Category Archives: Planning

VAT and Customs Duties: How to use a Customs Warehouse

By   24 September 2020
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With the reality of Brexit fast approaching, businesses should be planning for a No-deal outcome.

One result of Brexit is likely to be the increase in the number of importers using a Customs Warehouse (CW). If a business imports goods from outside the UK (which will include other EU Member States from 1 January 2020) and it wants to store the goods to delay duty payments, this can be done in a CW.

HMRC has, this month, as a result of the anticipated increase, updated guidance on the use of a CW. Interested parties may wish to consider this publication.

Overview

There are two types of customs warehouse where you can store your goods.

  • 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 are the depositor.

  • Private warehouse

This is a warehouse operated by a business to store its own goods. That business is the warehousekeeper and the depositor.

Paying duty and import VAT

A business will need to pay any Customs Duty due and import VAT when it removes its goods from a CW to free circulation (not at the time the goods enter the UK).  This a different procedure to duty deferment and often improves cashflow.

Placing goods in a CW

A business is responsible for:

  • correctly declaring the goods – if it uses an agent, it must give them clear written instructions about declaring the goods
  • ensuring that the goods are sent directly to the CW named on your declaration, within five days of Customs clearance
  • providing the warehousekeeper with all the details of the customs declaration
  • ensuring that the CW is approved for the type goods being deposited including chilled, frozen or requiring special storage needs, eg; chemicals
  • goods being correctly declared on removal from the warehouse

Removing goods from a CW

  • when a business releases goods to free circulation, it is ‘discharging’ or removing them from a CW and will pay any VAT and duty due
  • customs declaration will be required to remove the goods or declare them to another procedure
  • a business will be notified electronically of the entry number and it can remove the goods after it has made the declaration

Further details on managing a CW here.

VAT: Transfers of going concerns (TOGCs): additional condition

By   21 September 2020
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Reallocation of VAT registration number (VAT 68 action) conditions of reallocation

When a business is transferred as a going concern it is possible for the transferee to take the VAT registration number of the transferor. We do no generally advise such an action as the transferee inherits any VAT “issues” of the transferor, but there may be occasions where it is desirable.

Details of TOGCs including the conditions here.

The additional new condition for the reallocation of the VAT number in a TOGC is that the transferor may not have a VAT debt.

Details of VAT 68

  • the transferee must complete the form if it wants to keep the registration number of the previous owner. The transferee must also complete a form VAT 1. The previous owner must not complete a form VAT 7 to deregister
  • once the transfer of the registration number has been allowed, it cannot be revoked
  • the conditions that the new and previous owners must agree to are set out on the application form and are legally binding. This means that the transferee will be liable for any outstanding VAT from the previous owner’s registration. The transferor will no longer be entitled to any repayments of VAT or unclaimed input tax, even if these amounts refer to periods before or after the transfer
  • the previous owner must cancel any Direct Debit that they have set up to pay their VAT

Full conditions

The following conditions should be met as both a matter of law before reallocation can be allowed.

  • a TOGC must have taken place
  • a VAT 68 must have been completed correctly by all parties
  • the transferor must not have already deregistered
  • the transferee must not already be registered
  • where the transferor is a corporate body, it must not have been dissolved before the VAT 68 was signed
  • a group registration must not be involved
  • the transferor must be neither liable nor eligible to remain VAT-registered following the transfer
  • the transferor must not be the subject of a Notice of Direction in respect of disaggregation.
  • the transferor must have no VAT debt. This includes amounts declared (both due or not yet due), penalties and other applied charges – the new condition
  • any assessment notified to the transferor covering periods before the date of transfer must be paid
  • any assessment raised, or due to be assessed, against the transferor, or any voluntary disclosure made by the transferor, must be paid with no indication of an appeal
  • any penalty incurred by the transferor for periods prior to the date of transfer must have been paid, with no indication of an appeal
  • any interest incurred by the transferor for periods prior to the date of transfer must have been paid with no indication of an appeal
  • no civil penalty has been or is intended to be imposed on the transferor

HMRC internal guidance on this matter VATREG30100 here

VAT: Changes to duty-free and tax-free goods carried by individuals

By   15 September 2020
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Duty Free extended to the EU from January 2021

HMRC has announced changes to the treatment of excise duty and VAT of goods purchased by passengers for their own use and carried across borders luggage.

Passengers will be able to buy duty-free alcohol and tobacco products in British ports, airports, and international train stations, and aboard ships, trains and planes when travelling to EU countries.

Currently, the UK applies EU rules to these goods and there are differences between passengers traveling to and from EU member States and to and from countries outside the EU. From 1 January 2021 post Brexit the rules will change. These apply to GB rather than Northern Ireland and are:

  • the amount that passengers can bring back with them from non-EU Countries will also be increased, and extended to EU countries
  • tax-free sales in airports of goods such as electronics and clothing for passengers will end
  • VAT refunds for overseas visitors in British shops (the Retail Export Scheme – RES) will be removed. Currently, non-EU individuals can reclaim VAT incurred on retail purchases via the RES
  • however, overseas visitors will be able to buy items VAT-free in store but only if they have them sent direct to their overseas address. After 1 January 2020 this will be extended to EU countries
  • personal allowances will be:
    • 18 litres of still wine
    • 4 litres of spirits or 9 litres of sparkling wine, fortified wine or any alcoholic beverage less than 22% ABV
    • 200 cigarettes or
    • 100 cigarillos or
    • 50 cigars or
    • 250g tobacco or
    • 200 sticks of tobacco for heating
    • or any proportional combination of the above smoking products
  • UK excise duty will no longer be due on alcohol and tobacco bought when leaving GB. For example, alcohol purchased duty-free on the way to the EU

Commentary

Although sold by the government as applying our new freedoms and extending duty free, in reality, the current system permits bringing in alcohol and tobacco which was purchased for a cheaper price in other EU Member States (the duty being greatly lower than the UK and the goods themselves often cheaper) in almost unlimited quantities, so it is unlikely to be very beneficial for passengers.

Retailers will need to recognise the changes, particularly the removal of the RES and the end of tax-free sales of certain goods at airports.

VAT Self-billing. What is it? The pros and cons

By   7 September 2020
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Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered.  Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied.  This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal.  A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked.  As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

  • Enter into an agreement with each supplier
  • Review agreements with suppliers at regular intervals
  • Keep records of each of the suppliers who let you self-bill them
  • Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

  • Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
  • Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
  • An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
  • Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
  • Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

  • Copies of the agreements you make with your suppliers
  • The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

  • name
  • address
  • VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law).   Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements.  When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes.  This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

  • Sign and keep a copy of the self-billing agreement
  • Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
  • Agree to accept the self-billing invoices that your customer issues
  • Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

  • As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
  • As a customer, carry out an instant check of VAT registration numbers here
  • As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
  • As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
  • As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
  • It is possible to use self-billing cross-border intra-EC, but additional rules apply.

VAT: New HMRC policy papers on tax debt

By   25 August 2020
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HMRC has published two new policy papers covering their position on VAT debts.

The first covers HMRC’s approach to tax debt and covers:

  • contact and discussion on ways to settle debt
  • tailored support offered
  • the role of agents/supporters
  • general debt advice
  • actions against taxpayers who do not engage with HMRC, or refuse to pay
  • HMRC enforcement powers
  • removal of assets
  • recovery of debt directly from a taxpayer’s bank account
  • County Court proceedings
  • use of debt collection agencies

The second provides guidance on HMRC’s support for taxpayers with tax debt and includes:

  • contact with HMRC
  • ways in which HMRC can assist
  • payments options, including Time To Pay (TTP)
  • bespoke TTP arrangements
  • how affordable payments are calculated
  • the role of honesty
  • the use of the Citizens Advice Bureau
  • treatment of assets
  • expectations of first contact with HMRC
  • what happens after a time to pay arrangement has been agreed
  • enforcement powers

Interestingly (well, it is all relevant I suppose!) HMRC say that it typically has more than half a million TTP arrangements in place at any one time, and nine out of ten are completed successfully.

Planning

There are a number of schemes and methods to legitimately defer or reduce VAT payable. These include the Flat Rate Scheme, Cash Accounting, margin schemes, global accounting. Other basic planning may involve; tax point planning, invoice timing, ad use of Bad Debt Relief (BDR).

Advice

Our advice is always to contact HMRC as soon as possible if a business has tax payment problems. In some cases, the department is surprisingly helpful. As the statistics demonstrate TTP arrangements are, on the whole, a very successful method for both sides to deal with tax debt.

Reminders

  • if HMRC has no idea of the cause of debt, and no contact has been made by the taxpayer. the usual assumption is that the taxpayer is ignoring it and the full force of debt action usually follows
  • tax debt never goes out of time, as there is no statute bar
  • paying taxes late usually results in penalties but these may be avoided if a TTP agreement is in place at the appropriate time
  • A TTP agreement usually means that HMRC will not use its enforcement powers
  • the length of TTP agreements depend on the quantum and nature of the debt, however for VAT unlikely to be beyond 12 months

These policy papers provide helpful guidance and explanation of HMRC’s approach, especially in these difficult economic times as a result of COVID 19 and Brexit.

VAT: Staff costs – The San Domenico Vetraria SpA case

By   24 August 2020
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Latest from the courts

In the San Domenico Vetraria SpA CJEU case the issue was the treatment of the secondment of staff by an Italian parent company to its subsidiary and the reimbursement by the subsidiary company of the costs incurred. Was there a VAtable supply?

Background

The issue was whether the relevant payment represented a supply of services ‘for consideration’. The parent company seconded one of its directors to its subsidiary and a charge was made based solely on a reimbursement of actual costs. The Italian domestic court ruled that the transaction was outside the scope of VAT on the basis that there was no consideration paid or received and therefore no supply of services.

Decision

The court ruled that despite the fact that the value of the payment to the parent company was limited to the parent company’s costs this did not mean that consideration for the director’s secondment was absent. Therefore, as consideration flowed in both directions, a taxable supply took place such that VAT was due, the claim of input tax made by the subsidiary was correct and the Italian authorities were incorrect to deny credit for it.

The President of the Chamber stated in the ruling that “The amount of the consideration, in particular the fact that it is equal to, greater or less than, the costs which the taxable person incurred in providing his service, is irrelevant in that regard”. It was immaterial that no profit was made, and the absence of such profit did not affect the VAT treatment.

There was a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.

Commentary

This is a useful clarification/confirmation. The supply was not a disbursement (details here) so it was a supply by the parent company. More on inter-company charges here.

Planning

If the recipient company was partly exempt or unable to reclaim the input tax for any reason, the VAT would have represented a real cost. So, would there be a way to avoid this charge? The answer (in the UK at least) is yes. If the director had a joint contract of employment with both companies, there would be no supply. Also, if the two companies were part of the same VAT group, the “supply” would be disregarded, so there would be no VAT cost for the subsidiary.

VAT Planning – Why?

By   20 August 2020
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Why? How? Where? When? What? Who?

Why?

It is impossible for any business to do such a basic thing as set its prices properly unless it understands its VAT position and ensures that this is reflected in those prices, terms and contract terms etc. The aims of tax planning are:

  • compliance
  • business planning
  • avoiding unnecessary tax costs
  • maximising input tax claims
  • minimising VAT payable where possible
  • obtaining any refunds and retrospective claims due
  • avoiding penalties and interest

How?

The “How?” is dependent on the specific business and its needs. We offer a flexible and tailored service from start-ups to multi-national companies. We offer:

  • solutions to ad hoc issues
  • negotiation
  • structuring and restructuring
  • contractual arrangements
  • Dispute resolution (with HMRC, suppliers, customers etc)
  • full reviews and health checks
  • training of staff and management
  • assistance with international/cross-border supplies and purchases
  • due diligence
  • cost reduction exercises
  • income maximisation programmes
  • comprehensive land and property advice
  • advice on overseas indirect/GST matters both EC and non-EC
  • accounting and documentation advice

The VAT planning process – “The four As”

  • Ascertainment
  • Analysis
  • Alternatives
  • Action

More details of this approach here.

Where?

VAT, or its derivations applies in most countries around the world. So, the answer is probably “everywhere”. This is particularly relevant with cross-border transactions. A common issue is the “Place Of Supply” (POS) rules which dictate where a supply takes place and thus the VAT liability of it.

When?

Planning needs to be done in advance of transactions.  Once a contract has been entered into without thought for the VAT consequences, the damage may have already been done.

Where there is a one-off transaction (eg; sale of premises, sale of know-how, issue of shares), this is, by definition, something of which the business has little experience.  It is an occasion to assume that advice is needed, rather than to assume that the most obvious treatment is correct.

Since the impact of a change in the pattern of a business’ activities will continue down the years, rather than being restricted to a single occasion, it is doubly important to ensure that the correct treatment is identified from the outset.

Periodic reviews are a good time to look, not only at the future, but also at the past, to see whether developments in case law reveal past overpayments which may be reclaimed.  This is particularly important since repayments are subject to the four-year capping provisions.

The essential step is to have some means of becoming aware of changes and monitoring these with VAT in mind.  The means to be adopted are various and will depend on the size and type of the business.

What?

“Right tax, right time”. This means compliance with the relevant legislation but not paying any more VAT than is necessary. As one wag once said; “You must pay taxes. But there’s no law that says you have to leave a tip.”

Since VAT is a transaction-based tax, timing is often crucial and the objective is to legitimately defer payment to HMRC until the latest time possible, thus improving cash flow and retaining the use of VAT monies for as long as possible. The converse of this of course, is to obtain any repayments of VAT due from HMRC as soon as possible. We must also consider avoiding VAT representing an actual cost and taking advantage of any beneficial UK and EC legislation, determinations, guidance, case law and Business Briefs etc available.

VAT Planning objectives

  • improve cash flow
  • improve competitive position
  • legitimately reducing VAT payments or increasing repayments
  • minimise administration/management
  • avoid unnecessary tax or compliance costs
  • avoid penalties and interest

Who?

Marcus Ward Consultancy of course!

VAT: Changes to online advertising by charities

By   11 August 2020
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In very welcome good news from the Charity Tax Group (CTG) the zero rating for charity advertising has been extended to previously standard rated supplies

Background

Certain (“traditional”) advertising services received by a charity have always been zero rated. However, the zero rating did not cover advertising that was ‘selected” or targeted”. HMRC has always been of the view that websites which use cookies which target certain potential donors fall within the exemption such that standard rating applied which commonly represented an additional cost to a charity.

Changes

However, the CTG has announced that lengthy ongoing discussions with HMRC have finally borne fruit. HMRC have indicated that they have “relaxed“ their position and now agree that supplies of digital advertising to a charity may qualify for zero rating, even if cookies are used. This is not a blanket policy, but it does broaden the availability of zero rating which will mean an absolute saving for most charities.

Exceptions

Advertising which is sent to a social media personal accounts, or where the recipient has paid a subscription for the site, continues to be standard rated.

Action

Charities should review their advertising activity for the last four years to establish whether they have a retrospective claim. Measures should also be put in place to ensure that VAT is not overpaid in the future. We can assist with making claims if required.

VAT: Whether a person “in business”. The Y4 Express Ltd case

By   7 August 2020
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Latest from the courts

In the Y4 Express Ltd (Y4) First Tier Tax Tribunal (FTT) case the issue was whether an individual was in business such that he was entitled to be VAT registered.

Background

Y4 imported goods from China on behalf of UK customers. This entailed collecting the goods from the airport, storing them and then arranging delivery of them to the final customers. Y4 had an arrangement with Royal Mail (RM) for a discounted delivery rate. RM subsequently withdrew this discount resulting in Y4 incurring increased delivery costs. In order to mitigate this, Y4 put a structure in place using an individual (Mr Man) to contract with RM for the discount and letting Y4 use the account to take advantage of the reduced rates: RM invoiced Mr Man and Y4 would arrange payment from its own funds via direct debit. Y4 dealt with Mr Man’s VAT compliance and raised self-billing documents to itself on which it recovered input tax. It was reported that Mr Man considered this as a favour to a friend rather than as a business venture with a view to making a profit, and indeed, the charges made by RM were not marked up. Mr Man was not involved with the arrangement of deliveries of Y4 carried out by RM.

HMRC disallowed the input tax claimed as it considered that the individual was not in business, so no VAT was due on the charge made to Y4. This was on the basis that the individual was not carrying on an ‘economic activity’.

Decision

The FTT agreed with the respondent and upheld the decision to disallow Y4’s claim for input tax. This was on the basis that Mr Man was not in business so could not make supplies to Y4, which in turn meant that there was no input tax for Y4 to claim.

Commentary

The issue of whether an entity is “in business” goes back to the earliest days of VAT. I have considered the issue and recent case law here here here here and here.   HMRC relied heavily on the age-old (well, 1981) tests in the Lord Fisher case:

  • Is the activity a serious undertaking earnestly pursued?
  • Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  • Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

The judge found that the tests were not met by Mr Man and, even if they were, the evidence; the self-billing documents, were insufficient. It was also found that a penalty was due, although the quantum was reduced to reflect the cooperation of the taxpayer during the enquiries.

This appeal further demonstrates the ambiguity that often surrounds the definition of a business, and/or an economic activity (the EU legal definition). This is often an issue for charities and NFP bodies, but can extend to other areas such as in this case.