Category Archives: Imports

VAT in the Digital Age (ViDA)

By   16 December 2024
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EU Member States (MS) recently agreed the much-discussed ViDA package. Since Brexit, this does not directly affect the UK, however, it is an important pointer to the future and where we are all heading, so it will impact the UK in some ways.

The ViDA package (or a version of the finalised package) was first discussed in 2022 and has gone through a tortuous process before all MS agreed it.

What is ViDA?

ViDA aims to tackle what have been identified as three main challenges:

  • Real-time digital reporting

The new system introduces real-time digital reporting for cross-border trade, based on e-invoicing. It will give MS the information they need to increase the fight against VAT fraud, especially carousel fraud. The VAT Gap – the difference between expected and actual VAT revenue, has been widening across the EU over a number of years.

It is said that the move to e-invoicing will help reduce VAT fraud by up to €11 billion a year and bring down administrative and compliance costs for EU businesses by over €4.1 billion per year over the next ten years. It should ensure that existing national systems converge across the EU, and this should pave the way for EU countries that wish to introduce national digital reporting systems for domestic trade.

More on e-invoicing here.

  • Updated rules for the platform economy

Technological and business developments, especially in e-commerce, mean that VAT rules have struggled to keep pace. Under the new rules, platforms facilitating supplies in the passenger transport and short-term accommodation sectors will become responsible for collecting and remitting VAT to tax authorities when their users do not, for example because they are a small business or individual providers.

This will ensure a uniform approach across all MS and contribute to a level playing field between online and traditional short-term accommodation and transport services. It will also simplify life for SMEs who currently need to understand and comply with the VAT rules, often in different EU countries.

  • Single VAT registration

Building on the already existing VAT One Stop Shop (OSS) model for e-commerce, the package allows more businesses selling to consumers in another MSs to fulfil their VAT obligations via an online portal in one EU country. Further measures to improve the collection of VAT include making the Import One Stop Shop (IOSS) mandatory for certain platforms facilitating sales by persons established outside the EU to consumers in the EU.

Commentary

Many countries worldwide already have versions of e-invoicing and real-time reporting or plan to introduce them. Businesses operating in the EU will need to consider how the new rules impact them and what changes are needed for; systems, procedures, tax declarations, along with the commercial implications.

ViDA should result in a more harmonised VAT system and the UK will need to keep in step in order to avoid becoming even more of a commercial outlier.

The UK has also confirmed a consultation on e-invoicing so lessons which can be taken from ViDA will undoubtably inform the UK process.

HMRC publish 2024 VAT annual statistics

By   9 December 2024
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This document provides an overview of VAT statistics and covers; VAT receipts in the UK (including home and import VAT). It also contains statistics and analysis on the VAT business population and registrations.

The Headlines

  • total VAT receipts in the financial year 2023 to 2024 increased by 6% to £169 billion compared to £160 billion in 2022 to 2023
  • the VAT population in 2023 to 2024 was 2,178,950, with 238,176 new registrations and 273,768 de-registrations in-year
  • total net home VAT liability in 2023 to 2024 was £173 billion
  • the wholesale and retail sector was the largest contributor to net VAT liability (32%) with a total of £55 billion
  • businesses with an annual turnover of greater than £10 million paid 75% of total net VAT liability (£130 billion)

VAT: Second-hand goods scheme and best judgement – The Ancient & Modern Jewellers Limited case

By   7 October 2024
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Latest from the courts

The second-hands of time.

In the First-tier Tribunal (FTT) case, the issue was whether the second-hand goods margin scheme (margin scheme) was applicable and whether HMRC’s assessments for £5,474,249 (later reduced to £5,004,595) of underdeclared of output tax were issued in best judgement.

Background

The Ancient & Modern Jewellers Limited (A&M) sold second-hand wristwatches with the majority of the sales properly accounted for via the margin scheme. However, from information obtained from Italian tax authorities in respect of supply chain fraud, HMRC issued the assessments on the basis that supplies of certain goods did not meet the conditions of the margin scheme so that output tax was due on the full value of the watches rather than the difference between the purchase and sale values. HMRC decided to penalise A&M because the errors were deliberate and prompted and subsequently to issue a PLN on the basis that such conduct was attributable to the director. A&M is a “High Value Dealer” for anti-money laundering purposes.

Contentions

Appellant

The appellant claimed that HMRC did not use best judgement on the grounds that:

  • the inspector did not impartially consider the evidence
  • HMRC lacked sufficient evidence to raise an assessment thereby failing to meet the Van Boeckel test
  • the calculated amounts were no more than unreasonable and random guesses
  • the inspector did not approach the investigation with an open mind to such an extent that it could not be said that the assessments and penalties were the product of the reasonable behaviours of HMRC
  • put in terms of the case law: HMRC had acted in a way which no reasonable body of commissioners could have acted or, put another way, had been vindictive, dishonest or capricious

so the assessments and penalties were invalid.

Whilst accepting that a best judgment challenge is a high bar A&M contended that the conduct and mindset of HMRC’s investigating and assessing officer was so unreasonable that it vitiated the whole assessment.

Respondent

HMRC contended that the assessments were based on best judgement and that its focus was not on the supply chain fraud claims (as claimed by A&M). Additionally, a previous inspection in 2014 had raised prior concerns which provided adequate grounds for the assessments. Moreover, A&M was aware of the terms of operation of the second-hand margin scheme and considered that A&M had wilfully misused the scheme in several regards. The scheme had been incorrectly used for goods purchased by way of intracommunity supplies – which had been imported with the appellant claiming input tax on the imports and then including them in the margin scheme. A&M wilfully failed to carry out due diligence on its suppliers.

Best Judgement

It may be helpful if we consider what the words “best judgement” mean. This was best described by Woolf J in Van Boeckel v CEC [1981] STC 290

“What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act, then they are not required to carry out investigations which may or may not result in further material being placed before them.”

Technical

The second-hand margin scheme is provided for under The VAT Act 1994, Section 50A, The Value Added Tax (Special Provisions) Order 1995 and certain paragraphs of VAT Notice 718 which have force of law.

Decision

The appeal was dismissed. It was found that A&M deliberately rendered inaccurate VAT returns. The director of the company was aware both of how the margin scheme worked and that the terms of the scheme had to be complied with if a supply was to be taxed under the it. A&M was found to have acted deliberately in misusing the scheme by including ineligible supplies. A&M had been lax in the completion of its stock book, and it had not met the record-keeping requirements necessary to use the scheme for the relevant transactions. Additionally, some of its EU suppliers were not registered for VAT, a fact A&M did not take steps to discover, and so related purchases could not qualify for the scheme. Also, it was likely that some of the purchases were of new watches which made them ineligible for the margin scheme.

Re, evidence; the FTT found much of the A&M director’s evidence to have been self-serving and, in parts, evasive and that it did not consider that the integrity of HMRC could be impugned. The court determined that; the inspector was diligent and thorough, HMRC had legitimate concerns regarding A&M’s use of the margin scheme generally and specifically and there was a wider concern that the company was a participant in fraudulent supply chains. The FTT considered that the investigation was proportionately carried out considering these concerns and the assessments raised in exercise of best judgment.

Penalties and PLN

The case further considered penalties: whether the appellant’s conduct was deliberate (yes – appeal dismissed). Whether the Personal Liability Notice (PLN) [Finance Act 2007, Schedule 24, 19(1)] was appropriate for the conduct attributed to the director – whether his conduct led to penalty (yes – appeal dismissed).

Commentary

This case is a long read, but worthwhile for comments on; the margin scheme use, HMRC’s inspection methods, best judgement, evidence and MTIC amongst other matters.

What VAT CAN’T you claim?

By   12 August 2024
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VAT Basics
The majority of input tax incurred by most VAT registered businesses may be recovered. However, there is some input tax that may not be. I thought it would be helpful if I pulled together all of these categories in one place:

Blocked VAT claims – an overview

  • No supporting evidence

In most cases this evidence will be an invoice (or as the rules state “a proper tax invoice”) although it may be import, self-billing or other documentation in specific circumstances. A claim is invalid without the correct paperwork. HMRC mayaccept alternative evidence, however, they are not duty bound to do so (and rarely do unless the amount is minimal). So ensure that you always obtain and retain the correct documentation.

  • Incorrect supporting evidence

Usually this is an invalid invoice, or using a delivery note/statement/pro forma in place of a proper tax invoice. To support a claim an invoice must show all the information set out in the legislation. HMRC are within their rights to disallow a claim if any of the details are missing.

  •  Input tax relating to exempt supplies

Broadly speaking, if a business incurs VAT in respect of exempt supplies it cannot recover it. If a business makes only exempt supplies it cannot even register for VAT. There is a certain easement called de minimis which provide for recovery if the input tax is below certain prescribed limits. Input tax which relates to both exempt and taxable activities must be apportioned. More details of partial exemption may be found here.

  •  Input tax relating to non-business activities

If a charity or NFP entity incurs input tax in connection with non-business activities this cannot be recovered and there is no de minimis relief. Input tax which relates to both business and non-business activities must be apportioned. Business versus non-business apportionment must be carried out first and then any partial exemption calculation for the business element if appropriate. More details here

  •  Time barred

If input tax is not reclaimed within four years of it being incurred, the capping provisions apply and any claim will be rejected by HMRC.

  •  VAT incurred on business entertainment

This is always irrecoverable unless the client or customer being entertained belongs overseas. The input tax incurred on staff entertainment costs is however recoverable. A flowchart for recoverability in this area here.

  •  Car purchase

In most cases the VAT incurred on the purchase of a car is blocked. The only exceptions are for when the car; is part of the stock in trade of a motor manufacturer or dealer, or is used primarily for the purposes of taxi hire; self-drive hire or driving instruction; or is used exclusively for a business purpose and is not made available for private use. This last category is notoriously difficult to prove to HMRC and the evidence to support this must be very good.

  •  Car leasing

If a business leases a car for business purposes it will normally be unable to recover 50% of the VAT charged.  The 50% block is to cover the private use of the car.

  • Fuel costs

The element of fuel costs used for personal use is blocked. There are three ways to treat input tax on fuel:

    • claim 100% of the VAT charged. This is possible if fuel is bought for business motoring only or for both business and private motoring and the appropriate road fuel scale charge is applied on the value of supplies of fuel for private use
    • use detailed mileage records to separate business mileage from private mileage and only claim for the business element
    • claim no input tax
  •  A business using certain schemes

For instance, a business using the Flat Rate Scheme cannot recover input tax except for certain large capital purchases, also there are certain blocks for recovery on for Tour Operators’ Margin Scheme (TOMS) users

  •  VAT charged in error

Even if a business obtains an invoice purporting to show a VAT amount, this cannot be recovered if the VAT was charged in error; either completely inappropriately or at the wrong rate. A business’ recourse is with the supplier and not HMRC.

  •  Goods and services not used for a business

Even if a business has an invoice addressed to it and the services or goods are paid for by the business, the input tax on the purchase is blocked if the supply is not for that business’ use. This may be because the purchase is for personal use, or by another business or for purposes not related to the claimant business.

This is not input tax and therefore is not claimable. However, there are exceptions for goods on hand at registration and which were purchased within four years of registration, and services received within six months of registration if certain conditions are met.

  •  VAT incurred by property developers

Input tax incurred on certain articles that are installed in buildings which are sold or leased at the zero rate is blocked.

  •  Second hand goods

Goods sold to a business under one of the VAT second-hand schemes will not show a separate VAT charge and no input tax is recoverable on these goods.

  •  Transfer of a going concern (TOGC)

Assets of a business transferred to you as a going concern are not deemed to be a supply for VAT purposes and consequently, there is no VAT chargeable and therefore no input tax to recover.

  •  Disbursements

A business cannot reclaim VAT when it pays for goods or services to be supplied directly to its client. However, in this situation the VAT may be claimable by the client if they are VAT registered. For more on disbursements see here.

  •  VAT incurred overseas

A business cannot reclaim VAT charged on goods or services that it has bought from suppliers in other EU States. Only UK VAT may be claimed on a UK VAT return. There is however, a mechanism available to claim this VAT back from the relevant authorities in those States. Details here. However, in most cases, supplies received from overseas suppliers are VAT free, so it is usually worth checking whether any VAT has been charged correctly.

  • Business assets of £50,000 and more

There are special rules for reclaiming input tax using the Capital Goods Scheme, which means a business must spread the initial VAT claimed over a number of years.

VAT: Carousel fraud – How to recognise it and how to avoid been caught in it

By   8 August 2024
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VAT carousel fraud, also known as missing trader fraud or missing trader intra-community (MTIC) fraud, is a complex and highly sophisticated process used by organised criminals which involves defrauding governments of money that should be paid in VAT. It involves a series of transactions where goods are repeatedly bought and sold across borders, with the criminal acquiring goods free of VAT (exports of goods are tax free) and then reselling them with VAT added. The fraudster then does not pay output tax to the relevant authority, usually disappearing or closing the business without doing so. It mainly takes place in Europe, but also increasingly in South East Asia.

Round and round

If the goods are not sold to consumers (B2C) but rather, the transactions pass through a series of businesses.  To perpetuate a carousel fraud, companies often create a number of sham shell companies to conceal the nature of the transactions in a complex web.  The shell companies continue to trade with each other, and the transactions go round and round like a carousel. This can be almost endless. It is possible for the same goods to be traded many times between companies within the carousel fraud scheme network. Often, these transactions do not actually occur – the goods do not actually move from one party to another, but false invoices are issued.

It is common for these criminals to use the fraudulent money they have illegitimately obtained from other large scale illegal activities.

Innocent participants

Unfortunately, carousel fraud can involve innocent businesses. This often mean that these businesses suffer a VAT cost because HMRC will refuse to repay an input tax claim as the matching output tax was not paid by the missing trader. HMRC do this on the basis that the claimant knew, or should have known, that (s)he was involved in a VAT fraud (so perhaps not always so innocent).

Refusal to repay an input tax claim

This option is available to governments using the “Kittel” principle. This refers to a Court of Justice of the European Union (CJEU) case – Axel Kittel & Recolta Recycling SPRL (C-439/04 and C-440/04) where it was held a taxable person must forego his right to reclaim input tax where “it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT”.

The right of input tax deduction may also be denied where the taxpayer could/should have guessed that their transactions involved VAT fraud.

Due diligence

It is crucial that businesses carry out comprehensive due diligence/risk assessment to avoid buying goods that have been subject to carousel fraud anywhere along the supply chain. It is not enough to avoid a refusal to repay input tax to say to HMRC that a business just “didn’t know” about a previous fraud. The scope of verification of a transaction will depend on its size, value, and the type of business, eg; whether it is a new or existing business partner. Transactions with regular suppliers should also be verified, although there should be be a lower risk of VAT fraud.

HMRC sets out in its internal manuals guidance on due diligence and risk assessment which is helpful. The following quote sets out the authorities’ overview:

“The important thing to remember is that merely making enquiries is not enough. The taxable person must take appropriate action based on the results of those enquiries. Therefore, for example, if the taxable person has undertaken effective due diligence/risk assessment on its supplier and that due diligence/risk assessment shows one or more of the following results in relation to the supplier:

  • only been trading for a very short period of time,
  • managed to achieve a large income in that short period of time,
  • a poor credit rating,
  • returned only partly completed application or trading forms,
  • contacted the taxable person out-of-the-blue etc,

and yet the taxable person still goes ahead and trades without making any further enquiries, this could lead to the conclusion that the due diligence/risk assessment was casually undertaken and of no value”.

Carousel VAT fraud investigations

HMRC carries out serious VAT investigations via the procedures set out in Public Notice 160 in cases where they have reason to believe dishonest conduct has taken place. These are often cases where larger amounts of VAT are involved and/or where HMRC suspect fraudulent behaviour. If a business is under investigation for carousel VAT fraud it will receive a letter from HMRC. The consequences of a carousel VAT fraud conviction are serious, and a recipient of such a letter is strongly advised to contact a specialist carousel fraud barrister immediately to provide expert legal guidance.

The Reverse charge (RC) mechanism

Governments take the threat of carousel VAT fraud very seriously and are continually implementing new measures to deter the schemes. The UK has introduced changes to the way that VAT is charged on mobile telephones, computer chips and emissions allowances to help prevent crime (it was common to use these goods and services in carousel fraud).

The RC mechanism requires the purchaser, rather than the supplier, to account for VAT on the supply via a self-supply. Therefore, the supplier does not collect VAT, so it cannot defraud the government.

The future

VAT policy is consistently updated, so businesses must be aware of these changes to ensure compliance. Technology is being progressively used to fight fraud, and again, businesses need to be aware of this and the obligation to upgrade their own technology to comply with, say; real time reporting, eInvoicing, and other innovations. Compliance technology is increasingly employed to detect inconsistent transactions which means that a business must be compliant, because if it isn’t it will be easier for the tax authorities to detect. Even if non-compliance is unintentional the exposure to penalties and interest is increased.

How to pay duties and VAT on imports – updated guidance

By   22 July 2024
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HMRC has updated its guidance on how to pay Customs Duty, Excise Duties and VAT on imports from outside the UK.

The document covers, inter alia:

The update includes the removal of references to the Customs Handling of Import and Export Freight (CHIEF) system, as all import declarations must now be made through the Customs Declaration Service.

VAT: Fulfilment House Due Diligence Scheme registered businesses list updated

By   18 July 2024
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HMRC has updated its tool to check if businesses that stores third party goods in the UK is registered with the Fulfilment House Due Diligence Scheme for traders based outside of the UK.

The scheme applies to a business which stores any goods that:

  • were imported from a country outside the UK
  • are owned by, or stored on behalf of, someone established outside the UK
  • are being offered for sale and have not been sold in the UK before

If the scheme applies, failure to apply means a business:

  • will not be allowed to trade as a fulfilment business
  • will risk a £10,000 penalty and a criminal conviction

To apply

Apply online for the Fulfilment House Due Diligence Scheme.

A business cannot use an agent to apply on its behalf.

Managing a Customs Warehouse. Updated HMRC guidance

By   14 May 2024
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The new guidance explains how to manage a Customs Warehouse, handle goods, and process, repair and move goods.

Customs Warehouse

A Customs Warehouse is a warehouse that is under Customs control. Goods stored in a customs warehouse are not in free circulation. No duties or taxes have to be paid until that time when you ship the goods to their next destination.

There are two types of Customs Warehouse where goods may be stored.

  • Public warehouse

This is a warehouse operated by a business whose purpose is to store other people’s goods. They are the warehousekeeper and you’re the depositor.

  • Private warehouse

This is a warehouse operated by you to store your own goods. You are the warehousekeeper and the depositor.

You do not need to be authorised by HMRC to be a depositor in a public or private customs warehouse but, if you operate a private customs warehouse, you’ll need to be authorised as the warehousekeeper.

The warehousekeeper is responsible for coordinating general warehouse operations and activities including shipping and receiving deliveries, conducting stock checks, documenting warehouse transactions and records, and storage of inventory.

To be approved as a warehousekeeper, a person will need to:

  • be established in the UK
  • have an EORI number
  • be financially solvent
  • have a good compliance record in dealing with customs
  • prove you have a business need for the warehouse
  • be able or prepared to make declarations, or employ an agent who is
  • be able to keep inventory records and run the warehouse to health and safety standards
  • provide a guarantee if needed for Customs Duty and VAT unless you’re an Authorised Economic Operator or can meet Authorised Economic Operator conditions

Guidance Amendments

Updates include information for warehousekeepers who use a duty management system and guidance on when someone else uses your warehouse.

New centralised HMRC website to manage imports and VAT

By   15 April 2024
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HMRC guidance

HMRC has published a website Manage your import duties and VAT accounts, which provides a centralised place from which businesses importing goods can manage payment and guarantee accounts, manage and view authorities, and download duty deferment statements, import VAT certificates, postponed import VAT statements, and notification of adjustment statements. The website can only be accessed via the Government Gateway.

From this site a business can:

  • view and manage its cash account (top up and withdraw funds)
  • set up a Direct Debit for, and top up a duty deferment account
  • request older statements and certificates
  • view and manage a general guarantee account
  • manage the email address linked to an account
  • access secure messages from HMRC related to the account
  • set up, manage or view account authorities

Downloads are also available for:

  • duty deferment statements
  • import VAT certificates (C79)
  • postponed import VAT statements
  • notification of adjustment statements

To use the service a business must be subscribed to the Customs Declaration service.

VAT: HMRC agent update

By   23 January 2024
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HMRC have published a recent agent update. In respect of VAT it covers:

  • reporting accurate tax turnover for VAT registration
  • reporting VAT deregistration to HMRC
  • reporting dissolved companies and VAT deregistration to HMRC
  • reporting insolvent companies and VAT deregistration to HMRC
  • intending traders
  • DIY housebuilders’ scheme digitalisation
  • changes for goods moving from the island of Ireland to GB from 31 January 2024