Tag Archives: cross-border

Budget 2020 – VAT implications

By Marcus Ward 11 March 2020

A summary of how the 2020 budget changes VAT rules:

e-publications

Zero rating will apply to e-publications from 1 December 2020. This brings e-publications in line with traditional printed matter. The zero rate will apply to:

e-books
e-newspapers
e-magazines
academic e-journals

Presumably, this brings an end to HMRC’s arguments set out in the News Corp case.

Postponed Accounting

From 1 January 2021 postponed accounting will apply to all imports of goods, including those from the EU. This will provide an important boost to those VAT registered UK businesses which are integrated in international supply chains as they adapt to the UK’s position post Brexit.

Sanitary products

From 1 January 2021 the zero rate will apply to women’s sanitary products. This is calculated to save the average women £40 over her life.

Consultation

A consultation paper will be published to gather views on the potential approach to duty and tax-free goods policy post Brexit.

Cross-border goods policy

An informal consultation process will be launched in spring 2020 on the VAT and Excise treatment of goods crossing UK borders after Brexit.

Fund management

As announced on 4 March 2020 the government is legislating to clarify when fund management services are exempt from VAT.

Financial services

An industry working group will be set up to review how financial services are treated for VAT purposes. Presumably how Brexit will affect such services.

“Quick Fixes” Directive

Legislation will be introduced to simplify rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off.

Partial Exemption

Following the recent call for evidence on the simplification of the VAT rules on Partial Exemption and the Capital Goods Scheme, the government has said it will continue to engage with businesses in relation to their responses and will publish a response in due course.

Commentary

These proposed measures will be broadly be welcomed by business. Especially those in relation to e-publications and Postponed Accounting. It was widely expected that HMRC would lose its argument that e-publications and hard copy publications should be treated differently in any case. Postponed Accounting takes us back to the pre-1990s era. It looks very much like this means a “No-Deal” and although Postponed Accounting may be an easement for some aspects, it remains unnecessary if an agreement with the EU can be reached. However, there appears to be no political will nor appetite to reach such an agreement, so business suffers.

VAT: Extent of exemption for healthcare. The X-GmbH CJEU case

By Marcus Ward 10 March 2020

Latest from the courts

In the CJEU case of X, a German business, the issue was whether services provided by telephone could be treated as exempt. The decision is not available in English in the link above, so thanks to Google translate and very rusty schoolboy language skills!

Background

X provided a healthcare hotline to people covered by certain insurance. The types of services carried out where in respect of medical issues; medical advice, answers to queries, explanations of possible diagnoses and treatments, and patient support programmes for certain conditions. The service was provided by suitably qualified nurses, medical staff and doctors.

The issue

Was this service exempt from VAT as personal care considering it was “support” provided by telephone? He relevant legislation is Article 132(1)(c) of the VAT Directive. A separate issue was whether the staff required additional proof of their professional qualifications to qualify as an exempt service by telephone. The advice was provided via a computer assisted assessment, using targeted questions allowing X to assess the patient’s situation and to advise accordingly. Consequently, there was a degree of automation involved.

The German authorities considered that the supplies fell short of the exemption and raised assessments for output tax due on the services.

Decision

The CJEU has ruled that personal care is not dependent on where it is carried out and there is no bar to it being conducted by telephone. X contended that its services were directly connected with illness and was medical care and, as a result of its activities, the cost of subsequent treatment was reduced.

The court established that the supply was exempt if it met two tests:

it must be a service of personal care, and
it must be carried out within the framework of the exercise of the medical and paramedical professions as defined by the Member State concerned

Therefore, healthcare services carried out by telephone may fall within the exemption, but only if they meet all the conditions for applying this exemption. The test was not how the services were delivered.

Whether X’s services met the exemption conditions depended on case law and whether they were to;

diagnose, treat and cure illnesses or health anomalies
protect (including maintaining or restoring) the health of individuals.
explain diagnosis and therapies
propose modifications to treatments and medication

Such services were likely to have a ‘therapeutic purpose’. However, simply; directing patients to factsheets, providing specialists’ contact details and communicating information is insufficient to qualify for exemption and would be regarded as of a (taxable) administrational nature.

Summary

The services provided by telephone, consisting of providing advice on health and illness, were likely to be exempt, if they pursue a ‘therapeutic aim’. However, this was for the German referring court to verify. On the “additional qualifications” point, EU law does not define medical professions, so it is the responsibility of each Member State to determine the necessary qualifications. In the UK, these qualifications are set out at VAT Act 1994, Schedule 8, Group 7, item 1 (mainly; registered or enrolled as a doctor, optician, osteopath, chiropractor, nurse or midwife). It was decided that Article 132(1)(c) does not require that those X’s staff which provide telephone services to obtain additional professional qualifications.

Commentary

There is often significant uncertainty when businesses provide “healthcare”, This has mainly manifested in questions of whether staff or medical services are actually provided (and in more wide-ranging cases, whether the provision of staff is by way of agent or principal). However, with technology moving faster than ever, it is helpful to have these guidelines and the understanding that it is not just “old-fashioned” medical services which are covered by the exemption.

VAT exemptions widened by Finance Order 2020

By Marcus Ward 4 March 2020

Finance Order 2020

The government has laid the Value Added Tax (Finance) Order 2020 (“Finance Order 2020”) on 4 March 2020 to widen the VAT exemption for the management of investment funds.

The Finance Order 2020 will come into effect on the 1^st April 2020 and will provide for exemption for the management of certain pension funds (as defined) and will also remove the current restriction on the type of assets that a close-ended collective investment undertaking can invest in for its management to qualify for exemption.

It replaces the Value Added Tax Finance (EU Exit) Order 2019 (“Finance Order 2019”) which was revoked last July, following discussion with industry about the need for certainty about the date of implementation and provide sufficient lead in time. The Finance Order 2020 will make the same changes to the legislation as the Finance Order 2019 would have made except that (1) new paragraph (k) inserted into Item 9 now refers to a ‘qualifying’ pension fund as opposed to a ‘recognised’ pension fund and (2) the changes will not apply in the case of pension funds that are established overseas (ie; outside the UK and the EU).

VAT: EC AG’s Opinion – Are aphrodisiacs food?

By Marcus Ward 2 March 2020

Latest from the courts

It’s rare to come across anything vaguely sexy about VAT, but hey ho, aphrodisiacs were the subject of the AG’s opinion in the case of “X” – the name of the Dutch business. The document was published by the European Commission (EC) and is here but unavailable in the English language, presumably as a result of Brexit, unless anyone knows of any other reason.

Opinion

The AG, M. Maciej Szpunar decided that no, aphrodisiacs cannot be treated as food via Directive 2006/112/CE – Article 98 and are therefore not subject to a reduced rate (which would have been zero rated in the UK). The relevant element was:

“Foodstuffs” intended for human consumption “refers to products containing nutrients, and which are in principle consumed for the purpose of supplying said nutrients to the human body”. Products which are normally used to supplement or replace foodstuffs “Means products which are not foodstuffs, but which contain nutrients and are consumed in place of foodstuffs to supply these nutrients to the body, as well as products ingested in order to stimulate the nutritional functions of food or products used to replace them.

Therefore, in the AG’s opinion, the powders and capsules sold by X are different to foodstuffs and supplements and were not subject to the reduced rate. The fact that they may contain elements of nutrition did not override that they were intended to stimulate sexual desire and it was not the intention of the legislation that such products should be subject to the reduced rate as they were not “essential goods”.

That, of course, does not mean that foods which are said to contain aphrodisiac properties such as; asparagus, oysters, watermelons, celery and pomegranates are not reduced rated.

I doubt that Aphrodite – the Greek goddess of love and beauty, knew that ultimately there would be a court case on the rate of indirect tax applicable to such, err; “stimulants”.

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 overpayments – HMRC to consider changes

By Marcus Ward 24 February 2020

VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

A Round-Up of three new EU VAT measures

By Marcus Ward 24 February 2020

With the end of the Brexit transition period looming, the EU have announced new measures:

e-commerce VAT fraud

The first measure is the European Commission (EC) approving (this month) new measures to transmit and exchange payment data in order to fight e-commerce VAT fraud. Member States will be assisted in their fight against e-commerce VAT fraud by the launch of a Central Electronic System of Payment (CESOP) information arrangement.

CESOP will keep records of cross-border payment information within the EU, as well as payments to third countries or territories, for a period of five years. This will allow tax authorities to properly control the correct fulfilment of VAT obligations on cross-border Business to Consumer (B2C) supplies of goods and services.

The measures will be implemented on 1 January 2025.

Simplified rules for small businesses

The EC has also recently adopted simplified VAT rules applicable to small businesses. The new measures are intended to reduce the administrative burden and compliance costs for small enterprises and create a fiscal environment which will help small enterprises grow and trade across borders more efficiently.

The measures foresee that small enterprises will be able to qualify for simplified VAT compliance rules where their annual turnover remains below a threshold set by a Member State concerned, which cannot be higher than 85 000 EUR. Under certain conditions, small enterprises from other member states, which do not exceed this threshold, will also be able to benefit from the simplified scheme, if their total annual turnover in the whole of the EU does not exceed 100 000 EUR.

The new rules will apply as of 1 January 2025.

New rules for exchange of VAT payment data

In addition to the anti e-commerce fraud proposals above, new measures will enable Member States to collect, in a harmonised way, the records made electronically available by payment service providers, such as banks. These complement the VAT regulatory framework for e-commerce coming into force in January 2021 which introduced new VAT obligations for online marketplaces and simplified VAT compliance rules for online businesses.

The new measures will apply as of 1 January 2024.

How these new incentives affect UK businesses remains to be seen as our future trading relationship with the EU is, to put it diplomatically, unclear.

Brexit – Introduction of new import controls on EU goods

By Marcus Ward 17 February 2020

More red tape and delays

The government has announced new plans to introduce import controls on EU goods at the border from 1 January 2021, the day after the end of the Brexit transition period.

This will almost certainly mean additional complexity and delays at borders and will damage businesses, especially those which operate on a Just In Time (JIT) basis or import fresh food, flowers or any other goods which are subject to rapid deterioration.

It is difficult to divorce politics from commerce in these circumstances, but I have avoided commenting on this decision on a political basis, although I think it is fair to say I am not in favour.

The government commented that all UK exports and imports (currently called dispatches and acquisitions from the EU) will be treated equally. This will mean traders in the EU and GB will have to submit customs declarations and be liable to goods’ checks. It was also confirmed that the policy easements put in place for a potential No Deal Brexit will not be reintroduced as businesses have time to prepare. (HMRC have withdrawn a collection of guidance on issues including tariffs, origin, and quotas, which was prepared for a potential No Deal Brexit).

It is difficult to identify how businesses could have had time to prepare as HMRC guidance was unhelpful on this point and it was, and still is, unclear what precise arrangements a business has to prepare for. It is assumed that this a unilateral UK’ decision and it cannot be helpful for cooperation negotiations, unless these controls are what are actually wanted. In the document, it is stated that: ”Business can prepare for border controls by making sure they have an Economic Operator Registration and Identification (EORI) number, and also looking into how they want to make declarations such as using a customs agent”. That is the extent of the advice provided and repeats what has been said before.

Without wanting to amplify government propaganda, but in the interest of even-handedness, below are the reasons given for implementing import controls:

to keep our borders safe and secure so we know who’s coming in and how often, what they are bringing in, and why
to ensure we treat all partners equally as we begin to negotiate our own trading arrangements with countries around the world
to collect the right customs, VAT and excise duties
the EU has said it will enforce checks on our goods entering the Eurozone. We will likewise enforce our own rules for goods entering the UK

Also, HMRC extended the deadline for businesses to apply for customs support funding to 31 January 2021. To date, applications have been made for around £18.5 million out of a possible £26 million.

This announcement follows on from the consideration of the introduction of UK freeports here.

I hope that there are enough customs agents to go round, although the lack of any evidence that HMRC is recruiting new Customs officers suggests that perhaps it is not fully prepared itself.

Government Freeports consultation

By Marcus Ward 14 February 2020

The Government is consulting on plans to create up to ten freeports. Freeports may provide tariff flexibility, customs facilitations and tax measures designed to encourage global trade and attract inward investment post-Brexit. The proposed Freeports will have different customs rules to the rest of the country.

What is a Freeport?

Freeports are secure customs zones located at ports where business can be carried out inside a country’s land border, but where different customs rules apply. The paper says that Freeports may:

reduce administrative burdens and tariff controls
provide relief from duties and import taxes
ease tax and planning regulations
offer simplifications to normal customs processes on imported goods
encourage global trade
provide hotbeds for innovation
increase prosperity areas surrounding Freeports by generating employment opportunities
attract inward investment post-Brexit

Typically, goods brought into a Freeport do not attract a requirement to pay duties until they leave the Freeport and enter the domestic market. No duty at all is payable the goods are re-exported. If raw materials are brought into a Freeport from overseas and processed into a final good before entering the domestic market, then duties will be paid on the final good.

Government aims

It is stated that the government wants Freeports to boost trade, jobs and investment. They say that is why they are proposing cutting red tape by streamlining customs processes, exploring the use of planning measures to speed up planning processes and accelerate development and housing delivery in and around Freeports, and consulting on a comprehensive set of tax breaks to support businesses. Of course, all this would be unnecessary if Brexit had not have occurred.

Deadline

The consultation deadline is 20 April 2020 so there is not a lot of time to make your views known.

Changes to the VAT registration limits for overseas businesses

By Marcus Ward 16 January 2020

The (current) EU Member States have reached political agreement on correcting the current discriminatory and unfair rules on non-resident businesses. Unfortunately, these new measures will not come into effect until 1 January 2025 (well after the UK will have left the EU).

Background

Under the current rules a Non-Established Taxable Person (NETP) is required to register and account for VAT in a Member State as soon as any supply is made there. There is a zero threshold, so, for example, if a French company makes a UK supply of £100 it will be required to register here. Compare this to a UK company which will be able to make supplies up to £85,000 per annum without needing to register or pay UK VAT. Blatantly discriminatory and arbitrary based on where a company belongs. It also distorts competition and is inherently unfair. This is the position across the EU, so UK businesses will be suffering in other countries. This has long been a bugbear of mine!

New rules

From 2025 EU Member States have agreed to extend the threshold to all business making supplies. NETPs will have similar VAT registration thresholds as domestic businesses in each country. The registration limits will not be able to exceed €85,000 per year and overseas businesses may only benefit from this if their total sales across the EU are below an amount of €100,000. This is to avoid large enterprises benefiting from the small company threshold.

Outcome

The change will bring a level playing field between domestic and overseas business and will remove significant compliance costs which fall disproportionally on SMEs. This could also encourage small businesses to explore overseas markets without falling foul of; overseas regimes, potential penalties for innocent errors and the disincentive of domestic businesses having a commercial competitive tax advantage over those based overseas.

It is a pity that these changes will not be applied for another five years. It does beg the question why it will take so long. Of course, we have yet to see how Brexit plays out. It is not outside the bounds of reason to imagine the EU Member States excluding the UK from the new rules, nor the UK not implementing them at all here.

VAT: Digital newspapers zero-rated. The News Corp case

By Marcus Ward 10 January 2020

Latest from the courts

Hot on the heels of the update to e-publications here comes new from the Upper Tribunal (UT) in the News Corp UK and Ireland Ltd case.

Background

The issue was whether electronic editions of The Times (plus other e-newspapers from the same company: The Sunday Times, The Sun and The Sun on Sunday) were “newspapers” within the meaning of The VAT Act 1994, Schedule 8, Group 3, Item 2 and could therefore be treated as zero rated.

The relevant part of Schedule 8, Group 3 (where relevant), lists the following items:

“1 Books, booklets, brochures, pamphlets and leaflets.

2 Newspapers, journals and periodicals…”,

At the First Tier Tribunal (FTT) the appeal was dismissed, and the decision went in favour of HMRC. Details here. The facts were consistent throughout both hearings.

Decision

The UT agreed with the FTT in that there was no material difference between the two types of supply despite the sale of e-newspapers being supplies of services and the sale of physical newspapers being supplies of goods.

That being the case, it was possible to interpret Schedule 8, Group 3. Item 2 as extending to e-publications, which, of course, did not exist when the legislation was drafted in 1972. Consequently, the appeal was allowed, and the e-newspapers were zero rated. Such treatment did not extend the scope of UK zero rating which would not be permitted by the EU.

The UT also indicated that the zero rating would be subject to some restrictions in respect of what may be treated as e-publications.

It was observed that it is important that the legislation should be interpreted in a way that maintained its relevance and that the “always speaking” * principle is preserved.

Commentary

The EC European Council (EC) has previously agreed to allow Member States to apply reduced VAT rates to electronic publications. This UT case appears to confirm that this will extend to UK zero rating. Other Members States have already applied reduced rates or are in the process of doing so. The UK have not previously announced its approach, so this decision is likely to force their hand (notwithstanding the fallout from Brexit…).

Action

Supplies or e-publications should review their sales and decide whether their supplies are on fours with this case. If so, it may be possible to make a retrospective claim for overpaid output tax, subject to certain conditions.

Recipients of such supplies should consider approaching their suppliers and obtain a repayment of overpaid VAT if it represents a cost to them.

“Always speaking” is an influential principle that is recited in materials on legislative drafting as the justification for using the present tense, adopted in many common law jurisdictions as a principle of interpretation, and accepted as a foundation for the linguistic analysis of the use of tense in statutes. It is particularly relevant where technology has outpaced the law.