Tag Archives: business

VAT: Additional time for zero rating exported goods due to the coronavirus

By   19 May 2020
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COVID-19 Update 

HMRC has published concessions in VEXP30310 relating to the conditions for the zero rating of exports.

Background

Most exports of goods from the UK are subject to zero rating. However, in order for VAT free treatment to apply, certain conditions must be met, otherwise 20% VAT applies to the sale. One of the conditions is that the goods must be exported within specified time limits.

Time limits

Generally, goods can be zero rated provided that:

  • they are exported within 3 months of the time of supply, and;
  • valid evidence of export is obtained within 3 months of the time of supply

COVID-19

During the pandemic, it may not be possible for businesses to export goods within the prescribed time. HMRC recognises that some intended exports have been delayed due to circumstances outside a business’ control. Therefore, the guidance sets out the circumstances in which HMRC may agree to additional time for the export before any tax is collected.

Additional time

The time limits for the export of goods from the UK are set out in legislation. However, HMRC has discretion to permit non-observance of the conditions and time limits for export of goods – VAT Act 1994, Section 30(10). HMRC has said that it will use its discretion to temporarily waive the prescribed time limits for export on a case by case basis.  The goods must, however, have either already been exported or will be as soon as is reasonably practicable after the date a business is notified that HMRC is temporarily waiving the tax. An application for HMRC to waive the time limits must be made in writing.

Conditions

HMRC will permit a temporary waiver of time limits if the following conditions are met:

  1. it has not been possible to export goods within the prescribed time limit due to the COVID-19 emergency

Examples include:

  •   the UK or another Government has imposed restrictions on the movement of goods or people due to COVID-19 that prevent the goods          being exported to the intended destination
  •   cancellation of the intended mode of transport for reasons directly related to COVID-19
  •   a participant in the export is ill due to COVID-19 and a substitute cannot be found

This list is not exhaustive.

2. the goods have been/will be exported or removed at the earliest opportunity

3. all other conditions for zero rating exports or removals are met – exporters’ responsibilities here

Expiry

Any waiver will expire

  • one month after any government-imposed restrictions are lifted or
  • one month after any COVID-19 impediment to the export or removal ceases, or
  • there ceases to be an intention to export or remove the goods from the UK (Information on intention here)

whichever is the earlier.

If a business considers there are extenuating circumstances that mean additional time is needed to export goods beyond that permitted by the extension, it should contact HMRC setting out the details in full.

Evidence

A business must retain evidence that supports its case for the waiver (eg; cancellation notes demonstrating that the transport intended to use to take goods out of the UK did not take place, or screen shots of government rules preventing the export or removal of the goods).

Please contact us if you require any further advice or assistance.

VAT: Intention is crucial – The Sonaecom case

By   18 May 2020
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We cannot control the future…

The Sonaecom case

In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.

Background

Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.

Unfortunately, the intended purchase was aborted.

 The issue

The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?

Opinion

In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:

  • Sonaecom was not a “pure holding company”
  • There was a genuine intention to make taxable supplies (to the acquired co)
  • There was a direct and immediate link between the costs and the intended supplies
  • Although the acquisition costs would exceed the proposed management charges, this was not a reason to invalidate the claim
  • The above analysis was not affected by the fact that the transaction did not take place

Commentary

There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.

There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.

Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.

I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.

It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.

*  AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT: Where do I belong?

By   7 May 2020
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The place of belonging

The concept of “belonging” is very important in VAT as it determines where a supply takes place and thus the rate applicable and the country in which is due. (The so-called “Place Of Supply, or POS). It is necessary, for most supplies, to establish where both the supplier, and the recipient belongs. Because this is a complex area of VAT it is not difficult to be overpaying tax in one country, not paying tax where it is properly due, or missing the tax issue completely.

A relevant business person `belongs’ in the relevant country. A `relevant country’ means:

  • the country in which the person has a business establishment, or some other fixed establishment (if it has none in any other country);
  • if the person has a business establishment, or some other fixed establishment or establishments, in more than one country, the country of the relevant establishment (ie; the establishment most directly concerned with the supply); and
  • otherwise, the country of the person’s usual place of residence (in the case of a body corporate, where it is legally constituted)

A person who is not a relevant business person `belongs’ in the country of his usual place of residence. The `belonging’ definition applies equally to a supplier and the recipient of a supply, where relevant.

Business establishment is not defined in the legislation but is taken by HMRC to mean the principal place of business. It is usually the head office, headquarters or ‘seat’ from which the business is run. There can only be one such place and it may take the form of an office, showroom or factory.

Fixed establishment is also not defined in the legislation but is taken by HMRC to mean an establishment (other than the business establishment) which has both the technical and human resources necessary for providing and receiving services on a permanent basis. A business may therefore have several fixed establishments, including a branch of the business or an agency. A temporary presence of human and technical resources does not create a fixed establishment in the UK.

Usual place of residence. A body corporate has its usual place of residence where it is legally constituted. The usual place of residence of an individual is not defined in the legislation. HMRC interpret the phrase according to the ordinary usage of the words, ie; normally the country where the individual has set up home with his/her family and is in full-time employment. An individual is not resident in a country if only visiting as a tourist.

More than one establishment. Where the supplier/recipient has establishments in more than one country, the supplies made from/received at each establishment must be considered separately. For each supply of services, the establishment which is actually providing/receiving the services is normally the one most directly connected with the supply but all facts should be considered including

  • for suppliers, from which establishment the services are actually provided
  • for recipients; at which establishment the services are actually consumed, effectively used or enjoyed
  • which establishment appears on the contracts, correspondence and invoices
  • where directors or others who entered into the contract are permanently based, and
  • at which establishment decisions are taken and controls are exercised over the performance of the contract

However, where an establishment is actually providing/receiving the supply of services, it is normally that establishment which is most directly connected with the supply, even if the contractual position is different.

VAT groups

A VAT group is treated as a single entity. This also applies when applying the ‘place of belonging’. As a result, a group has establishments wherever any member of the group has establishments.

This is an area which often leads to uncertainty, and therefore VAT issues.  It is also an area where VAT planning may; save time, resources and avoid unexpected VAT costs, either in the UK or another country.

For more on our International Services

VAT Notice 700/57 Administrative agreements with trade bodies – Update

By   5 May 2020
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HMRC has published an updated version of VAT Notice 700/57: Administrative agreements with trade bodies.

This is an unusual publication as it lists situations where there are, or can be, deviations from “normal” VAT rules.

The agreements in the Notice permit members of trade bodies to use procedures which take into account their individual circumstances so they may meet their obligations under VAT law. The agreements apply only to areas where HMRC can exercise discretion, and HMRC say that they convey no direct financial advantage or relief from the legal requirements of the tax. However, there can be benefits a business can derive from the arrangements, including, but not limited to; simplification, cashflow, compliance and management.

The agreements can provide unique solutions to particular problems and reduce the burdens on businesses. Some of them might usefully be applied by other businesses, but it should be born in mind that a business cannot adopt any special method based on these agreements unless HMRC has given approval in advance.

The trade bodies covered in the Notice are:

London Bullion Market Association

Brewers’ Society

Association of British Factors and Discounters

Finance Houses Association Ltd

Association of British Insurers

Association of Investment Trust Companies

British Printing Industries Federation

Marine, Aviation and Transport Insurance Underwriters

Association of British Insurers, Lloyd’s of London, the Institute of London Underwriters and British Insurance and Investment Association

National Caravan Council Limited and the British Holiday and Home Park Association Limited

Association of Unit Trust and Investment Managers

British Bankers’ Association

British Vehicle Rental and Leasing Association

Society of Motor Manufacturers and Traders

Gaming Board for Great Britain and the British Casino Association

British Phonographic Industry

Thoroughbred Breeders Association and the British Horseracing Board

Meat and Livestock Commission

Society of Motor Manufacturers and Traders Limited

Retail Motor Industry Federation

if you or your clients are involved in business covered by, or similar to, the above entities, it maybe worthwhile considering whether any specialised trade agreements may be of benefit.

VAT: zero rating of e-publications brought forward – to tomorrow

By   30 April 2020
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Further to the history of objection to reduce rating e-publications, and the 2020 budget announcement which stated that e-publications will be zero rated from 1 December 2020, the Chancellor of the Exchequer has today announced that this date is brought forward and zero rating will now apply from 1 May 2020 – which is of course tomorrow.

Further details of the measure here.

Zero rating

This brings electronically supplied sales in line with traditional printed matter. The zero rate will apply to:

  • books
  • booklets
  • brochures
  • pamphlets
  • leaflets
  • newspapers
  • journals and periodicals (which include magazines)
  • children’s picture and painting books

What supplied electronically means

The term ‘supplied electronically’ is not defined in legislation. It falls to be interpreted in accordance with its generally accepted meaning and includes supplies made over the internet and by e-mail.

Excluded items

Items that are not entitled to the VAT zero rate:

  • Advertising

If more than half of an e-publication is devoted to advertising, audio or video content, its supply will remain standard rated for VAT purposes.

  • Audiobooks

The zero rating extension only applies to the supply of electronic versions of books already zero rated in UK law. As such, zero-rating is limited to electronic versions of books that can be read or looked at. Supplies of audiobooks remain taxable at the standard rate whether supplied in a physical or digital format.

  • Intellectual property
  • e-book readers

e-book readers are one form of hardware to which e-books can be downloaded before being read but are not in themselves e-books. Therefore, supplies of e-book readers are standard rated

  • Software

Software, eg: an app is used to access e-publications but is not in itself an e-publication. Therefore, supplies of such software are standard rated.

Lending of electronic publications

The lending of any of the zero rated e-publications for a charge (for example, by a library) is zero rated.

Summary

Although welcome, as zero rating is VAT nirvana, the short lead in time could catch out some business which make such online supplies. Businesses which provide e-publications may want to consider making a retrospective claim as a result of the News Corp case.

VAT: Retrospective claims – standard of proof. NHS Lothian case

By   24 April 2020
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Latest from the courts

An interesting and helpful comment was made by the judge in the NHS Lothian Health Board Court of Session (the Scottish equivalent of the Court of Appeal) case.

Background

The case involved a claim for overpaid VAT going back to 1974. The primary issue was not the existence of the taxpayer’s claim to recover overpaid VAT, but the quantification of that claim, and in particular whether the claim can be quantified with sufficient accuracy to permit an order for repayment of tax to be made. In the previous case it was held that the onus of proving that an amount of tax had been paid and not recovered rested upon the taxpayer and that the standard of proof was the balance of probabilities and Lord Drummond Young agreed with that proposition here.

Judgement

The specific comments which will be of assistance with businesses with similar clams were:

“The fundamental problem in such cases is that primary evidence does not exist owing to the lapse of time. The absence of such evidence, at least in cases such as the present, is not the fault of the taxpayer, and the lack of evidence should not be held against the taxpayer,”

Outcome

The court urged Tax Tribunals (First Tier Tribunal – FTT and Upper Tribunal – UT) to apply a flexible approach to the burden and standard of proof when making decisions in similar cases; of which there is a considerable number. This approach should apply to so called “Fleming” claims and others in respect of overpaid output tax. We understand that 700 such claims were made by NHS authorities in Great Britain alone, and circa 200 of these remain unresolved.

Commentary

In most cases, a taxpayer is only required to retain records for six years. So the comments made in this case should bolster the chances of success for claims made by other businesses, whether they be for overpaid output tax or underclaimed input tax. There are many and varied reasons why sufficiently detailed could be unavailable; we are looking at a potential 46-year time span. In 1974 record keeping was a different world and physical/manual records were usually the only option. It seems only reasonable that HMRC should make the allowances suggested in this case when it is agreed that a claim is valid in all other respects.

Action

If you, or your client, have had a claim rejected on the basis of insufficient supporting primary evidence, it may be worthwhile revisiting it on the basis of this decision. It sets out helpful and clear guidance and provides businesses with effective, appropriate tax relief where applicable.

VAT: Recovery of input tax on fuel costs

By   22 April 2020
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Fuel costs

Road Fuel Scale Charge (RFSC) simplification.

It is common for a staff member to use a car for both business and private purposes (a staff member also covers sole proprietors and partners). Input tax is only recoverable in respect of the business use, so an apportionment is required. This may be done in the following ways.

  • Apply the RFSC. This is a set figure per month which represents a disallowance for private use and is repaid to HMRC
  • Keep detailed mileage records and only claim for the business element
  • If a business pays a mileage allowance for exact business miles travelled it may reclaim input tax on that actual payment. HMRC publish approved Advisory Fuel Rates, which are used to calculate the payments and the recoverable VAT
  • Do not make a claim at all (if business mileage is minimal or the administration outweighs the cost benefit)

Application

One RFSC must be applied for each car that is used both privately and for business. The fuel scale charges are calculated according to a car’s CO2 emissions and the fixed charge is added to the output figure on the VAT return.

A business will need to check the relevant car’s CO2 emissions figure. This is available for the car’s log book. For dual fuel cars, the lower of the two figures is used.

The calculation

The RFSC allows a business to account for the VAT on fuel in monthly, quarterly or annual returns. When calculating VAT on fuel, if the relevant car has a CO2 emission of 160g, and the business files quarterly returns, the VAT inclusive consideration for a three-month period is £319.00.

The RFSC for the private use of the vehicle will then be calculated as follows: £319.00 x 1/6 (the VAT fraction of the total figure) = £53.16

In this example, the VAT output tax due to HMRC is £53.16 and this is included in Box 1 of the VAT return.

This amount will compensate for any private use of fuel where VAT has already been claimed on the initial purchase of the fuel.

Notes

If a business uses the Flat Rate Scheme no VAT is reclaimable on fuel and no scale charge is applicable.

The RFSC does not apply to commercial vehicles (vans, lorries etc) however, if there is a significant level of private mileage, VAT claims should be adjusted to exclude input tax on this.

HMRC publish updated RFSC valuation tables annually. The latest table is here

Input tax claims may be restricted due to partial exemption or non-business activities.

Help

HMRC have also published a useful ready reckoner tool which assists with the process here

Mileage payments

If a business recovers input VAT based on mileage payments made to employees, it must ensure that employees submit fuel VAT receipts evidencing that they have incurred costs and VAT on fuel. Without such receipts, HMRC may deny the VAT recovery on mileage reimbursements. Clearly, the total VAT incurred on fuel must exceed the business element claimed.

Penalties

Unfortunately, as always with VAT, if errors are made, penalties and interest could apply.

VAT: Bad Debt Relief – Increase due to coronavirus. A guide

By   17 April 2020
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The current coronavirus pandemic has thrown up unprecedented difficulties for society as a whole and significant difficulties for commerce. We have considered UK Government’s VAT assistance in previous articles, here here here and here and this is clearly welcomed.

What has become clear is that businesses and consumers will fall into default in increasing numbers as the economy worsens and it is anticipated that the ability to settle of debts on time will significantly decrease and it is apparent that many debts will never be settled. Consequently, it appears timely to look at the available relief.

The VAT position

VAT registered businesses usually account for tax on an accruals basis (but see CAS) and will therefore be required to account for output tax in the same VAT period as an invoice is issued to a customer. If that invoice is not paid and a bad debt arises this would mean that tax has been accounted for on a payment which has not been received.

Relief

Anything which can relieve the burden of VAT is to be welcomed, especially in such trying times. So VAT Bad Debt Relief (BDR) is a useful tool if a business is aware of it and understand when it may be claimed.

It is at the very least frustrating when a client does not pay, and in some cases this situation can lead to the end of a business. At least the VAT charged to the client should not become a cost to a supplier. The BDR mechanism goes some way to protect a business from payment defaulters.

There is a relief however, as normal with tax, there are specific conditions:

Conditions for claiming BDR

The supplier must have supplied goods or services for a consideration in money and must have accounted for and paid VAT on the supply. All or part of the consideration must have been written off as a bad debt by making the appropriate entry in the business’ records (this does not have to be a “formal” procedure and need not be notified to the customer). At least six months (but not more than four years and six months) must have elapsed since the later of the date of supply or the due date for payment.

Records required

Various records and evidence must be kept (for four years from the date of claim), in particular to identify:

  • the time and nature of the supply, the purchaser, and the consideration
  • the amount of VAT chargeable on the supply
  • the accounting period when this VAT was accounted for and paid to HMRC
  • any payment received for the supply
  • entries in the refund for bad debts account
  • the accounting period in which the claim is made

Procedure for claiming BDR

This part is straightforward: The claim is made by including the amount of the refund in Box 4 of the VAT Return for the period in which the debt becomes over six months old. The amount of BDR is either set-off against output tax due, or may create a refund position with HMRC.

Repayment of refund

Repayment of VAT refunded is required where payment is subsequently received or where the above conditions have not been complied with.

Adjustment of input tax for the debtor

Businesses are required to monitor the time they take to pay their suppliers and repay input tax claimed if they have not paid the supplier within six months. Subsequent payment of all or part of the debt will allow a corresponding reclaim of input tax. This is an easy assessment for HMRC to make at inspections, so businesses should make reviewing this matter this a regular exercise.

Finally, there is tax point planning available to defer a tax point until payment is received for providers of continuous supplies of services. Please see here

More on general VAT payment problems here.

VAT: Zero rated books? The Thorstein Gardarsson UT case

By   14 April 2020
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Latest from the courts

In The Thorstein Gardarsson T/A Action Day A Islandi Upper Tribunal (UT) case the issue was whether supplies of an “Action Day Planner” (ADP) were zero-rated as supplies of a book.

Legislation

The VAT Act 1994, Schedule 8, Group 3, item 1 zero rates – “Books, booklets, brochures, pamphlets and leaflets.”  The words in Group 3 are used in their ordinary, everyday sense.

Background

The Appellants (HMRC) appealed against a decision of the First Tier Tribunal (FTT) which determined that the ADP is a “book” with the result that supplies of it made by Thorstein Gardarsson (TG) were zero-rated for VAT purposes. TG belonged outside the EU but sold its products B2C via the Amazon platform to consumers in the UK.

HMRC argued that the ADP was properly to be considered a ‘diary’ and thereby stationery which is standard rated. Predictably, TG asserted that the ADP is not a diary and despite it having space in which the ‘student’ seeking to master skills of time management may enter information, doing so is merely part of the learning taught through the narrative sections of the book.

The FTT allowed TG’s earlier appeal and considered the judgment of the High Court in Colour Offset Ltd. [1995] BVC 31 to be binding. The FTT concluded that the main function of the ADP is to teach the user how to better or more effectively manage time. The writing space was no different from a student filling out answers to practice papers or someone completing a crossword puzzle. The ADP was therefore a book and zero rated.

Appeal

In this UT case HMRC appealed the FTT decision on the grounds that whilst Colour Offset was binding on the FTT, it failed to:

  • identify the correct test set out in Colour Offset
  • apply the test correctly to the facts it had found

The Product

The external appearance if the ADP is that of a black leather covered book. It had an elastic strap attached to the inside of the back cover that can be wrapped around the front to hold it closed. Inside it has 115 pages. The ADP is described as a time management tool developed to “help people to grow; to teach and instruct people time management skills”. The first 16 pages contain text setting out a narrative of the ethos articulated by the appellant for effective time management. The remainder of the ADP is taken up with 52 double page planners. At the back is a cardboard slip pocket.

Decision

The UT noted that the FTT had quoted from VAT Notice 701/10 and this had led the FTT into error. In the Notice ‘crossword books, exam study guides etc.’ are considered books although the statutory provisions do not mention these at all. The Notice only records HMRC’s practice in this regard and does not have force of law. However, the FTT concluded that because crossword books and exam study guides are referred to as books, it should follow that any item with the necessary physical characteristics ‘which has as its main function informing/educating or recreational enjoyment’ is also a book. The tests in Colour Offset do not refer at all to whether the main function of an item is to inform or educate; nor does it refer to recreational enjoyment.

The UT considered that the FTT approached its task by applying a test that was different from that articulated in Colour Offset and this had the ability to produce a different outcome from the correct test. In doing so, he FTT made an error of law. It also concluded that the ADP is not a book as its main function is to be written in (as distinct from being read or looked at) and that the comparison to crossword puzzles or revision guides is irrelevant. Therefore, ADPs were standard rated and output tax was due on the sale of them.

HMRC’s appeal was allowed, the FTT decision is set aside and directed the matter back to the FTT for reconsideration. It was directed that the FTT makes a decision predicated on the basis that the ADP is not a book.

Commentary

The zero rating of printed matter has long been a moot point in VAT and the amount of detail that the guidance goes into demonstrates this. It should be noted that HMRC guidance set out in Public Notice 701/10 is purely that, and does not have the force of law. This logic extends to all HMRC published guidance unless the narrative specifically states that it has the force of law. A lot of the guidance is based on case law, but certain definitions are unhelpful.

Even the FTT can get it wrong and apply the wrong tests, so if you or your clients have any doubts about the VAT liabilities of supplies made, it is worthwhile having these reviewed by a specialist.