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Julie Park

Online Sellers Budget 2016 VAT

By VAT news

We understand that a large online selling platform has written to a number of retailers/traders and their agents requesting confirmation of their VAT number. It is likely that this is in response to the measures announced in the 2016 Budget to counter VAT avoidance and evasion that may have taken place through large online platforms. The measures would potentially make the online platforms jointly and severally liable for any VAT that should have been accounted for on the sale of products.

Should you or your clients receive any correspondence from online platforms regarding VAT registration and you are unsure how to deal with the request and/or need assistance with VAT registration please contact us on +44(0)VAT registration1962 735 350.

VAT in the Gulf region (GCC)

By VAT news

It has recently been announced that the Gulf Cooperation Council (GCC) has agreed that its member states will introduce VAT from 1 January 2018.

The members of the GCC include Bahrain, Kuwait, Oman, Qatar, Saudia Arabia and the United Arab Emirates.

The rate is initially set at 5%, and similar to most VAT systems there will be a range of exemptions.  It is intended that certain foods will be exempt. Certain services, including education and healthcare, will also be exempt.  With rapid growth in the region continuing, the impact on construction and the various world events taking place over the next few years, including the 2022 World Cup in Qatar needs to be fully considered by businesses.

VAT under the magnifying glass

Whilst the implementation date is 1 January 2018, there is a long-stop option which requires full implementation by 1 January 2019. It is expected that further information on the detail of the rules will be available by mid 2016.

As with any introduction of a new tax there is a systems challenge for corporates in terms of how they capture the correct information for reporting and invoicing. Certain GCC member countries rely on cheques and post-dated cheques as the main instruments for carrying out large corporate transactions in certain industries.  Businesses will therefore need to fully understand the tax point rules and how to correctly book these transactions to ensure correct VAT reporting.

There are also a number of free zones in the GCC countries.  The impact of the new VAT rules and the interaction with the existing free zones regulations will have to be considered by businesses.

Please contact Sean McGinness on +44(0)1962735350 for further information.

Brexit – VAT and Customs Duty Considerations

By VAT news

With the date of the referendum now fixed for 23 June 2016 attention is turning to the VAT and Customs Duty considerations of a Brexit and questions are being asked by businesses about the likely timing of any changes and what these might be. The impacts can essentially be broken into 3 key areas for both taxes:
i) Changes to bottom line VAT and Duty costs
ii) Compliance and
iii) Systems

Timing and Transition
HMRC have not, understandably, published any specific VAT and Customs Duty guidance on the impact of an exit from the EU but the Government has published a useful paper ‘The Process for Withdrawing from the EU’. Crucially this details the legal process and the timelines which will be of interest to businesses. In simple terms:
• the UK would have up to 2 years to exit the EU from a legal perspective – this means current VAT and duty legislation which has an EU framework can remain in place during this period
• once the 2 year period is up, the UK can extend the transition period if it has the approval of the majority of Member States
• if no extension is applied for or granted, the UK ceases to be an EU Member State at the end of the two year period.
There would be a number of immediate impacts which are set out below. In terms of the legislation, leaving aside the extreme complexity of enacting new VAT and customs duty legislation, there is no obvious reason as to why we would not simply replicate existing legislation, adopting the same tax point, place of supply rules etc and the same reliefs and similar for customs duty. The elements that become irrelevant and require change are areas impacted by EU as opposed to non EU status. This is where the situation becomes a little complex for VAT – from an outbound perspective ie from a UK supplier’s perspective, HMRC would likely want to retain the tax impact of the EU versus non ‘flag’. This is due to the fact that, generally speaking, B2C transactions with EU counterparts create sticking tax whereas those with a non EU flag do not. Therefore, there would be a drop in VAT revenues unless the legislation is amended to create special rules specifying the VAT treatment of certain transactions where the counterpart is in one of the other 27 Member States.

Bottom Line VAT Costs
There is no obvious attraction in HMRC trying to make wholesale changes to the legislation on Brexit (there could be some politically motivated changes and we expect lobbying regarding the extension of the zero-rate in particular), but there is a question over whether the VAT rates would change. The current rate range is fixed within the EU framework but this would cease to be relevant post exit. It is unlikely that a VAT rate change (up or down) would be an immediate feature as the rates could be changed pre exit within the parameters of the current EU legislation, and the existing rate is competitive within the EU framework. The only caveat on this is the fact that the threat of an exit followed by a positive vote to exit could likely create significant economic turmoil for the UK, and VAT rate changes could be used to counter the impact.
As mentioned above, there are a number of areas of the EU VAT legislation which use an EU versus non EU flag to determine the VAT treatment of a transaction. These include (but is not limited to) the following:
– specified supplies – in the financial services and insurance sectors, transactions with non EU counterparts allow VAT recovery on costs – EU suppliers of such services to UK counterparts will see their VAT recovery rate boosted – this could in theory positively impact on pricing for UK buyers. The more crucial question for the sectors impacted in how their overhead VAT recovery rate is impacted by the loss of the EU/non EU flag
– TOMS – EU travel taxed under TOMS is subject to VAT, non EU travel is not. EU travel companies outside the UK will see their VAT costs reduced, making the UK a more attractive location. For UK businesses does revenue for all non UK destinations become UK VAT free? This seems unlikely given the revenue gap it would create.
– Use and enjoyment – this is applied to certain services and bites in a B2C environment in practice – if the UK becomes a non EU country the VAT treatment of such services used and enjoyed here would change and again UK suppliers could face a material change in the taxation of charges
– The distance selling rules would cease to be applicable to the UK which means that B2C sales of goods to EU customers could become VAT free exports. However, with the tightening of low value thresholds globally, Brexit could force UK retailers to look at maintaining an EU hub to make their sales to EU private customers as EU import procedures could put off potential customers

Bottom Line Costs – Customs Duty
For duty the position is more acute and clear in that, until new trade agreements are in place, the UK would lose the benefit of the duty rates afforded by being an EU Member State. This would increase the landed cost of many goods and, based on current experience it takes a good number of years to negotiate trade agreements.
In addition to the duty rate increasing on imports, current acquisitions from EU Member States become imports and thus attract customs duty at the new higher rate. The impact of the duty rate increase has featured in a number of articles in the mainstream press but the point about the change in status from acquisitions to imports has not been highlighted. This reclassification would create bottom line duty costs in addition to increased compliance costs – see next section.

Compliance
On a positive note Intrastat and EC Sales Lists would no longer need to be completed and this would be very welcome for most businesses. However, where a business trades in goods, this would be replaced by the need to complete additional import and export declarations. This compliance function is often outsourced to a freight agent or customs broker. Therefore, whilst internal resource would be freed up by removing the need to report intra EU transactions for VAT and Intrastat purposes, an additional external cost would arise from the cost of completing the additional entries. The cost of this will vary depending on the commercial arrangements businesses have in place with their agents. This varies from say £1-£2 to around £35 per entry. On a related and perhaps more critical note, deferment account guarantees will need to cover additional amounts as the former intra EU acquisition transactions are reclassified as import transactions. HMRC are currently battling with the new EU customs duty regulations to be rolled out 1 May 2016 (The Union Customs Code, UCC). As with VAT it is likely there would be a clear preference to ape the existing legislative framework, albeit the volume of transactions captured will increase. Almost half of the goods leaving the UK are currently destined for the EU so a Brexit would double the number of export declarations currently processed.

From the perspective of VAT compliance, the UK would presumably lose access to the EU ‘one stop shop’ mechanisms (for electronic service and telecoms providers there is the non-union MOSS scheme that may become relevant) gradually being rolled out in various areas of VAT to remove the burden for a business requiring 28 VAT registrations across all Member States. This would be problematic for smaller to mid-sized businesses in the B2C arena in particular, as they would face a disproportionately high compliance cost and burden in needing to file VAT returns monthly, bi-monthly or quarterly in up to 28 locations in order to remain compliant and ensure their customers are not adversely impacted, for example by the changes in terms of the speed with which they receive their goods.
Triangulation is a simplification measure meaning EU businesses can be in a chain of 3 where the goods move from the original manufacturer in EU Country A to customer in EU Country C, without the supplier in EU Country B needing to VAT register in Country A or C. This easement would cease to be available and Supplier B in the UK would need to VAT register in multiple additional locations in the EU countries where such transactions currently take place and rely on the simplification.

Systems and Resource
Businesses will need to have sufficient warning of any changes to allow them to update IT systems etc where the status of a location has an impact on tax determination and this changes post Brexit. Invoice templates will also need to be changed and any new VAT registrations required as a result of the changes outlined above configured into the system.
One of the potentially critical systems issues however would be HMRC’s import and export system, CHIEF, and its ability to deal with a doubling of the number of transactions it processes as a result of the reclassification of intra EU trade. An overhaul to CHIEF is already tabled for 2016 to 2020 to enable it to meet the requirements of the UCC, and an exit from the EU would likely have an impact on this, in particular the need to ensure that the speed with which CHIEF processes entries is not impeded by the significant increase in volume.
On a more fundamental level there has to be real concern over HMRC resourcing for both VAT and customs duty in the event of a Brexit.

What Should Businesses Be Doing Now?
It is likely that most businesses trading in a significant way with other EU Member States will have initiatives running outside tax to identify the impact of a Brexit on the business. From a VAT and duty perspective the position will remain the same for up to 2 years post Brexit and therefore, as to what should be done now, this is likely to be limited to determining which of the factors outlined above (and any others) are relevant. Where there could be an impact on pricing depending on how changes are implemented, the wider business would need to be aware of this asap so that appropriate decisions can be made in the event of a vote to exit. For the other changes eg the increased compliance burden, there is no clear business case for doing much more at this stage than drawing up a short list of what these impacts could be so that a more specific and detailed piece of work can be done once we know the outcome of the Referendum – the short timescale on this means awaiting the outcome before doing a more detailed analysis is feasible.

VAT and Insurance Intermediary Services – Aspiro

By VAT news

The European Court of Justice (CJEU) has released it decision in the Polish case of Aspiro. The key question in this case was whether the VAT exemption that applies to insurance intermediary services can be applied to claims handling and management services. The case is very similar to the questions raised by the CJEU case in 2005 of Arthur Andersen and reaches the same conclusion – these services are not exempt as they are not provided by a business as part of finding prospective clients or introducing them to an insurer.

The court held that, for the services to fall within the VAT exemption for insurance intermediary services, the supplier must meet two conditions:

• It must have a relationship with the insurer and the insured party, either directly or indirectly. The court held that Aspiro had a direct relationship under its contract with the insurer. This contract also gave it an indirect relationship with the insured (presumably on the basis that the contract could not be performed if Aspiro did not interact with the insured by way of managing the claim); and
• The activities carried out by the supplier must cover the essential aspects of the work of an insurance agent or broker.

It is this second test that was not met. This was because Aspiro was not finding or introducing potential clients. It could therefore not be an insurance intermediary for the purposes of EU VAT law and its services are therefore standard rated. The court indicates that if a business does provide introductory services and also provides other services such as a claims handling then the service could be exempt (this then becomes a question of what is being supplied and whether it is one supply or not).

It is interesting to note that the Court refers to the UK Government position regarding consideration of the definition of insurance mediation under EU insurance law. It dismissed this reference on the basis that it was not relevant for the purposes of VAT law which has to be interpreted narrowly.

What does this mean for the UK?

The case basically reflects the position of the CJEU in the Andersen case which highlighted that the UK VAT law was too wide. HMRC chose not to make changes to the law or guidance following the case and state in their internal manual (VATINS5210) that claims handling and certain administrative services provided in the performance of an insurance contract can continue to be treated as being exempt from VAT until the EU FS review is concluded. This review is not on the agenda currently.

However, with another case adopting the same position we would recommend that claims handlers and other outsourcers in the insurance supply chain continue to monitor the position. Clearly the introduction of a taxable supply to the supply chain impacts on profitability within the chain.

Should you have any queries on the impact of this decision on your business as either a supplier of services to the insurance industry or as an insurer buying in services, please contact Sean McGinness on 01962735350 or at sean.mcginness@thevatconsultancy.com.

Union Customs Code (UCC) – Key Changes and Impacts for Businesses

By Customs Duty news|Featured|Uncategorized|VAT news

The attached slide deck summarises key changes brought about by the new EU wide customs legislation, the Union Customs Code (UCC) which is introduced wef 1 May 2016.  Contact Julie Park on +44 208 977 3228 or julie.park@thevatconsultancy.com if you would like any further information

 

Download it here by clicking the link below:

Union Customs Code (UCC) – Key Changes and Business Impacts.pdf

Copthorn Holdings VAT decision – backdated VAT group registration

By Uncategorized|VAT news

The following summarises the findings in our recent Tax Journal article on the implications of the Copthorn Holdings VAT decision which considered whether a VAT group registration application could be backdated.  Contact us if you would like more details or the full article:group

Speed read

In a recent case, Copthorn Holdings returned to the First-tier

Tribunal for a second time to challenge HMRC’s refusal to accept

a backdated VAT group registration. Following the taxpayer’s

initial success, HMRC was instructed by the tribunal to reconsider

its policy regarding when discretion might be exercised in this

area. e second appeal concerned HMRC’s continued refusal to

allow the backdating, even a€er its policy had been revised. e

tribunal found HMRC’s revision of the published guidance to be

a ‘cynical endeavour’, but its only option was to remit the case

back to HMRC for further consideration, with recommendations

regarding the scope of the policy. the case raises important

questions about HMRC’s approach to its published guidance and

how it should be held to account.

Extent of the VAT insurance intermediary exemption – tightening of HMRC’s view?

By Uncategorized|VAT news

The recent first tier tax tribunal case of Risktop Consulting Limited ( [2015] UKFTT 469 (TC)) seems to represent further evidence of HMRC considering the scope of the UK insurance exemption, notwithstanding their published guidance which states that until the EU Financial Services review is concluded the UK exemption will remain in force.  HMRC agreed during the hearing that this is the case, but appear to be tightening their interpretation on what does and does not fall within the broad UK definition of an insurance intermediary.

The case questioned whether a company that provided surveys and related recommendations to insurers on the level of risk, fell within the exemption for services of an insurance agent acting as an intermediary between the insurer and the potential insured. This is key in an insurance environment as insurers, and others in the insurance supply chain, are VAT sensitive and additional VAT charged will affect margins of suppliers, or represent an additional cost to insurers or their agents who buy in the services.  Risktop had twice been advised by HMRC that their services were exempt, prior to HMRC changing its position.

The Riskstop case

The services in question broadly involved providing a risk report to insurers regarding the potential risk of insuring a particular party.  The report also contained risk improvement recommendations which Risktop assisted the insured/potentially insured party in complying with before a specified deadline to ensure they were covered.  Risktop would also inform the insurer if the deadline would not be met, and the insurer would then decide whether to, for example, change the level of risk/premium or extend the deadline.

Riskstop were instructed and paid by the insurer but also had close contact with the insured. The corporate group had previously received a ruling (for another group entity) that the services came within the VAT exemption. HMRC changed their view and contended that the services did not fall within the VAT exemption for insurance intermediary services as Risktop was not acting as an insurance agent but was instead acting as an outsourced function of the insurer.  As it was not an agent (and it was agree it was not a broker) it could not fall within the exemption for insurance intermediary services.

Wider impact

HMRC could seek to use the decision to review other services being provided in the insurance supply chain.  It is interesting that HMRC referred to aspects of the Arthur Andersen decision, when it has previously stated that the main principal of that case regarding the scope of the UK exemption being too wide would not be implemented in UK law until the EU’s financial services review is concluded.  It would appear however they are now reviewing the scope of the exemption for insurance intermediaries/related transactions (there is also an ongoing appeal in the case of Westinsure relating to the scope of the intermediation exemption). It is therefore something that both service providers and recipients should consider.

 

If you would like to discuss the impact of this case on your business in further detail, please contact Sean McGinness on 01962 735 350.

VAT: Which establishment receives the supply?

By Uncategorized|VAT news

Q: We provide e-learning via a website to private individual customers worldwide. We have an office in New York and use the services of a UK associate company to set up new customer accounts, offer customer support and carry out marketing activity. They raise a monthly invoice to us for this.  All our key decision makers and IT capability (including content development) are in the US.    Our accountants believe we are liable to pay VAT on our revenues from EU customers and also that the UK company should charge us VAT.  Is this correct?

A: Dealing firstly with the customer facing revenues, VAT is due. There is a mechanism for non EU companies selling such services to account for VAT – the Mini One Stop Shop (MOSS) scheme.  This effectively means that you pay the VAT due in each EU country (typically determined by your customer’s country of residence) at the relevant rate.

However, from the background provided there is a wider consideration which creates UK VAT risk in the form of the UK associate company (UK Co) and this is linked to the answer to your second question about the charge for the support services.

Section 7A VAT 1994 states that the place of supply of B2B services is the country where the recipient (in this case US Co) belongs, unless they fall under any of the exceptions, eg land related services, passenger transport, admission to events. The exceptions are not relevant here.

To determine whether UK Co should charge VAT to US Co, we  need to establish where US Co “belongs” – also referred to as where it is ‘’established’’ in the European law (Article 44 EU VAT Directive 2006/112).  As you only have one office which is in the US, then as a matter of fact your “permanent establishment” is in the US, and as a starting point this would be your location for receiving the services (Article 20, EU Regulations 282/2011, HMRC guidance in public notice 741A paragraphs 3.3 and 5.2).

However, there is an additional question which must be answered which is whether the business has another establishment (referred to as a “fixed establishment” ) with the human and technical resources to receive and consume the services being provided.  If the answer is yes, the services are taxed where this alternative establishment is located (Article 21, EU Regulations 282/2011).

For example, if US Co had a branch office in the UK with staff and infrastructure, meaning it could receive and use the services being provided by UK Co, this would likely be viewed by HMRC as being the establishment receiving the services – the monthly charge from UK Co would be subject to UK VAT.

You are probably thinking, “why is this relevant as we don’t have a UK branch?” which leads to a point that most businesses are unaware of, and something that HMRC are other tax authorities are increasingly focusing on.

HMRC’s guidance (notice 741A paragraph 3.4.1) states that a business can have a fixed establishment if:

an overseas business contracts with UK customers to provide services. It has no human or technical resources in the UK and therefore sets up a UK subsidiary to act in its name to provide those services. The overseas business has a fixed establishment in the UK created by the agency of the subsidiary.”

 Whilst the above example talks about connected parties both HMRC and other tax authorities (for example the Polish tax authority in the ECJ case Welmory) have argued that, as the business has UK customers and the UK supplier and overseas business provide the services together, either through an outsourcing agreement or a co-operation agreement, the sub-contractor services are consumed by the customer (US Co) in the UK by virtue of the sub-contractor’s establishment in the UK.  The argument they use is that it would be “irrational” to say that the services are supplied where received in these cases (and not subject to UK VAT).

Clearly this can make it very difficult for a business to determine whether not charging VAT to an overseas customer is “irrational” and therefore should be subject to VAT.  The case of Welmory in 2014 provides some assistance in this respect by stating the fundamental principles are:

  • to “avoid having to undertake complex investigations in order to determine the point of reference (place of supply)”;
  • whether the recipient has the human and technical resources capable of receiving the services being performed; and
  • that the end supply being made by the recipient (US Co ) is to be considered separately from the supply from the subcontractor to it (UK Co’s supply to US Co).

In your case, following this rationale, as all of the business’s key decision makers and IT infrastructure are in the US, following the tests above, it seems clear that US Co is making its supplies to customers from the US, not from the UK in the form of the UK Co, and therefore US Co should account for VAT on EU revenues through MOSS. There would be no longer an advantage to them arguing that UK Co is the fixed establishment for the B2C revenues.

The knock on effect is that the charge from UK Co to US Co for support services is received in the US , and it would be “irrational”  to conclude otherwise.  Unfortunately, we are aware that HMRC continue to challenge this interpretation so it is recommended that you document the reason for UK Co not charging VAT , should HMRC query it – this may protect against any potential penalties in the future.  It is hoped HMRC/other tax authorities and the EU provide clarity on this issue following Welmory.

Originally published in Tax Journal -Ask an Expert on 8 May 2015

VAT and prompt payment discounts: which option is best?

By Uncategorized|VAT news

We are a large corporate that offers prompt payment discounts (PPDs) to some, but not all, of our UK based clients. In addition, we periodically take advantage of the PPDs offered by our suppliers. The guidance issued by HMRC on 22 December 2014 (Revenue & Customs Brief 49/2014) explains our two options from a VAT accounting perspective, but we are struggling to determine which of these is the best fit for our business. What would you recommend?

The guidance was issued as a result of the UK VAT legislation in this area changing to bring it in line with the position in other EU member states. This is captured in VATA 1994 Sch 6 para 4. Previously, where a discount was offered (and regardless of whether it was taken up), VAT was accounted for by both the supplier and the customer on the discounted amount. With effect from 1 April 2015, the full invoice value is booked initially, with a subsequent adjustment if and when the discount is taken up.

A business will only know whether its prompt payments discount (PPD) offer has been taken up once payment has been made, and after a tax point has been created by the issuing of the original tax invoice detailing the PPD offer. Even if payment was made just two days after the initial invoice was issued (which is highly unlikely given the current payment terms in most industries), the impact on the VAT accounting processes is the same. Consideration needs to be given to which process best suits the control framework of the business.

Accounting processes

The actual technical change to the VAT legislation is a simple one to understand: the VAT is accounted on the lower amount only if the discount is taken up. This is, in the main, a straightforward concept. However, as with many areas of VAT, particularly for larger businesses using sophisticated enterprise resource planning (ERP) systems, it is vital that the accounting impact of such changes is fully considered.

The guidance specifies two options in dealing with the discount:

  • Credit note option: The supplier can issue a credit note to the customer if the discount is taken up. The credit note would flow through the accounting systems of the supplier and customer in the usual way, the undiscounted value of the original invoice having been booked by both in the first place on their systems; or
  • Invoice statement option: The supplier can include narrative on his invoice stating that, in the event the customer takes up the discount, he must only recover the lower amount of VAT. In this option, the supplier and customer are to downwardly adjust the amount of VAT they originally booked in their systems without any further documentation changing hands between them. Instead, both parties are to retain evidence of the actual value paid (via bank statements).

There will typically be two key factors to consider in respect of the VAT accounting processes referred to above: tax risk; and the question of whether accounts receivable (AR) and accounts payable (AP) processing is negatively impacted.

The credit note option

This option appears ‘cleanest’ from a tax risk perspective, providing an immediately traceable audit trail in the form of the credit note, a key accounting document. In addition, ERP and other accounting systems have built-in risk management and control functionality, which relies on having documentation to support adjustments.

On the downside, however, for a business using PPDs regularly, this could effectively double the AR and AP process in terms of volume, with two documents rather than one for each sale/purchase involving a PPD. For many AR/AP teams, this could have a serious impact on processing times, requiring more staff or slowing down processes.

In addition, there could be a need to recognise the difference between a normal commercial credit note scenario and a PPD credit note scenario, the former arising from a commercial dispute and the latter simply being a standard VAT process.

The invoice statement option

The potential difficulty with this proposal from a tax risk perspective is that it creates the requirement for an audit trail to be based on something other than a primary accounting document (invoice or credit note).

The suggestion is that the bank statement is used to evidence the value of the actual payment made. To the extent that there is no direct match in values – for example, because the customer has made a single payment relating to several invoices, some where he takes up the PPD and others where he does not – the audit trail could be difficult to identify and this could create tax risk. From a process perspective, there is no doubling up on the documentation being issued, but the requirement to evidence the final value of the transactions means that a control will need to be created to support what will effectively be a manual process to downwardly adjust the value of the original invoice.

Manual adjustments necessarily result in increased processes and the type of controls in the ERP system will differ for each business. As mentioned above, most systems will not allow an adjustment without a document reference. This means that, although this solution would appear to result in fewer documents than the credit note option, in practice the system may require a dummy credit note or similar to evidence the adjustment, meaning the processes could end up being more onerous than in the first option.

Where does this leave us?

There is no obvious answer to the question posed. The only clear point is the absolute need for the AR and AP teams to be heavily involved in determining the way in which the business will implement the new legislation.