited the original country and moved overseas.

It may not be the end of the road for the case if MedHotels is given leave to appeal to the Supreme Court. However, the outcome of the Court of Appeal will give some no option other than to consider whether it is still viable to operate under their existing arrangements.

Please contact Martyne Pearson on 01962 737 961 or via email if you have any questions regarding the above.

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

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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?

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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?

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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.

Exports and Insufficient Evidence

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We are encountering an increasing number of instances where clients are failing to retain sufficient evidence to confirm that exported goods have actually been shipped out of the UK. Exporters are required to retain documentary proof that goods have physically been exported from the UK and this evidence must be obtained within 3 months of the date of export and retained for a 6 year period. In circumstances where a business does not hold satisfactory export evidence then HMRC will not only assess for the output tax due and interest but are also likely to impose a penalty equivalent to 30% of the VAT due!

A number of the exposures have come to light following reviews we have undertaken on behalf of clients, particularly in relation to establishing whether the SAO criteria are satisfied, but others have come about because of specific enquiries made by HMRC and it is clear that this is becoming a priority area for HMRC to review.

Our experience is that failure to retain sufficient export evidence tends to arise due to one of the key following reasons:

– It’s not my job!it is apparent that in many instances no one individual in the finance department actively manages or takes responsibility for the export process and it is often assumed that someone in the shipping department takes responsibility or it is being dealt with elsewhere in the organisation.

– Ex Works Sales/Indirect Exports sales where the seller physically hands over the goods to the customer or their haulage company when the goods are still within the UK frequently give rise to problems where it becomes particularly difficult to obtain appropriate evidence of export from the customer or their haulier once the transaction has taken place. HMRC specifically identify these as high risk transactions and will expect exporters to meet a high standard of evidence.

– Reliance on your haulier – very often the evidence to confirm that goods have been exported is not held by the exporter but by their haulier and we frequently find that there is no service level agreement in place which creates any obligation on the haulier to retain the evidence on behalf of the supplier.

– Customers EU VAT number – it is a legal requirement to show the EU customers VAT number for goods delivered to a customer in another EU state in order to support zero rating,failure to have this will mean that the supply cannot be zero rated.

– Poor or incomplete Audit Trail – the lack of a clear audit trail were the transport document, consignment notes, invoice do not clearly identify the precise goods which have been shipped (eg reference/stock numbers, specifications, quantity, weights, pallet numbers etc) will result in a HMRC challenge.

It’s also worth bearing in mind that in terms of the quality of export evidence retained this will have to qualify as either “official” or “commercial” documentation and in whichever case this must be supported by “supplementary” evidence to show that a transaction has taken place and that this relates to the goods physically exported. In our experience we often find that clients are unsure as to what constitutes either “official”, ”commercial “ or “supplementary” evidence and are surprised to learn that what they actually retain falls very much short of what is required to support zero rating.

At The VAT Consultancy we have extensive experience in advising clients on ensuring that the evidence they retain is sufficient to support the zero rating of exports and where this is is not the case make appropriate recommendations to improve procedures going forward and remedy any potential liabilities or exposures which may exist.

If you have any queries in relation to this matter please do not hesitate to contact Julie Park or John Forth on 01962 735350.

Getting ready for RDR – are IFAs VAT compliant?

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January 2013 is only a few months away and a lot of uncertainty remains regarding the VAT treatment of financial advisory services. The long awaited formal guidance from HMRC has failed to clarify the VAT position with regard to the definition of ‘advice’. Therefore, there is still a high level of subjectivity and from our experience many financial advisers are unsure how to handle VAT especially for advisory services provided in an intermediary capacity.

Under RDR, the term ‘advice’ covers a broad range of functions including:

– recommendation

– referral and

– intermediation work around product distribution.

The objective of RDR is to move the focus from the current commission-led environment to a fee-based structure where intermediaries (termed ‘advisers’) charge in relation to the work done. This is aimed at removing any ‘hidden’ bias in product recommendations and ensuring that advisers fully disclose the nature of their advice and provide the best service to clients.

Although it may be clear from a RDR perspective that the IFA is providing ‘advice’, the type of advice and the capacity in which the advice is provided, will determine the VAT treatment of the services being performed. Because of this ambiguity it is not surprising that IFAs have been questioning if the VAT treatment historically applied has been correct.

Working with a number of firms of IFAs we have seen examples at both ends of the spectrum. There seems to be little consistency within the industry as far as the VAT treatment is concerned. Some firms are over accounting for VAT by charging VAT on all advisory services, whereas others are potentially at risk of challenge from HMRC having treated all supplies as exempt from VAT. In practice, much will depend on the contractual position and the nature of the services provided.

This is not a satisfactory situation when IFAs have to deal with so many other challenges to comply with the imminent RDR implementation. Mistakes could be costly resulting in either applying the incorrect VAT treatment or creating a VAT risk.

If you would like assistance with this matter please call Martyne Pearson on 01962 735350.