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:

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.

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.

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

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.

We are a Spanish company and have won a contract to build a waste disposal plant in the UK. UK and overseas subcontractors will supply us with components for the plant, which will be constructed outside the UK and then shipped here. Engineers on site will provide advisory services in relation to the contract. Will we be required to UK VAT register or is there a simplification we can use? If there is a simplification, does this also apply to the subcontractors?

The starting point has to be to map out the various transactions and identify where any VAT is due in relation to each, and then crucially who is liable to account for it. Although complex, a cross-border contract of this nature should ultimately be VAT neutral for the parties involved. However, neutrality is only achieved if all parties are VAT compliant where they need to be and if the VAT blueprint is properly embedded into processes put in place for invoicing, taking stage payments, etc. throughout the life of the contract.

Let’s focus first on the customer facing contract. Technically, if a business has a contract to supply installed goods to a customer – the key point here being that title passes in the goods in such situations after they have been installed – the place of supply for VAT purposes will be where the goods have been installed, in this case in the UK (VATA 1994 s 7(3)(a) refers).

The question then arises as to who is liable to account for the VAT: the UK established customer, or the Spanish established main contractor? A number of EU member states, including the UK, operate the simplification mechanism, which allows the established customer to account for the VAT. The UK has always made wide use of reverse charge type mechanisms where possible, recognising that it is preferable from a risk perspective to have an established entity bearing the VAT liability in the event HMRC needs access to assets in the case of a default. However, looking at the customer facing transaction in isolation to determine the answer to the question ultimately gives you the wrong outcome. This is because the transactions between the subcontractors and the main contractor hold the key in practice.

Where an overseas subcontractor will be shipping goods to the UK, someone needs to acquire or import them. From a legal and commercial perspective, the UK customer will not take on this liability as they are contracted to purchase installed goods. In the absence of a GB VAT registration number, overseas EU subcontractors cannot ship to the UK without local VAT which will form a cost for Spanish Co.

If, for example, the subcontractor in France needs to ship the components to Belgium for processing, before onward shipping to the UK, care is needed to ensure that a hidden VAT cost does not emerge. The question for the French subcontractor is how he gets the goods to Belgium without a French VAT charge, due to the requirement to either:

• have a BE VAT registration number to allow the zero rated despatch; or
• make use of the temporary movement easements allowing the movement to be ignored (SI 1992/3111 art 4(e)–(h) and SI 1995/2518 reg 42 provide the UK vires for this).

The temporary movement easement appears to provide a useful work around, but this is often unusable as commercial practice frequently results in the goods being sent to the final destination, rather than returned to the initial dispatch country. Unless the French subcontractor VAT registers in Belgium, it is likely that an embedded French VAT cost will arise.

Therefore, whilst the overarching simplification could technically be used by the main contractor when looking at the customer facing contract in isolation, the wider supply chain analysis provides a different outcome, making it clear that the simplification is ultimately of little use for all but the simplest of supply and installation contracts.

With regard to services, a further complication arises where the services are land related; for example, a Polish company providing specialist surveying services in relation to the installation. They too must ask the question of whether they are required to UK VAT register as their services relate to UK land/ immovable property. Their customer, Spanish Co, is not UK established, although it is UK VAT registered. It therefore has a mechanism to account for the VAT. UK guidance makes it clear that the extension to the reverse charge applies to land related services. Notice 741a (para 18.11.1) states ‘the extension to the reverse charge applies if you are UK VAT registered and receive B2B supplies of the services listed in para 18.11 which are supplied in the UK where your supplier belongs outside the UK’.

The position is confusing, as the UK and EU VAT legislation talk about the UK customer needing to ‘belong’  in the UK. VATA 1994 s 8(2)(a) states: ‘sub-s 1 above applies if the recipient is a relevant business person who belongs in the UK’. It is sufficient for Spanish Co to just be VAT registered in the UK, according to the guidance; whereas EU and UK VAT legislation suggest they need to have a fixed establishment in the UK. It is possible a fixed establishment could exist in the construction industry, e.g. a site office with staff and key decision making taking place. For the Polish subcontractor, however, the lack of clarity presents a risk.

The above illustrates how the numerous simplifications for intra-EU transactions cannot always be relied upon, as the conditions attached rarely match commercial flows. Where they cannot be used there are two outcomes: either an increased VAT compliance burden for businesses trading within a supposed single market; or a trapped VAT cost, impacting profitability.

For further information, please contact Julie Park on 0208 941 9200 or julie.park@thevatconsultancy.com

Background

In the context of international trade, a “fixed establishment” is a place (other than the main head office of a business) that has the “human and technical resources” to make or receive supplies.  This is relevant when looking at cross border services to determine where the supply is made from, where it is received and, therefore, where it should be taxed.

The Welmory case

In certain circumstances, it is possible for a fixed establishment to be created through a business’ relationship with a third party (e.g. if a business operates in a particular territory through a dependent agent). The CJEU was asked to consider whether a supplier had created a fixed establishment for its customer.

Welmory  Limited (based in Cyprus) provided an auction website for customers to use to buy goods in Poland.  The website was managed by Welmory Sp z.o.o (based in Poland).  When Welmory Poland invoiced Welmory Cyprus for its website management services, it believed the services were received in Cyprus and, as a cross border supply, did not charge Polish VAT.

The Polish tax authorities disagreed, and argued that the supply should be liable to Polish VAT, because Welmory Poland acted as the “human and technical resources” of Welmory Cyprus, creating a fixed establishment for Welmory Cyprus in Poland.  As a domestic supply, this would be liable to Polish VAT.

The CJEU confirmed the factors that are relevant when considering whether a third party can create a fixed establishment for another business.  In particular, it noted that whilst Welmory Poland did indeed provide some business infrastructure for Welmory Cyprus, it did not do so in the context of enabling Welmory Cyprus to receive its own website management services.

It is for the Polish Courts to apply the CJEU decision to the facts of the case.  However, it was noted that the webservers, software, key decision makers and the people able to conclude contracts were not based in Poland.  If these facts are confirmed by the Polish court, then we would expect it to conclude that Welmory Cyprus does not have a fixed establishment in Poland and the supplies properly take place cross border.

What does this mean for other taxpayers?

The prospect of suppliers routinely creating fixed establishments for their business customers would be worrying for many international businesses, in terms of the level of complexity it would create.  However, this CJEU case doesn’t really tell us anything new – there are circumstances in which the relationship between a business and a third party can create a fixed establishment but the nature of the infrastructure being provided (and in relation to which supplies) needs to be considered on a case by case basis.

If you would like to discuss the impact of this case on your business in further detail, please contact Julie Park on 0208 941 9200 or Julie.Park@thevatconsultancy.com.

From 1 January 2015, supplies of digital services (telecoms, broadcasting and electronically supplied services) to private individuals in other EU Member States will be liable to VAT in the customer’s country.  Rather than registering for VAT in every Member State where customers are located, businesses can discharge their EU VAT obligations via the MOSS.                                                                                                                            

Registration is now open and can be accessed via HMRC’s online services:

https://www.gov.uk/register-and-use-the-vat-mini-one-stop-shop

For further information, please contact Julie Park on 0208 941 9200 or julie.park@thevatconsultancy.com

Overview

Direct mail is frequently used by financial institutions to target new customers, whilst many charities will use it to solicit donations.  As both types of organisations are unable to recover much VAT, they benefit significantly from the availability of zero-rating for printed matter.

For the agencies supplying these mail packs, the rules regarding zero-rating are complex, in terms of:

• what types of printed matter qualify (and therefore, whether the mail pack qualifies overall);  and
• the treatment of other services provided as part of the print process e.g. design, artwork, fulfilment and postage.  On their own, many of these services would be standard rated.  The question therefore arises as to whether they form only a minor part of the contract (“ancillary” to the main supply of printed matter), to enable them to be zero-rated as well.

The question of zero-rating has become even more important, since the changes which resulted in more postal services being subject to the standard rate of VAT – as the benefit of zero-rating as a single supply of printed matter has increased.

The debate with HMRC

The question of zero-rating these additional services has been the subject of much discussion between HMRC, individual taxpayers and representative bodies over the last two years.  Many agencies that supply mail packs to financial institutions or charities have been visited by HMRC anti-avoidance officers, whilst other agencies have contacted HMRC to obtain rulings on the VAT liability of particular supplies.

Many agencies consider that HMRC’s guidance is unclear in relation to:

• the difference between zero-rating of “delivered goods” and the standard rating of “direct mail” services; and
• the point at which additional services no longer qualify as “ancillary” to the supply of printed matter and therefore liable to VAT at the standard rate.

HMRC have attempted to clarify their position and recognise that past guidance has been unclear, with contradictory rulings issued.  Updated guidance is expected shortly and HMRC have indicated that from October 2014, they expect agencies to apply the zero-rate correctly.

Key considerations

That still leaves agencies with the question of which supplies qualify for zero-rating and this will be influenced by:

• the terms of the contract with the customer;
• the scope of the additional services – including the cost and time input relative to the print;
• how the postage services are procured i.e. whether the agency is acting as a principal or merely as an agent between Royal Mail and the client.

Based on the above, we consider that it is still possible for some mail packs to qualify for zero-rating, although these are likely to be subject to scrutiny from HMRC.  As such, the VAT liability will need to be carefully considered for each type of mail pack being supplied to a client that cannot recover all of the VAT it incurs.  Although it is possible that HMRC will adopt a light touch in respect of past errors (given the lack of clarity in their guidance), this isn’t guaranteed it would be prudent to review all such contracts within the last four years, to avoid potential assessments and penalties.

For further information please contact:

Steve McIntyre  (steve.mcintyre@thevatconsultancy.com)

Rowena Clifton (rowena.clifton@thevatconsultancy.com)

HMRC have published Revenue Brief 32/2014, confirming that whilst their policy post-BAA remains unchanged, they have updated their guidance on deal costs.

What was the BAA case about?

The Ferrovial Group set up a new company (ADIL) to acquire the shares of airport operator BAA.  ADIL incurred £6m of VAT on professional costs at a time when it was not registered for VAT.  After the takeover, ADIL joined the BAA VAT group and sought to recover the VAT incurred.

In order to recover the VAT, the taxpayer needed to prove that ADIL was carrying on an economic activity (or intended to) at the time the costs were incurred, and that there was a direct link between the takeover costs and the taxable supplies of the BAA VAT group.

The Court of Appeal found that at the time the costs were incurred, ADIL’s only intention was to take over the group by acquiring the shares.  There was no intention to carry out an economic activity such as providing management services (or to even join the BAA VAT group), even though this did come later.

What next?

HMRC’s guidance has been updated to reflect the specific scenario that was considered in the BAA litigation.  Although BAA was denied leave to appeal to the Supreme Court, HMRC have indicated that they will review their policy again once a number of similar German cases (Larentia and Minerva) have been heard in the Court of Justice of the European Union (CJEU) in 12 to 18 months time.

Despite the ruling in BAA, deal costs remains an area where many businesses may still be eligible to recover a proportion of the VAT they incur.  However, as the BAA case shows, VAT needs to be considered early on, not just in the context of the structure of the transaction, but also the post takeover activities and good quality documentation will be critical.  BAA demonstrates just how difficult it is to deal with VAT effectively after the deal is done.

For further information on the recovery of VAT on deal costs please speak to Julie Park (julie.park@thevatconsultancy.com or 0208 941 9200).

Following the recent seminar on the 2015 VAT changes for broadcasting, telecoms and e-services, HMRC has published its responses to the questions raised which can be viewed on HMRC’s website (http://tinyurl.com/k5fx3n8).

The European Commission is continuing its roadshows with an event in Warsaw on 9 September 2014, followed by an event in the US in Santa Monica on 16 September 2014, and they are useful forums for businesses to attend.

In preparation for the 2015 VAT changes we have prepared a MOSS readiness project document to assist businesses with their planning – http://www.thevatconsultancy.com/mini-one-stop-shop-download/

Should you wish to discuss mini-one stop shop for broadcasting, telecoms and e-services and what your businesses needs to do prior to 1 January 2015 please contact your usual TVC contact or Sean McGinness on +44 (0) 1962 735350 or Julie Park on +44 (0) 208 9419200