Two months ago the Court of Appeal mainly ruled in favour of Associated Newspapers on the treatment of vouchers. Commentary and links here
The decision consequently cast doubt on HMRC’s published guidance on the VAT treatment of vouchers.
HMRC have announced that they are seeking leave to appeal to the Supreme Court. Although this further delays definitive rules on vouchers, it is hoped that if it goes to the Supreme Court we will get some sort of closure on this matter.
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.
How does the UK system fit with EU legislation?
Further to my recent article on the legal impact of The Great Repeal Bill and Article 50 here I thought it would be a good idea to take a step back and look at the background. We now know that on the day the UK leaves the EU the following rules will still apply and that there will be no immediate changes to the status quo. After Brexit there is likely to be a review of the VAT position, but we expect any changes to the system to be subtle at first with any significant changes (if any) being made over a much longer period.
So where are we now?
As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?
It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.
History
Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU.
When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.
In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.
Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.
Intention
The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:
EU Statements
There are four types of EU statements:
EU Legislation as part of UK Legislation
EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.
Direct effect
The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” – Becker. Also, in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.
Primacy of EU Directives over UK legislation
A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.
Interpretation of UK law
If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (English-Speaking Union of the Commonwealth).
Legal principles
In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.
Examples of some of these are the principle of:
Practical application for most taxpayers
Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly. However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.
Changes to VAT on the day the UK leaves the EU – details of new White Paper
There has been significant confusion and differing views over how the UK would treat existing CJEU case law and its impact on the UK legislation when the UK leaves the EU.
Welcome certainty and clarity has been provided by the publication of a White Paper in respect The Great Repeal Bill (GRB). Full details of the GRB here
Background
The European Communities Act 1972 (ECA) gives effect in UK law to the EU treaties. It incorporates EU law into the UK domestic legal order and provides for the supremacy of EU law. It also requires UK courts to follow the rulings of the Court of Justice of the European Union (CJEU). Some EU law applies directly without the need for specific domestic implementing legislation, while other parts of EU law need to be implemented in the UK through domestic legislation. As explained in the White Paper, domestic legislation other than the ECA also gives effect to some of the UK’s obligations under EU law. The government states that “…it is important to repeal the ECA to ensure there is maximum clarity as to the law that applies in the UK, and to reflect the fact that following the UK’s exit from the EU it will be UK law, not EU law, that is supreme.” The GRB will repeal the ECA on the day we leave the EU.
Overview
The main point stressed in the White Paper is that “The same rules and laws will apply on the day after exit as on the day before. It will then be for democratically elected representatives in the UK to decide on any changes to that law, after full scrutiny and proper debate” and “This Bill will, wherever practical and appropriate, convert EU law into UK law from the day we leave so that we can make the right decisions in the national interest at a time that we choose.”
The intention is that the GRB will do three things:
This means that case law precedent from the CJEU will continue to apply (for a time at least). Any uncertainties/disagreements over the meaning of UK law after the UK leaves the EC that has been derived from EU cases will be decided by reference to the CJEU case law as it exists on the day the UK leaves. As a consequence, the GRB is likely to give CJEU case law similar precedent status to the UK Supreme Court. The result is that Tribunals (and other court cases) will be heard in a similar way as they are now and both sides may continue to rely on case law as they have up to this point. Any changes to the VAT legislation, if any, may then be made at a more leisurely pace while providing certainty while this is done.
Customs
There will also be changes to the current UK Customs regime as a consequence of the UK leaving the Single Market. The Customs Declaration Services (CDS) programme is intended to replace the existing system for handling import and export freight (CHIEF) from January 2019. Now that the Government has made a decision to leave the EU customs union, there is concern that this project is in place on time. A letter from the Treasury Select Committee states that “even modest delays, there is potential for major disruption to trade and economic activity”.
There are still a lot of uncertainties which will not be dealt with until we know the terms of the UK leaving and we will try to report these as soon as we have any information. Please subscribe to our free monthly e-newsletter to keep up to date on this, and other VAT developments. Simply email us at marcus.ward@consultant.com
Flat Rate Scheme (FRS)
I have looked at the changes to the FRS and the impact of these here
This is a timely reminder for all businesses using the FRS as changes to the scheme come into effect tomorrow: 1 April 2017.
The first matter to consider is if your business is a “limited cost trader”. This may be done on the HMRC website here
Relevant costs, in this instance, only include goods (please see below).
If not a limited cost trader no further action is required.
If a business qualifies as a limited cost trader (which is likely to include, but not limited to, labour-intensive businesses where very little is spent on goods) there are the following choices.
Options
Relevant Goods
It should be noted that the goods referred to above mean goods that are used exclusively for the purposes of a business, but do not include:
As may seen, the definition is very restrictive. Failure to recognise this change is likely to result in penalties and interest being levied.
If you would like any advice on this matter, please contact us as soon as possible considering the timing of the implementation.
Unusually in the VAT world, Triangulation is a true simplification and is a benefit for businesses carrying out cross-border trade in goods.
What is it?
Triangulation is the term used to describe a chain of intra-EU supplies of goods involving three parties in three different Member States (MS). It applies in cases where, instead of the goods physically passing from one to the other, they are delivered directly from the first to the last party in the chain. Thus:
In this example; a UK company (UKco) receives an order from a customer in Germany (Gco). To fulfil the order the UK supplier orders goods from its supplier in France (Fco). The goods are delivered from France to Germany.
Basic Treatment
Without simplification, UKco would be required to VAT register in either France or Germany to ensure that no VAT is lost. That is; if registered in France, French VAT (TVA) would be charged to UKco, this would be recovered and the onward supply to Gco would be VAT free. The supply to Gco would be subject to acquisition tax in Germany. VAT therefore is neutral to all parties. Alternatively, UKco may choose to VAT register in Germany. This would mean that it would be able to produce a German VAT number to Fco so to obtain the goods VAT free. UKco would recover acquisition tax it applies to itself on the purchase and charge German VAT to Gco. Again, VAT is neutral to all parties.
Triangulation does away with these requirements.
To avoid creating a need for many companies to be structured in this way, Triangulation simplification was created via the EU VAT legislation (which is implemented across all MS) so, in this example, UKco is not required to register in any MS outside the EU.
Simplification
Under the simplification procedure Fco issues an invoice to UKco without charging VAT and quoting UKco’s VAT number. UKco, in turn, issues an invoice to Gco without charging VAT. The invoice is required to show the narrative “VAT Simplification Invoice Article 141 simplification”. Gco should account for the purchase from UKco in its German VAT Return using the Reverse Charge mechanism. Details of the Reverse Charge here
The Conditions
EU VAT Directive 2006/112/EC, Article 141 sets out the conditions which must be met for Triangulation simplification to apply. Using the example above these may be summarised as:
Impact on businesses
A business may be involved in triangulation as either:
In whichever role, it is important to ensure all relevant details have been obtained and the documentation is correct.
And after Brexit?
As in many areas, we do not yet know how Brexit will affect the UK’s relationship with the EU. In general, the “worse” case scenario for UK business is that this simplification will be unavailable and all cross-border transactions will be treated as exports and imports similar to any other transactions with countries outside the EU and UK business will need to VAT register in one or more MS in the EU. This will add complexity and possibly delays at borders for goods moving to and from the UK. It is also likely to create additional cash flow issues.
In these uncertain times it makes sense to keep abreast of the (likely) changing requirements and take advantage of the simplification while it lasts.
The Adecco case
In the Upper Tribunal (UT) case of Adecco the judge considered the tripartite situation between certain self-employed workers, employment businesses (Adecco) and the actual clients. Specifically, whether Adecco provides self-employed temporary workers to clients for the total consideration paid by client or only introductory services for commission retained by the employment business. Broadly, whether temporary workers supply their services to Adecco or to the clients.
Background
Based on the Reed Employment Ltd v HMRC [2011] UKFTT 200 (TC) “Reed” case. Reed also concerned the VAT treatment of supplies by an employment bureau in relation to the services of non-employed temps. The FTT in Reed concluded that the employment bureau was making supplies of introductory services to clients in respect of the placement of non-employed temps. The value of the introductory services was the commission charged to clients for the introduction of the temps and the employment bureau was only required to charge and account for VAT on its commission and not on the non-employed temps’ remuneration. Following Reed, Adecco made claims for repayment of the VAT which it had charged and accounted for in respect of payments representing the non-employed temps’ remuneration. HMRC rejected the claims. One of the reasons given for the rejection was that Adecco did not merely supply a service of introducing the non-employed temps to the clients but also supplied the non-employed temps’ services.
Decision
The UT found in favour of HMRC. It found that output tax is due on the full amount paid by the clients rather than the commission retained. The full amount included earnings paid to the temporary workers. The decision was based on the contracts in place in this instant case and it is possible that a different outcome would have occurred if a wider view was taken and/or if the relationship between contracts and economic reality had been considered.
Consequences
It is unlikely that this will be the definitive word on the matter and it is expected that further challenges to HMRC’s stance will be made given the two different outcomes in Reed and Adecco. As always in these types of cases, it demonstrates the importance of contracts and careful consideration of the relationships between the parties.
For more on agent/principal relationships please see my articles on latest relevant court cases here and here
Please contact us if this case impacts on your business or that of your clients.
VAT payment problems
In the Upper Tribunal (UT) case of Swanfield Limited (Swanfield)
The matter was whether HMRC had the right to allocate payments made by the applicant to specific periods against the wishes of the taxpayer.
Background
Swanfield was late with returns/payments such that it was subject to the Default Surcharge (DS) mechanism. Details of the DS regime here
HMRC issued DSs to Swanfield, many at the maximum rate 15%. The total involved was said to be over £290,000. However, if the payments made by Swanfield had been allocated in a certain way (broadly; to recent debts as desired by the taxpayer) it would have substantially reduced the amount payable. However, HMRC allocated the payments to previous, older periods which were not the subject of a DS.
The Issue
The issue was relatively straightforward; did HMRC have the authority to allocate payments as they deemed fit, or could the taxpayer make payments for specific periods as required?
The Decision
The UT found that Swanfield were entitled to allocate payments made to amounts which would become due on supplies made in the (then) current period, even though the due date had not yet arrived. Additionally, HMRC did not have the authority to unilaterally allocate payments made by the taxpayer to historical liabilities as they saw fit, in cases where the taxpayer has explicitly made those payments in relation to current periods. In cases where there is no specific instruction in respect of allocation of the payment, HMRC was entitled to allocate payment without any obligation to minimise DS. The UT remitted this case back to the First Tier Tribunal to decide, as a matter of fact, whether Swanfield had actually made the necessary allocation.
Commentary
This is a helpful case which sets out clearly the responsibilities of both parties. It underlines the necessity of a taxpayer to focus on payments and how to manage a debt position to mitigate any penalties. Staying silent on payments plays into the hands of HMRC. It is crucial to take a proper view of a business’ VAT payment position, especially if there is difficulties lodging returns of making payment. Planning often reduces the overall amount payable, or provides for additional time to pay (TTP). A helpful overview of payment problems here
Things can be done if a business is getting into difficulties with VAT; whether they are; reporting, submitting returns, making payments, or if there are disputes with HMRC. There are also structures that may be put in place to assist with VAT cashflow.
We would always counsel a business not to bury its head in the sand if there are difficulties with HMRC. Please make contact with us and, in almost all cases, we can improve the situation, along with providing some relief from worries. VAT may be payable, but there are ways of managing payments – as this case demonstrates.
In the First Tier Tribunal case of Grange Road Car Sales one of the main issues was the evidence required to satisfy HMRC that goods have actually left the UK (and, as exports, be zero rated). If a business cannot satisfy HMRC then the sales must be standard rated. There are different levels of evidence required for different types of export, and this case is a handy reminder of the importance of having the correct documentation. I have briefly set out below the different requirements and would strongly advise that any business that exports, regularly or occasionally, to keep this situation under constant review. It is an area which is easy for HMRC to “pick off” transactions and to be “unsatisfied”…
The case
In this case the supplier of cars was based in Northern Ireland and purportedly exported cars to the Republic of Ireland. The purchasers were said to drive the cars over the land boundary. In brief, the appeal was thrown out because both the evidence given in court and the documentation provided appears to have been woefully lacking; which is putting it politely. The case makes entertaining reading (if reading about VAT cases is your thing!). However, it does raise a serious point about exports.
An overview of export requirements
These requirements for exports are set out in Public Notice 703 (although in this case, as the supply was said to be intra-EU, the rules are set out in Public Notice 725). Not only are the requirements prescribed in detail, but they have the force of law (unlike a lot of HMRC’s published Notices). Unless these conditions are met, it is not possible to treat an export as zero rated, even if a business knows that the goods have physically left the UK.
Proof of export
The section of the Notice covering evidence is mainly set out in paragraph 6.
Official evidence
Official evidence is produced by Customs systems, for example Goods Departed Messages (GDM) generated by NES.
Commercial transport evidence
This describes the physical movement of the goods, for example:
Photocopy certificates of shipment are not normally acceptable as evidence of export, nor are photocopy bills of lading, sea-waybills or air-waybills (unless authenticated by the shipping or airline).
Supplementary evidence
You are likely to hold, within your accounting system some, or all, of the following:
You must hold sufficient evidence to prove that a transaction has taken place, though it will probably not be necessary for you to hold all of the items listed.
What must be shown on export evidence?
Vague descriptions of goods, quantities or values are not acceptable. An accurate value, for example; £50,000 must be shown and not excluded or replaced by a lower or higher amount.
How long must I retain export documentation?
To substantiate zero-rating a transaction you must make sure that the proof of export is:
What happens if I do not hold the correct export evidence?
If you do not hold the correct export evidence, within the appropriate time limits, then the goods supplied become subject to VAT at the appropriate UK rate.
Additional, or different, evidence is required in the following cases:
This list is not exhaustive.
Summary
As may be seen, there is a degree of complexity here, and curiously, just waving a car off to a different country does not create, in itself, a zero rated export.
We are able to review a business’ export procedures to ensure that, as far as possible, HMRC is satisfied that goods have left the UK and that the correct documentation is held to evidence this.
Please contact us if this service is of interest.
In today’s budget, the Chancellor of the Exchequer made the following announcements on VAT:
VAT Registration
The annual VAT registration limit has been increased from £83,000 to £85,000 in line with inflation.
The deregistration limit has been increased from £81,000 to £83,000.
Registration in respect of acquisitions from other Member States has also been increased to £85,000.
Notes: The UK’s VAT registration threshold is the highest in the EU. Businesses trading below the threshold can choose to register voluntarily. This may be appropriate in order to recover input tax on purchases (where the addition of VAT on sales would not create issues).
It is understood that the increase in the threshold will prevent around 4,000 businesses from having to register for VAT by the end of the 2017 to 2018 financial year.
VAT: ‘Split Payment’ model
It was announced that: Some overseas traders avoid paying UK VAT, undercutting online and high street retailers and abusing the trust of UK consumers who purchase goods via online marketplaces. Building on the measures introduced in Budget 2016, the government will shortly publish a call for evidence on the case for a new VAT collection mechanism for online sales. This would harness technology to allow VAT to be extracted directly by the Exchequer from online transactions at the point of purchase. This is often referred to as a ‘Split Payment’ model. This is the next step in tackling the non-payment of VAT by some overseas traders selling goods online to UK consumers”.
Use and enjoyment provisions for business to consumer mobile phone services
The government will remove the VAT use and enjoyment provision for mobile phone services provided to consumers. The measure will bring those services used outside the EU within the scope of the tax. It will also ensure mobile phone companies can’t use the inconsistency to avoid UK VAT. This will bring UK VAT rules in line with the internationally agreed approach
Making Tax Digital for Business
And that, in a nutshell, is all Philip Hammond had to say directly on VAT. However, via the Making Tax Digital for Business (MTDfB) Policy Paper, it was announced that businesses, self-employed people and landlords will be required to start using the new digital service from:
Businesses, self-employed people and landlords with turnovers under £10,000 are exempt from these requirements.
It was further announced that a one year deferral from the mandating of MTDfB for unincorporated businesses and landlords with turnovers below the VAT threshold. This means that only those businesses with turnovers in excess of the VAT threshold with profits chargeable to Income Tax and that pay Class 4 NICs will be required to start using the new digital service from April 2018.
I suppose that we should be grateful that there were not too many changes to VAT announced (I’m sure there will be many more as a result of Brexit…….).