Tag Archives: ec-vat

VAT – Extent of healthcare exemption. Latest from the courts

By Marcus Ward 26 June 2017

In the First Tier Tribunal (FTT) the case of The Learning Centre (Romford) Ltd (TLC) the exemption for healthcare was considered.

Background

The appellant provides day-care to vulnerable adults with learning difficulties (referred to as students). Both directors have relevant qualifications and a great deal of experience in providing the care which the company provides. The taxpayer provided their students with education, activities, and entertainment during working hours Monday to Friday, providing meals and, where required, assistance with eating, administering medication, and personal care. They also provided the transport to bring the students to and from their homes and the facility. The education provided was geared towards teaching the students independent living.

While HMRC accepted that what the appellant provided was ‘welfare services’ within the meaning of the Value Added Tax Act 1994, Schedule 9, Group 7 Item 9 and Note (6), exemption applied only where it was supplied by a specified type of entity. Those entities are:

1) A charity

2) A state-regulated private welfare institution or agency, or

3) A public body.

The appellant was not a charity: it was a company which ran the business for profit. As a privately owned company, it was not a public body either. The only possible category for the appellant was ‘a state-regulated private welfare institution or agency’ and HMRC did not accept that the appellant fell within that category. Day-care is not regulated in England and as a consequence HMRC decided it is not covered by the exemption.

Decision

The FTT found for the appellant. It was noted that day-care is regulated in Scotland and it would be a breach of fiscal neutrality if the VAT treatment of day-care was different North and South of the border. TLC could rely on the direct effect of the Principal VAT Directive and, as a consequence, could treat its supplies as exempt and deregister from VAT.

Commentary

It was a logical decision, however, logic does not always play a part in VAT…. It sought to level a playing field that was far from that. If the decision had been in favour of HMRC the VAT treatment would have been different if the supply had been made:

in other areas of the UK
by the Local Authority
by a charity

contrary to EC law.

There are many businesses which provide similar services and it is imperative that they review their VAT position immediately. We can assist with this.

VAT: Is the card game bridge a sport?

By Marcus Ward 21 June 2017

Latest from the courts: Advocate General’s (AG) opinion* on the English Bridge Union (EBU) case.

Certain supplies of services closely connected to sport are exempt from VAT. Consequently the EBU (a non‐profit making membership‐ funded organisation committed to promoting the game of duplicate bridge) appealed to the ECJ wanting certain fees paid to it to be exempt. HMRC consider that contract bridge is not a sport so that output tax was due on the supply. This view was supported by the First Tier and Upper Tribunals. So, the simple question is: Is bridge a sport? The ECJ hearing has come about due to a referral from the British courts in reference to how it should be applied to bridge.

The AG has looked at how the term “sport” should be defined. As a starting point, it is clear that games such as football, cricket, tennis and squash are sport. However, this does not mean that activities which are less strenuous cannot be a sport, and the examples of archery and badminton were given. The AG was also of the view that sport does not need to include any physical element, meaning that any activity which is characterised by:

competition
an effort to overcome a challenge or obstacle
results in physical or mental wellbeing

may qualify as a sport.

In connection with contract bridge; as a card game it:

is dependent on skill and training rather than luck
requires considerable mental effort and training to compete at an international level
is recognised by the International Olympic Committee as a sport

such that the AG concluded that bridge can indeed be defined as a sport.

This, if followed by the ECJ, means that the EBU will be due a refund of output tax declared on competition entry fees charged to its members.

The EBU has always maintained that bridge is a sport and point to the UK Charity Commission which recognises bridge as a sport. It adopted Parliament’s most recent definition in the Charities Act, updated by Parliament in 2011, which specifically included Mind Sports in the definition of ‘sport’, stating that sports are “activities which promote health or wellbeing through physical or mental skill or exertion”. Additionally, bridge is seen as an excellent way of improving mental acuity and delaying the onset of dementia, and the social and partnership aspects of bridge are of great benefit to those who may otherwise become isolated.

We now await the court’s decision on whether one needs to wear shorts and get sweaty to be participating in sport.

* The most important work performed by the Advocates General is to deliver a written Opinion, named “reasoned submission”. The role of the Advocate General is to propose an independent legal solution. It is important to note that the Court is not obligated to follow the Opinion delivered by the Advocate General. Even though the Opinion does not bind the Court it has an impact on the decision in many cases, and in fact, in most cases the ECJ follows it.

VAT – Are overpayments subject to output tax?

By Marcus Ward 19 June 2017

This was the question considered by the Upper Tribunal (UT) in the case of National Car Parks Limited

Latest from the courts

We’ve all been there. We’ve found a NCP pay and display car park and want to park for one hour. We find a free space and go to the pay and display ticket machine. In this example, the prices stated on the tariff board next to the pay and display ticket machine are: Parking for up to one hour – £1.40. Parking for up to three hours – £2.10. The pay and display ticket machine states that change is not given but overpayments are accepted.

Guess what? As usual, we find that we don’t have the right money and only have a pound and a fifty pence piece, so we have to put them both in the machine. The machine meter records the coins as they are fed into the machine, starting with the pound coin. When the fifty pence piece has been inserted and accepted by the machine, the machine flashes up ‘press green button for ticket’ which we customer do. The amount paid is printed on her ticket, as is the expiry time of one hour later and we wander off to attend our business.

So, is VAT due on the overpayment of 10p?

The First Tier Tribunal (FTT) said “yes”. It held that the excess payments made by the customer to NCP were not voluntary because the customer was required to pay at least the amount specified in order to park their vehicle and, if the customer did not have the correct change, the customer was required to pay an additional amount in order to obtain the right to park. The only sense in which the payment could be said to be “voluntary” is that the customer could decide not to buy a ticket which would mean not parking the car and having to go elsewhere. The taxpayer then appealed to the UT.

Law

Article 2(1)(c) of the Principal VAT Directive (PVD) provides that supplies of services for consideration within the territory of a Member State by a taxable person acting as such are subject to VAT. Article 73 of the PVD provides: “In respect of the supply of goods or services… the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.” The provisions of the PVD have been implemented in UK law by the Value Added Tax Act 1994. Section 5(2)(a) of the VAT Act 1994 defines ‘supply’ to include all forms of supply but not anything done otherwise than for a consideration and section 19(4) provides: “Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it.”

Decision

The UT agreed with the FTT, and so the taxpayer’s appeal was dismissed. A distinction was made between these overpayments and optional payments such as tips (which are VAT free). It was stated that the PVD seeks to identify what consideration was received by NCP, not whether the customer could have obtained the same service for less. NCP retained the £1.50 in return for providing the car parking and this was consequently the value of the service provided.

Commentary

We have recently dealt with a number of cases which dealt with the topic of valuation and have been successful in obtaining a refund of overpaid VAT. Unfortunately for the appellant in this case, it seems that there was little chance of success and they didn’t get to keep all of value of the overpayments. All those 10ps add up…

VAT and Customs Duties. Bringing goods into the UK – A brief guide

By Marcus Ward 12 June 2017

VAT and duty on and imports and acquisitions

The rules covering bringing goods into the UK are complex and set out in different areas of the legislation and HMRC guidance. I thought it may be helpful bring some of the most salient rules together in one place. Of course, with Brexit, some of the information below may be subject to change. Most likely, acquisitions will take on more of the rules applicable to imports, but we shall see…

If you are bringing goods into the UK it is important to recognise the VAT and duty rules and procedures. You must ensure that you pay the right amount of VAT and import duties via the correct mechanism.

Goods brought into the UK from other EC countries are called acquisitions rather than imports, and this is an important distinction as we shall see below.

The details and practicalities can be complex and you may want to seek advice or use an agent or freight forwarder to handle your responsibilities, particularly if you are new to international trade or only need to bring goods here occasionally.

Acquisition of goods from EC Member States

The EC Member States

The 28 EC countries are: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the UK.

Information

If you are UK VAT registered you need to give your supplier your VAT number. This allows the supplier to treat the sale to you as VAT free. You will need a VAT invoice as with any other purchase. If not UK VAT registered you will pay VAT applicable in the Member State of the supplier.

Accounting for VAT

You must account for VAT on acquisitions (“acquisition tax”) on your VAT return. VAT is charged at the normal UK rate of VAT for those goods. You reclaim this acquisition tax in the same way as you reclaim input tax on purchases of supplies within the UK. So for most businesses the effect is VAT neutral. In this way there is no difference between buying the goods in the UK or another EC Member State so it rules out cross-border “VAT rate shopping”. There are no Customs Duties to pay on acquisitions.

Reporting

All VAT-registered businesses must show the total value of goods acquired from other EU Member States in box 9 of their VAT Return.

In addition, those who trade in the EC above the Intrastat exemption threshold in force during the year must also complete a monthly Supplementary Declaration (SD). The threshold is £1.5 million.

Importing goods from outside the EC

Your responsibilities for imports

You are normally responsible for clearing the goods through UK customs and paying any taxes and duties. Your supplier needs to provide the documentation you need to clear the goods through Customs. If you are importing you may have to pay import duty.

You will need to decide whether to use an agent to handle your responsibilities. Freight forwarders can handle Customs clearance as well as transport. You can find reputable freight forwarders through the British International Freight Association: here

You need to check what import duty applies

Import duty is based on the type of goods you are importing, the country they originate from and their value. HMRC’s Integrated Tariff sets out the classification of goods and the rates of duty in detail: here

Confirm what paperwork you require from the supplier for Customs clearance

This normally includes an invoice and a copy of the transport documents. You may need proof of the origin of the goods to claim reduced import duty for goods from certain countries. A valuation document is also normally required for imports above a set value.

Complete an import declaration

You normally declare imports using the Single Administrative Document (SAD). If you are registered for VAT in the UK you will need an EORI (Economic Operator Registration & Identification) to enable your inbound commercial shipments to be cleared through the automated CHIEF (Customs Handling of Import and Export Freight). This is made up of your VAT number, plus a further three digits.

Release of goods

You will need to pay VAT and duty to get the goods released. You pay VAT at the normal UK rate for those goods when sold in the UK.

Deferment

Regular importers are able to defer payment of VAT and duty by opening a deferment account with HMRC. You need to provide security and must agree to pay by direct debit. It is also possible to use your agent or freight forwarder’s deferment account.

Accounting for VAT

HMRC will send you a monthly C79 certificate showing the import VAT you have paid. You must retain this. Certificates cover accounting transactions made in each calendar month should be received around the 24th of each month following imports logged the previous month.

You can reclaim VAT paid on imports on a C79 in the same way as you reclaim input tax on purchases of supplies within in the UK. It is not possible to reclaim VAT on any other document, eg; an invoice. Shipping or forwarding agents can’t reclaim this input tax because the goods weren’t imported to be used in part of their business.

NB: If you import works of art, antiques and collectors’ items they are entitled to a reduced rate of VAT.

You cannot reclaim import duty.

Be aware of special cases

Check whether any goods you are buying are subject to Excise Duty

Excise duty is charged on fuel, alcohol and tobacco products. It is charged on acquisitions from within the EU as well as imports from countries outside the EC. If goods are subject to excise duty, you pay this at the same time as you pay VAT and import duty.

VAT is charged on the value of the goods plus excise duty.

Warehousing

You may want to consider using a Customs warehouse if you expect to store imports for a long time. If you store goods in a Customs warehouse, you will not need to pay import duty and VAT until you remove the goods from the warehouse.

Storage ‘in bond’ like this is often used for products subject to excise duty, such as wine and cigarettes, although it is not limited to these goods.

Re-exported goods

You will also find it beneficial to find out about tax relief if you are planning to re-export goods you import. There are special Inward Processing Relief (IPR) rules so that you do not have to pay import duty and VAT. This relief can apply to imports that you process before re-exporting them.

Valuation of imported goods for VAT and Duties

There are six methods of valuing imported goods, however, in the vast majority of cases (over 90%) the “Transaction Method” is used and, in fact, you must use this method wherever possible.

Transaction Value

This is the price paid or payable by the buyer to the seller for the goods when sold for export to the EC adjusted in accordance with certain specific rules.

This may also cover situations where goods are imported from a processor. The “transaction value” may be “built up” or “constructed” by reference to the cost of processing plus any items to be added commonly referred to as “assists”.

What items must be added to the price paid or payable?

You must add the following to the price you pay (unless they are already included):

(a) Delivery costs. – The costs of transport, insurance, loading or handling connected with delivering the goods to the EC border must be included.

(b) Commissions. – Certain payments of commission and brokerage, including selling commission, must be included.

But you can exclude buying commission if it is shown separately from the price paid or payable for the goods.

(c) Royalties and licence fees. – You must include these payments when they relate to the imported goods and are paid by you as a condition of the sale to you of those goods.

(d) Goods and services provided free of charge or at reduced cost by the buyer. – If you provide, directly or indirectly, any of the following, you must include in the customs value any part of the cost or value not included in the price charged to you by the seller:

materials, components, parts and similar items incorporated in the imported goods including price tags, kimball tags, labels
tools, dies, moulds and similar items used in producing the imported goods, for example, tooling charges. There are various ways of apportioning these charges

iii. materials consumed in producing the imported goods, for example, abrasives, lubricants, catalysts, reagents etc which are used up in the manufacture of the goods but are not incorporated in them,

engineering, development, artwork, design work and plans and sketches carried out outside the EC and necessary for producing the imported goods. The cost of research and preliminary design sketches is not to be included.

(e) Containers and packing. Include:

the cost of containers which are treated for customs purposes as being one with the goods being valued (that is not freight containers the hire-cost of which forms part of the transport costs), and
the cost of packing whether for labour or materials

Where containers are for repeated use, for example, reusable bottles, you can spread their cost over the expected number of imports. If a number of the containers may not be re-exported, this must be allowed for.

(f) Proceeds of resale. – If you are to share with the seller (whether directly or indirectly) the profit on resale, use or disposal of the imported goods you must add the seller’s share to the price paid. If at the time of importation the amount of profit is not known, you must request release of the goods against a deposit or guarantee.

(g) Export duty & taxes paid in the country of origin or export. – When these taxes are incurred by the buyer they are dutiable. However, if you benefit from tax relief or repayment of these taxes they may be left out of the customs value.

Summary

If you are new to acquisitions or importing it may be worthwhile talking to an expert. This article only scratches the surface of the subject. There can be significant savings made by accurately classifying goods and applying the correct procedures and rates will avoid assessments and penalties being levied. Planning may also be available to defer when tax is paid on imports and acquisitions.

VAT: Latest from the courts – are services by a CIC business?

By Marcus Ward 19 May 2017

This case considers the perpetual difficulty of deciding whether activities represent a business… or not.

In the First Tier Tribunal (FTT) case of Healthwatch Hampshire CIC (HH) here the issue was whether HH made taxable supplies by way of business to a Local Authority – Hampshire County Council (HCC)

Background

Under certain prescribed new arrangements, local authorities, including HCC, were required to enter into contractual arrangements with a body corporate, which was required to be a social enterprise and a Community Interest Company (CIC) for the provision of various services.

These services comprised, inter alia:

Promoting, and supporting, the involvement of local people in the commissioning, provision and scrutiny of local care services
Information, signposting and advice
Advocacy services

HH is a company limited by guarantee but is not a charity. It is however non-profit making in its objectives, and any profits which do arise can only be spent for the benefit of the local community. HH was formed by a consortium comprising; three organisations all of which are charities. These charities effectively carried out the work via a sub-contract arrangement and charged HH with the addition of VAT. The issue is the VAT treatment of HH’s charge to HCC. Was this a business activity on which VAT is charged? Or, as HMRC contended, was the money paid to HH was outside the scope of VAT because it represented something which was not consideration for taxable supplies and thus non-business.

This was important as if the services provided by the CIC are deemed to be non-business, the VAT charged to HH by the three consortium members would represent an absolute VAT cost as it could not be VAT registered and therefore not able to recover the input tax.

Technical Note

Because of the special VAT rules which apply to local authorities, input tax incurred by them may be recovered if it relates to their non-business activities (their statutory activities). This is via VAT Act 1994, s33 and this legislation turns “normal” VAT rules on their head. In this particular case, if HH charged HCC VAT, HCC would be in a position to recover it meaning that VAT would be neutral for all parties.

Decision

The matter of whether HH’s activities amounted to a business was considered with significant references to the Longridge On The Thames. Case commentary here

As a starting point, the judge commented on previous CJEU cases that it “…would seem to be a clear demonstration that simply because an activity is normally carried on by the state does not automatically mean that, per se, it cannot be economic activity”. It was also decided that “we have come to the conclusion that HH is not a body governed by public law.” So this strand of HMRC’s argument did not lead anywhere.

The court decided in the taxpayer’s favour; which appears to be common sense all round. The supplies were by way of business despite the arrangements having features which may not necessarily be found in a more commercial environment (including the fact that LAs were legally required to outsource certain of its functions) . Ultimately, consideration was flowing in both directions; HCC paid for supplies which it required and those were supplied by a third party such that VAT was properly chargeable. The fact that HCC met its statutory obligations in structuring transactions in this way did not preclude them being an economic activity.

Action

This case (and Longbridge) demonstrates that where charities, LAs, CICs, NFP entities and similar bodies are concerned, it is crucial to review all agreements from a VAT perspective. It is insufficient to assume the correct VAT treatment is how it is desired and slight differences in arrangements can, and do, produce different VAT outcomes. After Longbridge HMRC are looking more closely at similar arrangements (not limited to LAs) and we expect more of these types of cases to be heard in the future.

For more on the EC aspect of business/non-business please see here

VAT: Latest from the courts – Brockenhurst College

By Marcus Ward 19 May 2017

The Court of Justice of the European Union (CJEU) has released its decision in Brockenhurst College here

Unusually, it has gone against the Advocate General (AG) Kokott’s opinion (here) and concurs with previous decisions reached by the UK courts. This is good news for the taxpayer and other providers of educational services. The decision has been referred back to the Court of Appeal (CoA) for it to consider points such as the distortion of competition and the fulfilment of a separate function, however, it is likely that this will not affect the decision by the CJEU and HMRC’s appeal will be dismissed.

Background

The case considered two types of supply made by Brockenhurst College:

The supplies made from its restaurant, used for training chefs, restaurant managers and hospitality students. The claim was made on the basis that these were exempt supplies of education and not standard rated supplies of catering
Tickets for concerts and other live performances put on by students as part of their educational courses. These were similarly claimed to be exempt.

Students were enrolled in performing arts and catering and hospitality courses. As part of their course of study they were required to run a restaurant and stage live performances. Persons not enrolled on the relevant courses would pay for and attend these events. The services were usually supplied to a limited public including; parents, siblings, friends etc, and were supplied at a reduced cost as part of the practical element of the students’ education. The appellant argued that the experience was invaluable to their studies and should be regarded as ‘closely related’ to the principal supply of education. HMRC considered that the services in question were supplied to third parties in return for payment. Consequently, the services, whilst of benefit and practical experience to the students were separate VATable supplies made to third parties and the supplies cannot, therefore, be closely related to the supply of education to the student.

The First Tier Tribunal (FTT) concluded that the supplies in question were exempt as being closely linked to education because:

the College was an eligible body and so its principal supplies were exempt supplies of education
the supplies were integral and essential to those principal exempt supplies
the supplies were made at less than their cost
the supplies were not advertised to the general public. Instead, there was a database of local groups and individuals who might wish to attend the restaurant or performances
the supplies were not intended to create an additional source of income for the College

HMRC disagreed with the conclusion on the basis that the supplies were outside the education exemption because the students were not the beneficiaries of the supplies in question, but only benefitted from making them. HMRC appealed to the Upper Tribunal (UT).

The UT rejected HMRC’s argument and agreed with the FTT. It held that the supplies were closely related to the exempt supplies of education because they enabled the students to enjoy better education. The requirement in the domestic law for the supplies to be for the direct use of the student was met because they were of direct benefit to him.

HMRC subsequently appealed to the CoA which referred it to the CJEU.

The AG’s opinion was that closely related transactions are to be regarded as independent supplies to the principal supply, but do not include the supply of restaurant or training services supplied to third parties who are not themselves receiving the principal supply of training. The third parties pay for their own consumption (of either the catering or performance) and do not pay for the provision of education. It is very rare that the CJEU makes a decision that goes against the AG’s opinion.

CJEU Decision

The CJEU ruled that activities consisting of students of a higher education establishment supplying, for consideration and as part of their education, restaurant and entertainment services to third parties, may be regarded as supplies closely related to the principal supply of education and accordingly be exempt from VAT – provided that those services are essential to the students’ education and that their basic purpose is not to obtain additional income for that establishment by carrying out transactions which are in direct competition with those of commercial enterprises liable for VAT, which it is for the national court to determine.

Action

We understand that there are a number of cases stood behind Brockenhurst. Any other colleges, FE, universities or other eligible bodies carrying out similar activities to Brockenhurst need to consider their tax position. It is possible that retrospective claims may be made, depending on specific circumstances. Treating such supplies as exempt may also impact on a body’s partial exemption position and could create business/non-business implications. This may also impact on activities like hairdressing, motor maintenance and beauty treatments which colleges provide on a similar basis to the activities in this instant case.

We are happy to discuss the implications of this case with you.

VAT – Input tax recovery by holding companies

By Marcus Ward 10 May 2017

HMRC has published updated guidance on the recovery of input tax incurred by holding companies.

The guidance may be found here

It is important for holding companies and/or their advisers to read and understand the changes to the VAT recovery rules as costs are often significant. The changes are a result of various UK and CJEU case law which, in general, considered; the definition of economic activity, the direct and immediate link to taxable supplies made by a holding company, the contractual and payment arrangements and the use of the input tax.

Key Points

The guidance considers:

When a shareholding is used as part of an economic activity
Is the Holding Company the recipient of the supply?
Is the Holding Company undertaking economic activity for VAT purposes?
Shareholding acquired as a direct, continuous and necessary extension
Intention to make taxable supplies
Contingent consideration for management services
The effect of a holding company joining a VAT Group
Stewardship costs
Mixed economic and non-economic activities

Generally

In order to recover the relevant input tax, it must be incurred by a taxable person in the course of an economic activity and have a direct and immediate link to taxable supplies made by that person. This has been a long settled definition and the guidance seeks to apply these tests to holding companies. This means that, in order to receive a supply, a holding company must;

Contract for it
Use it
Be invoiced for it
Pay for it

Specifically

The publication considers previously disputed situations such as:

Services provided on contingent terms are not an economic activity because the necessary reciprocity between the obligations of the holding company and of the subsidiary is absent
How input tax incurred by holding companies which make taxable supplies to some subsidiaries and not to others and those that make taxable supplies and exempt loans should be dealt with
If a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company the input tax incurred on acquisition costs may be deducted even if management charges are not made
A holding company joining a VAT group cannot change a non-economic activity into an economic one or create an automatic link between holding company costs and the taxable outputs of other group members (For VAT to be deductible, the holding company must provide management services to the companies acquired in the VAT group, or earn interest from loans granted to them, and these must support taxable supplies made by the VAT group)
If a member of a VAT group incurs costs for non-economic (“business”) activity, the supplies are treated as being used by the representative member for non-economic purposes
Stewardship costs (group audit, legal, brand defence, bid defence etc) are costs for the purposes of the VAT group as a whole rather than for the purposes of the holding company activities

Action

The previous input tax position of holding companies should be reviewed in light of the above guidance and adjustments made as necessary. In some cases, the guidance may provide additional opportunities to reclaim input tax which was previously thought to be barred, and conversely, it is possible that VAT claimed as a result of the understanding of the position at the time may need to be repaid.

We can assist in reviewing the input tax position of holding companies and advising on structures for future intended acquisitions. The four year cap applies to such adjustments of input tax, so the clock is ticking for past transactions.

Image: company stamps

VAT evasion by non-EU online sellers

By Marcus Ward 26 April 2017

Investigation by The National Audit Office (NAO) into overseas sellers failing to charge VAT on online sales.

The NAO have investigated concerns that online sellers outside the EU are avoiding charging VAT. Full report here

The NAO has published the findings from its investigation into the concern that online sellers based outside the EU are not charging VAT on goods located in the UK when sold to UK customers. Online sales accounted for 14.5% of all UK retail sales in 2016, just over half of these were non-store sales, mainly through online marketplaces.

VAT rules require that all traders based outside the EU selling goods online to customers in the UK should charge VAT if their goods are already in the UK at the point of sale. In these cases, sellers should pay import VAT and customs duties when the goods are imported into the UK and charge their customers VAT on the final selling price. The sellers should also be registered with HMRC and are required to submit regular VAT returns.

Some of the key findings of the investigation are as follows:

HMRC estimates that online VAT fraud and error cost between £1 billion and £1.5 billion in lost tax revenue in 2015-16 but this estimate is subject to a high level of uncertainty. This estimate represents between 8% and 12% of the total VAT gap (The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected) of £12.2 billion in 2015-16. UK trader groups believe the problem is widespread, and that some of the biggest online sellers of particular products are not charging VAT. These estimates exclude wider impacts of this problem such as the distortion of the competitive market landscape.

HMRC recognised online VAT fraud and error as a priority in 2014, although the potential risk from online trading generally was raised before this. In 2013 the NAO reported that HMRC had not yet produced a comprehensive plan to react to the emerging threat to the VAT system posed by online trading. The report found HMRC had developed tools to identify internet-based traders and launched campaigns to encourage compliance but had shown less urgency in developing its operational response. Trader groups claim that online VAT fraud has been a problem as early as 2009, which has got significantly worse in the past five years. The Chartered Trading Standards Institute shares this view. Based on the emergence of the fulfilment house (a warehouse where goods can be stored before delivery to the customer) model, HMRC recognised online VAT fraud and error as one of its key risks in 2014 and began to increase resources in this area in 2015.

HMRC’s assessment is that online VAT losses are due to a range of non-compliant behaviours, but has not yet been able to assess how much is due to lack of awareness, error or deliberate fraud. Amazon and eBay consider that lack of awareness of the VAT rules is a major element of the problem. Amazon and eBay have focused on educating overseas sellers and providing tools to assist with VAT reporting and compliance. HMRC’s strategic threat assessment, carried out in 2014, concluded it was highly likely that both organised criminal groups based in the UK and overseas sellers in China were using fulfilment houses to facilitate the transit of undervalued or misclassified goods, or both, from China to the UK for sale online.

HMRC introduced new legal powers to tackle online VAT fraud and error in September 2016. The new joint and several liability power gives HMRC a new way to tackle suspected non-compliance, and is the first time any country has introduced such a power for this purpose. The new powers include making online marketplaces potentially jointly and severally liable for non-payment of VAT when HMRC has informed them of an issue with a seller, and they do not subsequently take appropriate action.

Conclusion

Online VAT fraud and error causes substantial losses to the UK Exchequer and undermines the competitiveness of UK businesses. Compliance with the VAT rules is a legal requirement. Not knowing about the rules does not excuse non-compliance. The UK trader groups who raised the issue report having experienced the impact of this problem through progressively fewer sales. They consider HMRC has been slow in reacting to the emerging problem of online VAT fraud and error and that there do not seem to be penalties of sufficient severity to act as a substantial deterrent.

It is too soon to conclude on the effectiveness and impact of HMRC’s new powers and whether the resources devoted by HMRC to using them match the scale of the problem. We recognise that HMRC must consider effort and efficiency in collecting VAT but its enforcement approach to online trade appears likely to continue the existing unfair advantage as perceived by UK trader groups. This is contrary to HMRC’s policy of encouraging voluntary compliance and it does not take account of the powerful effect that HMRC’s enforcement approach has on the operation of the online market as a whole. We intend to return to this subject in the future.

Further to the above, this article suggests that HMRC should have acted even earlier.

VAT Implications of Transfer Pricing – Valuation

By Marcus Ward 24 April 2017

The EC has recently published a paper on the possible VAT implications of Transfer Pricing (TP) here

This Working Paper considers when TP adjustments may affect the application of VAT. The main conflict is highlighted as the difference between how sales are valued. For TP purposes value is determined via arm’s length (open market value) versus the subjective value, ie; the price actually paid, for VAT purposes.

Transfer Pricing

The arm’s length principle is the international transfer pricing standard that Organisation for Economic Co-operation and Development (OECD) member countries have agreed, and which should be used for tax purposes by Multinational Enterprise Group (“MNE group”) and tax administrations, including the price, match comparable market conditions and that profits are fairly divided between the jurisdictions in which MNE operates.

According to the OECD TP Guidelines, by seeking to adjust profits by reference to the conditions which would have been obtained between independent enterprises for comparable transactions and under comparable circumstances, ie; in “comparable uncontrolled transactions” the arm’s length principle treats the members of an MNE group as entities operating separately rather than as inseparable parts of a single unified business. Because the separate entity approach treats the members of an MNE group as if they were independent entities, attention is focused on the nature of the transactions between those members and on whether the conditions thereof differ from those that would be obtained in comparable uncontrolled transactions.

VAT

It is not generally required for VAT purposes that the consideration which must be present in order for a transaction to be qualified as taxable, has to reflect the market value of the goods or services supplied. In fact, as to the concept of “consideration”, it is settled case law of the CJEU that the taxable amount for the supply of goods or services is represented by the consideration actually received for them.

I shan’t rehearse the details here as they are clearly set out in the paper linked to above.

However, it is an important area of tax and I strongly recommend reading the Working Paper for any business or adviser involved in international supplies. It is also an interesting read for students of the tax technical side of such supplies.

We have a strong global structure of skilled advisers which are able to assist if you have any queries.

VAT EORI – What is it? Do I need one?

By Marcus Ward 19 April 2017

What is an EORI?

EORI is an acronym for Economic Operator Registration & Identification.

An EORI number is assigned to importers and exporters by HMRC, and is used in the process of customs entry declarations and customs clearance for both import and export shipments travelling to or from the EU and countries outside the EU.

What is the EORI number for?

An EORI number is stored both nationally and on a central EU EORI database. The information it provides is used by customs authorities to exchange information, and to share information with government departments and agencies. It is used for statistical and security purposes.

Who needs an EORI number?

You will require an EORI number if you are planning to import or export goods with countries outside the EU. Also, you may need an EORI number to trade with these countries in Europe: Andorra, Bosnia and Herzegovina, Gibraltar, Guernsey, Iceland, Jersey, Liechtenstein, Macedonia, Moldova, Norway, Switzerland.

Format of the EORI number

VAT registered companies will see the EORI as an extension of their VAT number. Your VAT nine digit VAT number will be prefixed with “GB” and suffixed with “000”.

How do I apply for an EORI Number?

Non VAT registered companies can apply using this link – FORM C220

VAT registered companies can apply using this link – FORM C220A

Once completed, your form should be emailed to: eori@hmrc.gsi.gov.uk

How long will my EORI application take?

EORI applications take up to three working days to process.

Please contact us if you have any issues with importing or exporting.