Category Archives: Latest VAT news

VAT: Land & Property – Option To Tax Update

By Marcus Ward 3 June 2019

Who opts to tax?

HMRC have published an updated Public Notice 742A The changes are in connection with authorised signatories, in particular; corporate bodies, overseas entities and powers of attorney. It is important to establish who can sign an option to tax (OTT) form VAT1614A as getting it wrong may invalidate an OTT with potentially very expensive consequences.

A guide to the OTT here.

It seems an appropriate time to look at who can sign an OTT form. HMRC guidance states:

“The person responsible for making the decision and notifying the option to tax depends on the type of legal entity holding (or intending to hold) the interest in the land or building, and who within that entity has the authority to make decisions concerning VAT. In most cases it will be the sole proprietor, one or more partners (or trustees), a director or an authorised administrator. If you have appointed a third party to notify an option to tax on your behalf, HMRC requires written confirmation that the third party is authorised to do so.”

Some specific situations:

Beneficial owners

In cases where there is both a beneficial owner and a legal owner of land or buildings for VAT purposes it is the beneficial owner who is making the supply of the land or building. It is therefore the beneficial owner who should OTT. This may not be the case where the beneficiaries are numerous, such as unit trusts and pension funds. In these cases, the person deemed to be making the supply is the trustee who holds the legal interest and receives the immediate benefit of the consideration.

Joint owners

Joint ownership is where two entities purchase land or buildings together, or one party sells a share in property to another party. Usually, a supply may only be made by both entities together. The two entities should OTT together as a single option and register for VAT account for output tax as a single entity (usually a partnership even if it is not a partnership for any other purpose.).

Limited partnerships

Under the Limited Partnership Act 1907 every limited partnership must be registered with Companies House. A limited partnership is made up of one or more general partners, who have unlimited liability, and one or more ‘limited’ partners, who are not liable for debts and obligations of the firm. A limited partner is unable to take part in the management.

If there is only one general partner and one or more limited partners, the general partner is treated as a sole proprietor for VAT registration purposes. If there are two or more general partners and one or more limited partners, the general partners are treated as a partnership. It is the general partners who should OTT.

Limited liability partnerships (LLPs)

An LLP has separate legal status from its members and is able to enter into contracts in its own right. An LLP is a body corporate and is may register for VAT. If the partnership decides to OTT, one or more members, as the authorised signatory must sign the notification.

Authorised persons for particular legal entities

In order for an OTT to be notified effectively, it must be signed and dated by an authorised person who possesses the legal capacity to notify a decision.

List of authorised signatories

Legal entity	Authorised persons
Sole trader (proprietor)	Owner of the business
Trust	Trustee (or partner if VAT2 is completed)
Partnership (UK)	Any partner (on VAT2)
Partnership (Scotland)	Any partner
Limited partnership (UK)	General partner
Limited partnership (Scotland)	General partner
Limited Liability Partnership	Designated member or member
Unincorporated Association	Chairperson, treasurer, trustee or company secretary
Limited company	Company director or company secretary
Community Interest Company (CIC)	Company director or company secretary
Charitable Incorporated Organisation	Director, chairperson, treasurer, trustee, or company secretary
Community Benefit Society	Chairperson, treasurer, trustee or company secretary
Local Authority	Section 151 officer (or Section 95 officer in Scotland), town clerk, head of finance, or treasurer
VAT group	Director or company secretary of the group member that owns the property
Government department	Nominated VAT liaison officer or finance manager (or a person senior to either)
Corporate body acting as a director, trustee or company secretary	Any office holder or employee authorised by the corporate body (as long as the corporate body itself has authorisation from the owner the property)
Overseas entity	Director or manager
Power of attorney	Anyone granted a power of attorney to administer or manage the tax affairs of the owner of a property

Commentary

An invalid OTT may result in, among other things:

Input tax recovery being barred
A potential Transfer of a Going Concern (TOGC) becoming subject to VAT
VAT registration being denied
Unwanted complexity in transactions with the potential for a deal to be aborted
Costs in unwinding the VAT position (if firefighting is possible)
Uncertainty
Delays in transactions
A dispute between two sides to a transaction
Past input tax being the subject of clawback
The Capital Goods Scheme (CGS) being triggered resulting in VAT costs and complexity
HMRC levying penalties and interest

It is important to get the, seemingly simple, process of OTT right, and right first time!

The ABC of VAT – property

By Marcus Ward 28 May 2019

A glossary

Anyone who has had even the slightest brush with VAT will know that it is a very complex tax. Now, multiply that complexity by the intricacy and occasionally arcane nature of property law and one may see that the outcome will be less than straightforward. I have produced a general guide and an article on residential property VAT Triggerpoints

I hope the following glossary will help with steering through some of the difficulties.

Annex– a building which is joined to or is next to a larger main building usually an extension or addition to a building
Assign – to transfer the right or interest in a property from one party to another
Break clause – a clause allowing either landlord or tenant to give written notice after a particular date or period of the tenancy in order to end the tenancy
Beneficial owner – party deemed to make a supply of property rather than the legal owner
Blocked input tax – VAT which a developer is unable to recover when constructing a new dwelling. Typically, expenditure on good such as; carpets, fitted furniture, and gas and electrical appliances
Building materials– goods ordinarily incorporated into a property which attracts similar VAT treatment to the construction services.
Capital Goods Scheme(CGS) – a method of calculating the recovery amount of input tax incurred on property over a ten-year period, Details of the CGS here
Certificate – a document issued to a supplier in order to obtain certain zero-rated or reduced-rated building work
Change of number of dwellings– usually a conversion from commercial to residential, or a single house into flats (or flats into a single house) at 5% VAT
Consideration– a thing done or given in exchange for something else = a supply. Usually quantified in money, but in some cases non-monetary consideration
Construction of new dwellings – a zero rated supply
Contract – legal document detailing the agreement of terms between the vendor and buyer
Contractor – entity responsible for building works
Conversion–work on a non-residential building which results in a property designed as a dwelling(s) being created
Covenants – rules governing the property in its title deeds or lease. May impact the definition of dwellings
Curtilage– either a garden, or an area surrounding a building which is deemed to be part of the property
Designed as a dwelling– a property initially designed for residential use, regardless of any subsequent alternative use
Dilapidations – items that have been damaged during a tenancy for which the tenant is responsible for the cost of repair or replacement. Usually VAT free
DIY Housebuilders’ Scheme – a scheme which ‘self-builders’ to recover VAT on a new build dwelling or conversion. Details here
Dwelling– a building deemed to be residential
Empty house – if, in the ten years before work on a dwelling starts, it has not been lived in, the work may be subject to 5% rather than 20% VAT
Exempt– a supply that is VAT free. It usually results in attributable input tax falling to be irrecoverable
Facade– a wall (or two walls on a corner plot) which may be retained without affecting the zero rating of a new dwelling construction
Grant– a supply of an interest in land
Holiday home – the sale or long lease of a holiday home cannot be zero-rated even if it is designed as a dwelling
Housing Association – a non-profit organisation which rents residential property to people on low incomes or with particular needs
In the course of construction– meaningful works that have occurred in relation to the construction of a building (but prior to its completion)
Incorporated goods – goods sold with a new dwelling which are zero rated and to which the input tax block does not apply. See white goods
Input tax– VAT incurred on expenditure associated with property
Interest in, or right over, land– the right to access to and use of, land. Usually via ownership or lease
Lease – legal document governing the occupation by the tenant of a premises for a specific length of time
Licence to occupy– a permission to use land that does not amount to a tenancy
Live-work units – a property that combines a dwelling and commercial or industrial working space. Usually subject to apportionment
Major interest–a supply of a freehold interest or a lease exceeding 21 years
Multiple occupancy dwelling – a dwelling which is designed for occupation by persons not forming a single household
New building–a commercial building less than three years old the sale of which is mandatorily standard
Non-residential– a commercial building which is not used as a dwelling
Open market value – likely sale price with a willing seller and buyer, with a reasonable period of marketing and no special factors affecting the property
Option to tax (OTT) – act of changing the exempt sale or letting of a commercial into a taxable supply. The purpose is to either; recover input tax or avoid input tax being charged. Details here
OTT disapplication– the legal removal of a vendor’s option to tax
OTT not applicable – the OTT does not apply to residential buildings (so VAT can never apply to dwellings)
OTT revocation– the ability to revoke an option to tax after six months or twenty years
Partial exemption– a calculation to attribute input tax to exempt and taxable. Generally, VAT incurred in respect of exempt supplies is irrecoverable
Person constructing – a developer, contractor or sub-contractor who constructs a building
Premium – upfront payment for a supply of property
Relevant Charitable Purpose (RCP)–the use by a charity for non-business purposes or for use as a village hall or similar
Relevant Residential Purpose (RRP)– dwelling used for certain defined residential purposes, eg; children’s home, a hospice or student accommodation
Reverse surrender– a tenant surrenders an onerous lease to the landlord and makes a payment to surrender
Share of freehold – where the freehold of the property is owned by a company and the shareholders are the owners of the property
Single household dwelling– a building designed for occupation by a single household
Snagging – the correction of building faults. Usually follows the VAT liability of the original work
Stamp Duty Land Tax (SDLT) – tax paid by a purchaser of a property. SDLT is increased if the sale of a commercial property is the subject of an option to tax
Substantial reconstruction– certain significant works to a listed building
Surrender– a tenant surrenders the lease to the landlord in return for payment
Taxable supply– a supply subject to VAT at the standard, reduced or zero-rate
Use as a dwelling – a building which was designed or adapted for use as someone’s home and is so used
Vendor – entity selling a property
Transfer of a Going Concern (TOGC) – the VAT free sale of the assets of a business as a going concern. This may include a tenanted property
Zero-rated– a taxable supply subject to VAT at a rate of 0%

We strongly recommend that advice is obtained if any property transaction is being undertaken.

Details of our land and property services may be found here.

VAT: Treatment of vouchers, gifts and discounts – How business promotions work

By Marcus Ward 24 May 2019

Business promotions are an area of VAT which continues to prove complex. This is further exacerbated by changes to the legislation at EU and domestic level and ongoing case law. The main points are; whether there is a supply, and, if so, what is the value of that supply?

I hope that the VAT position is helpfully summarised here. I thought it may be useful if the VAT treatment of various business promotion schemes is summarised in one place.

…I recall a statement from an old mentor of mine; “if you have a marketing department you have a VAT issue!”

Summary

Offer	How to charge VAT
Discounts	Charged on the discounted price (not the full price)
Gifts	Charged on the gift’s full value – there are some exceptions listed below
Multi-buys	Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc	No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
Face value vouchers that can be used for more than one type of good or service (multi-purpose)	No VAT due, if sold at or below their monetary value
Face value vouchers that can only be used for one type of good or service (single-purpose)	VAT due on the value of the voucher when issued
Redeemed face value vouchers	Charged on the full value of the transaction at the appropriate rate of the goods provided in return for the voucher

Exceptions for gifts

There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.

Free goods and services

A business is not required to account for VAT on things like free samples if they meet certain conditions.

Supplies	Condition to meet so no VAT due
Free samples	Used for marketing purposes and provided in a quantity that lets potential customers test the product
Free loans of business assets	The cost of hiring the asset is included in something else you sell to the customer
Free gifts	The total cost of all gifts to the same person is less than £50 in a 12 month period
Free services	You don’t get any payment or goods or services in return

Background

Face value vouchers

Recent changes, radically alter the UK rules for face value vouchers (FVV). FVVs are; vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services.

Examples of FVVs would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.

Single or multi-purpose

The most important distinction for FFVs is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher then little has changed. If it is a single purpose voucher, however, HMRC will now required output tax to be accounted for at the date it is issued.

Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.

For example:

a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to either books (zero rated) or an e-book download (standard rated) from the same seller will be multi-purpose
a voucher which entitles you to £10 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and you can buy a take away with the voucher (or hot food) then it would be multi-purpose.

The above means that for single purpose vouchers VAT is due whether the voucher is actually redeemed or not; which seems an unfair result. There is no way to reduce output tax previously accounted for if the voucher is not used.

Please contact us if you, or your clients use this type of business promotion. of course, get it wrong, and there is likely to be a financial penalty!

VAT: Worldwide rates and registration limits

By Marcus Ward 20 May 2019

It can be difficult finding the answer to simple questions on VAT/GST. So, I provide a summary below of the rates of VAT applicable in the major countries which apply VAT/GST and the amount of income per year that a domestic business may receive before it is required to VAT register. You, or your clients, will need to be aware of these if they have a Place Of Supply (POS) overseas. I hope that it is useful to have this information all in one place – a “cut out and keep” type document!

Worldwide VAT/GST rates			Annual turnover limit for Registration
	Standard rate	Reduced rates	National currency	Limit
Australia	10.0	0.0	AUD	75 000
Austria	20.0	10.0/13.0	EUR	30 000
Belgium	21.0	0.0/6.0/12.0	EUR	25 000
Canada	5.0	0.0	CAD	30 000
Chile	19.0	N/A	CLP	None
Czech Republic	21.0	10.0/15.0	CZK	1 000 000
Denmark	25.0	0.0	DKK	50 000
Estonia	20.0	0.0/9.0	EUR	40 000
Finland	24.0	0.0/10.0/14.0	EUR	10 000
France	20.0	2.1/5.5/10.0	EUR	82 800
Germany	19.0	7.0	EUR	17 500
Greece	24.0	6.0/13.0	EUR	10 000
Hungary	27.0	5.0/18.0	HUF	8 000 000
Iceland	24.0	0.0/11.0	ISK	2 000 000
Ireland	23.0	0.0/4.8/9.0/13.5	EUR	75 000
Israel	17.0	0.0	ILS	99 003
Italy	22.0	4.0/5.0/10.0	EUR	65 000
Japan	8.0	N/A	JPY	10 000 000
Korea	10.0	0.0	KRW	30 000 000
Latvia	21.0	5.0/12.0	EUR	40 000
Lithuania	21.0	5.9/9.0	EUR	45 000
Luxembourg	17.0	3.0/8.0/14.0	EUR	30 000
Mexico	16.0	0.0	MXN	None
Netherlands	21.0	9.0	EUR	1 345
New Zealand	15.0	0.0	NZD	60 000
Norway	25.0	0.0/12.0/15.0	NOK	50 000
Poland	23.0	5.0/8.0	PLN	200 000
Portugal	23.0	6.0/13.0	EUR	10 000
Slovak Republic	20.0	10.0	EUR	49 790
Slovenia	22.0	9.5	EUR	50 000
Spain	21.0	4.0/10.0	EUR	None
Sweden	25.0	0.0/6.0/12.0	SEK	30 000
Switzerland	7.7	0.0/2.5/3.7	CHF	100 000
Turkey	18.0	1.0/8.0	TRY	None
United Kingdom	20.0	0.0/5.0	GBP	85 000

Source National Delegates – position as at 1 January 2019

Notes

Reduced rates include zero-rates applicable to domestic supplies (ie; exemption with right to deduct input tax). They do not include zero-rated exports or other supplies subject to similar treatment such as international transport.

Registration/collection thresholds identified in this table are general concessions that relieve domestic suppliers from the requirement to register for and/or to collect VAT/GST until such time as they exceed the turnover threshold. Thresholds shown in this table apply to businesses established in the country. In most countries, the registration threshold does not apply to foreign businesses ie;. businesses having no seat, place of business, fixed establishment, domicile or habitual residence within the country.

VAT – Business Entertainment Flowchart. What input tax may I recover?

By Marcus Ward 10 May 2019

Input tax recovery on entertainment

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable. The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EC involvement and case law. Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances. It seems reasonable to treat entertaining costs as a valid business expense. After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings. However, HMRC sees things differently and there is a general block on business entertainment. It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT. It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

VAT – Business Entertainment Flowchart

The future of VAT and online marketplaces

By Marcus Ward 7 May 2019

Latest

The Organisation for Economic Co-operation and Development (OECD) recently held a forum which considered how to level the playing field between traditional and online businesses and to collect the correct amount of tax. It is recognised that the current rules and different application of those rules in different countries has led to VAT not being collected in full in respect of online transactions.

OECD

The OECD Global Forum on VAT is a platform for a global dialogue on international VAT standards and key issues of VAT policy and operation.

The report

The subsequent report The role of digital platforms in the collection of VAT/GST on online sales focuses on the design of rules and mechanisms for the effective collection of VAT on digital sales of goods, services and intangibles, including sales by offshore digital sellers. It states that it provides “practical guidance to tax authorities on the design and implementation of a variety of solutions for enlisting the platforms economy, including e-commerce marketplaces and other digital platforms, in the effective and efficient collection of VAT/GST on digital sales”.

Background

Tax action is necessary as global B2C e-commerce sales of goods alone are now estimated to be worth in the region of USD 2 trillion annually with projections indicating they may reach USD 4.5 trillion by 2021, USD 1 trillion of which is estimated to be cross-border e-commerce with approximately 1.6 billion consumers buying online. This clearly represents considerable VAT revenue which is at stake.

See details on online evasion here

Issues

The problems which have been identified in previous report are:

imports of low-value parcels from online sales which are treated as VAT free in many jurisdictions, and
the strong growth in the trade of services and intangibles, particularly B2C, on which often no, or an inappropriately low amount of VAT is levied due to the complexity of enforcing VAT payment on such supplies

Exemptions for imports of low-value goods have become increasingly controversial in the growing digital economy. At the time when most of these exemptions were introduced, internet shopping did not exist and the level of imports benefitting from the relief was relatively small. Over recent years, many countries have seen a significant and rapid growth in the volume of low-value imports of goods on which VAT is not collected. This results in decreased VAT revenues and unfair competitive pressures on domestic retailers who are required to charge VAT on their sales.

Summary

The focus was on the rôle of digital platforms. These are capable of collecting a vast amount of data. The report stated that it is reasonable to require this information/data to be shared and that is proportionately relevant for VAT compliance purposes, ie; necessary to satisfy the tax authorities that the tax for a supply has been charged and accounted for correctly by the underlying supplier.

The two potential models are:

to make the digital platform fully liable for the payment and remittance of VAT on the online sales they facilitate
or, alternatively, to limit the responsibility of the digital platforms to simply assisting authorities in the collection of VAT

Implementation

Two options could be considered for the implementation of any information sharing obligation for digital platforms in connection to online sales:

provision of information on request. Under this option, a jurisdiction requires that a digital platform retains records of the sales that are subject to VAT in that jurisdiction, and that this information be made available on request.
systematic provision of information. Via this option, a digital platform is required to systematically and periodically provide information on online sales carried out via the platform to the tax authority of the jurisdiction of taxation.

Overall

The report is a good “solid” and long study (I cannot however, recommend it as holiday reading, although the above précis may assist). The proposed solutions are sensible, considered and workable and are likely to, at least, provide more equality and a better way for tax authorities to collect tax which is due.

VAT: Transactions in Bitcoins

By Marcus Ward 1 May 2019

Further to my articles here and here concerning transactions involving cryptocurrencies, and considering the increased use of them, it seems timely to provide an update on the VAT treatment of certain business activities which use Bitcoins as a value for exchange, or payment for goods or services.

What is cryptocurrency?

Cryptocurrency is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.

What is Bitcoin?

Bitcoin was the first popular cryptocurrency and it first appeared in 2009. The advantage of bitcoin is that it can be stored offline on the owner’s local hardware (a process called cold storage) which protects the currency from being taken by others. If a person loses access to the hardware that contains the bitcoins, the currency is lost forever, and it is estimated that as much as 23% of bitcoin has been mislaid by miners and/or investors.

Exchange between currencies and bitcoin

The VAT treatment of transactions exchanging traditional currencies for Bitcoin, or Bitcoin for currencies carried out for consideration (added by the supplier) are exempt services in a similar way to any other currency transactions via The VAT Directive Article 135(1)(e).

Paying for goods or services using Bitcoin

Similar to any other payment method, simply using Bitcoin to obtain goods or services is outside the scope of VAT and no VAT is due on the value the Bitcoin represents. That is to say that the authorities do not consider that such a transaction is a barter.

Provision of goods or services in return for Bitcoin payment

The provision of goods or services paid for in Bitcoin are treated in a similar way as any supplied for consideration consisting of

Traditional currencies, or
Non-monetary consideration

and the value is; anything received by the supplier in consideration of that supply.

Should the consideration be in Bitcoin, there two alternatives for the conversion of foreign currencies into the main currency of a Member State (although these were drafted before the introduction of Bitcoin and originally relate simply to foreign currencies)

the latest exchange rate recorded on the most representative exchange market of the Member State, or
the latest exchange rate published by the European Central Bank

However, as above, because Bitcoin is not administered by any bank, this may make valuation difficult. The VAT Committee of the European Commission (EC) has indicated that a potential resolution is to use Open Market Rate (OMR*) as the exchange of the virtual currency. This would be the responsibility of the supplier. This is likely to be commercially available information from the websites of the likes of; coindesk, Cryptocompare or Cointelegraph for eg.

All of the above seems logical, although confirmation provided by the EC VAT Committee is welcome.

* OMR is the amount for which an asset is transferred between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

VAT: Zero rating of prescriptions

By Marcus Ward 29 April 2019

Latest from the courts

The UK is unique in the EU for the zero rating of medicines prescribed by a registered medical practitioner.

In the First Tier Tribunal (FTT) case of Pearl Chemist Ltd (Pearl) the issue was whether the development of new technology and legislation affected the zero rating of prescriptions written by UK registered and non-UK registered doctors and the interpretation of “registered medical practitioner”.

Background

Pearl is authorised to dispense medicines prescribed online by doctors based in countries based in the European Economic Area. It contracted with a third party which operated websites which offered medical screening and services, primarily for conditions such as erectile dysfunction, hair loss and obesity/weight loss.

Customers of the third party could obtain an online consultation with qualified doctors. If the doctor decided to issue a prescription, the written prescription would be sent to Pearl who would then despatch the medicine directly to the individual customer on behalf of the third party. Pearl treated all these supplies as zero-rated. The relevant law covering such prescriptions changed in 2008 such that it was now possible to dispense drugs prescribed by a qualified doctor based outside the UK.

HMRC formed the view that these supplies were not covered by the UK zero rating on the basis that an EU qualified doctor who is not registered with the GMC is not a registered medical practitioner. An assessment for output tax was issued in respect of supplies made against prescriptions written by non-UK doctors.

The issues

The issues, broadly were:

Are qualified doctors based outside the UK covered by the description “registered medical practitioner” in UK legislation?
If not, does this breach of the principle of fiscal neutrality? (Whether there is clear discrimination between identical supplies made on the prescription of UK doctors and doctors from other EU countries)

Decision

The judge ruled that the UK zero rating does not cover prescriptions written by non-UK doctors as they are not within the definition of “registered medical practitioner” Consequently, the supplies must be standard rated in the UK. However, the exclusion of medicines prescribed by overseas doctors from the zero-rating constitutes a breach of the principle of fiscal neutrality. This seemed good news for Pearl, but…the Tribunal stated that it was unable to provide an effective remedy for that breach and accordingly dismissed the appeal and affirmed HRMC’s assessment.

Commentary

This decision seems rather harsh on the appellant. It appears that the judge ruled that she had no power to override UK Parliament’s intention despite the inherent “unfairness” of the outcome of this intention where identical supplies were treated differently depending on where the prescription was written.

Certainly an odd one and I wonder if this is the last of this matter. Any business in a similar situation may need to review its position on the basis of this decision.

Changes to recovery of VAT on imports

By Marcus Ward 15 April 2019

HMRC have recently issued RCB 2 (2019) which sets out HMRC’s view on Toll Manufacturers (TM). TM is an arrangement in which a company which has a specialised equipment processes raw materials or semi-finished goods for another company. It may also be called toll processing. Typically, a TM will import, say, pharmaceutical goods, process and distribute them within the UK for clinical trials on behalf of an overseas owner.

HMRC has become aware that a number of UK TMs have paid import VAT on behalf of overseas customers have also claimed a corresponding deduction for input tax under VAT Act 1994 Section 24. However, there is no provision in UK law for such deduction.

Current treatment

TMs will usually act as importer and recover import VAT via a C79 despite them not being the owner of the goods (the owner instructs the TM to carry out works on their goods on their behalf).

HMRC has now confirmed that this VAT treatment is incorrect, and it will no longer be permitted.

New treatment

Only the owner of the goods will be treated as the importer and be able to recover import VAT. TMs will no longer be able to claim this VAT.

However, HMRC will not require TMs to make adjustments to past claims and the treatment will only be required going forward.

Introduction

The change comes into effect from 15 July 2019

Affect

Affected TMs are likely to need to make significant changes to their systems before that date.

Overseas owners of the relevant goods will either need to:

register for UK VAT and claim the import VAT on a “regular” return, or
make a claim via the Thirteenth VAT Directive (86/560/EEC)

NB: In cases where title has passed before import into the UK (businesses sell on the goods before importing them into the UK so ownership and title has passed to the new owner, however the business that sold the goods acts as importer on UK import declarations, pays the import VAT to HMRC and receives the import VAT certificate – C79) the correct procedure is for the new owner of the goods to be the importer of record and reclaim the import VAT and not the previous owner.

As with many areas of VAT, a No-Deal Brexit is likely to increase the complications for such cross-border transactions in the future.

Please contact us if you have any queries or require assistance on this matter.

VAT: Increased input tax recovery for suppliers of financial services – Brexit

By Marcus Ward 5 April 2019

If the UK leaves the EU in a no-deal scenario there may be a benefit for UK based suppliers of financial and insurance services (so called Specified Supplies) to recipients in the EU. These Specified Supplies attract beneficial input VAT treatment pursuant to the VAT (Input Tax) (Specified Supplies) Order 1999 (the Specified Services Order).

Current position

Currently, these Specified Supplies are exempt and consequently, there is no right to deduct input tax incurred in connection with such services. However, if the Specified Supplies are provided to recipients located outside the EU, they are also VAT free, although any attributable input tax is recoverable; a good VAT position.

Post Brexit position

If the UK leaves the EU, the VAT treatment of supplies to non-EU countries is also applicable to the EU 27 countries; the EU would essentially become a “third country”.

Example

A City of London based bank supplies financial services to both Germany and the US clients. Income from these two clients is 50:50. At the current time the bank would be restricted to a claim of circa half of the VAT it incurs on expenditure in the UK. After Brexit, via The Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019 all input tax incurred will be recoverable in full.

What are Specified Supplies?

Specified Supplies are broadly:

the issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.
granting of credit
dealing in; shares, stocks, bonds, notes (other than promissory notes), debentures, debenture stock
the operation of any current, deposit or savings account.
the management of certain investment funds/schemes
insurance
and intermediary services in respect of the above supplies

This list is not exhaustive and is only a very general example of types of supplies which may be considered as Specified Supplies. Please seek advice on specific services.

Other matters

The government says that this change will ensure that UK businesses compete for business in the EU on an even footing with businesses in other non-EU countries.

The proposed legislation also provides that partial exemption special methods (PESM) agreed before a no-deal Brexit will be honoured so businesses will not need to apply to HMRC for approval of a new PESM. Please see guide to partial exemption here

NB: If a deal is agreed between the UK and the EU, the above legislation will not be enacted, and the current VAT treatment will continue throughout the implementation period set out in a withdrawal agreement.