Tag Archives: input-tax

VAT: Separate or composite supply? The Ice Rink Company Ltd case

By Marcus Ward 4 October 2017

Latest from the courts – Appellant on thin ice?

In the first Tier Tribunal case of The Ice Rink Company Ltd the issue was whether supplies of admission to ice skating rink and the hire of children’s ice skates – where sold as a package were single or multiple supplies. This is yet another separate/composite/compound supply case.

As a background to the issue please see previous relevant cases here here and here (in fact, this case was referred to in this hearing).

The issue of what is a single supply and what must be split as separate supplies seems to be neverending and HMRC appears to have an appetite to challenge every moot position through the courts.

Background

As anyone who has been ice skating will be aware (I tend to avoid the places not least as a result of not wishing to demonstrate my total lack of balance or skill) you can take your own skates, or hire skates for that session. In this case, the costs were £8 to use the rink or £10 with skate hire. The sole issue in the appeal was whether, when the appellants sold a “package deal” at £10 allowing a child to skate and to hire skates, it made a single supply or two separate supplies. If they made separate supplies, the £2 hire of skates to children is zero-rated. If it is a single supply the whole package is standard rated.

Decision

The judge decided that there were two separate supplies and that the skate hire supply could be treated as zero rated. This decision was based on a number of factors put forward by the appellant and which may be summarised as:

Skating with skate hire is a mixed supply, as the supply of skates is distinct and separate from the supply of admission
Around half the customers wishing to skate brought their own skates and some customers hired skates without paying to skate (at club sessions when a club had hired the rink and they needed skates for their club members). The hire of skates was therefore capable of being carved out from a single supply
A single “package” price is not determinative – in this case is it clear to the customer that they have freedom of choice and the components are available separately
Despite what HMRC said, it is clear that the skate hire is additional and optional
Neither supply is predominant and neither ancillary (as HMRC have previously accepted)
There was physical separation between the admission booth and the skate hire zone

The decision helpful included the following observations: “In our view… it is plain that in this case there are two supplies, a supply of the use of a skating rink and the supply of hire of ice skates. Neither is ancillary to the other as they both can be, and are, purchased on their own. Far from it being artificial to split the package into two, that is precisely what is in effect done in a substantial percentage of the appellant’s transactions with those using its facilities.” And “From the customers’ viewpoint a consumer of the package is getting the two things they want. The two elements are dissociable, not because of any spatial separation between the ticket office and the skate hire booth, but because that is the only appropriate way of looking at the supply of the elements.” And “…a substantial percentage of customers will choose to buy one or other of the element but not both, and that it is possible that the same customer may at one time buy a package and at another buy only one of the elements. Therefore it makes no sense to say that the elements are not dissociable when on a majority of the occasions that users enter the reception to use the rinks they choose only one of the two main elements, entry to the rink.”

Commentary

A sensible decision based on the facts. There does not seem to be an end to these types of cases as the decision is always based on the unique facts of each situation. It is difficult, if not impossible, to draft legislation which covers every type of scenario. Consequently, case law is very important in this area and the lead cases of CPP and Levob are the most cited. This case further illustrates that HMRC are not always correct in reaching a conclusion on multiple/composite supply cases and there is usually value in challenging their determinations. I would also say, from experience, that a review of a business’ activities can often identify such contentious areas and as always, getting it wrong can either result in an assessment and penalties, or mean that a business is paying too much VAT – not something that sits easily with me!

VAT: Latest from the courts – partial exemption attribution

By Marcus Ward 4 October 2017

In court about courts…

In the First Tier tribunal (FTT) case of The Queen’s Club Limited the issue was whether certain input tax was attributable to the company’s taxable activities or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. A brief guide to partial exemption here

Background

The Queen’s Club (The Club) is a well-known members’ tennis club in West London. The Club’s tennis facilities are world-class and each year the Lawn Tennis Association hires the Club’s courts to put on the Aegon Championship which is a precursor to the Wimbledon tournament and attracts many of the world’s leading players. It makes exempt supplies of sporting services to its members and also makes taxable supplies of food and drink in its bars and restaurants. It incurred VAT on the costs of refurbishing the bars, restaurant and café facilities on its premises. The Club considers that it is entitled to a full credit for input tax on those expenses as they were wholly attributable to the taxable supply of catering.

The Club’s revenue comes primarily from the membership fees that it charges. For the year 2012-13 the annual membership fee was £1820. By becoming a member of the Club, a person obtains the right to use both its sporting and non-sporting (catering) facilities. It was decided by the FTT that the Club had a discretion, but not an obligation, to provide the café etc to its members, however it was accepted that most members do not use the social facilities. It was agreed that the membership fee was consideration for an exempt supply of services closely linked with sport for the purposes of Value Added Tax Act 1994, Schedule 9, item 10. The Club also receives five main sources of taxable income:

Fees from the LTA to use its courts for the Aegon Championship
Sales of food and drink from restaurant and bars
Sales of sporting and other goods
Provision of the use of the restaurant and bars, usually with catering
Rental income for certain other rooms

The decision

There was no dispute that there was a direct and immediate link between the refurbishment of the restaurant and bars and taxable supplies made from them. The question that divided the parties was whether there was also a direct and immediate link between the refurbishment the exempt membership supplies.

The judge decided that “In short, viewed objectively, what members obtain when they join the Club is a right of access to world-class sporting facilities together with such additional facilities as the Club decides, in its discretion, to offer. The focus is on the sporting facilities…” and that, viewed objectively, the renovated bars and restaurant are a means by which members are able enjoy the Club’s sporting offering. The overall conclusion was that there was no direct and immediate link between the renovation goods and services and exempt supplies that the Club made.

The decision was that the Club was entitled to credit for the full amount of input tax that it incurred.

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant; particularly when they are incurred on land and property. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution. These type of costs are often covered by the Capital Goods Scheme, so care must be taken over a ten year period which adds to the complexity. As always, when considering land and property transactions it pays to obtain professional advice as mistakes are costly. A brief guide to land and property issues here

Recovering VAT on Staff Expenses

By Marcus Ward 29 September 2017

VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

reclaim all the VAT and pay the fuel scale charge – HMRC details here
only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices in all cases.

VAT due on property search fees? Whether they are disbursements

By Marcus Ward 25 September 2017

Latest from the courts – Brabners LLP

In the First Tier Tribunal case of Brabners LLP (Brabners) the issue was whether an external search agency used by the appellant correctly treated its supplies as VAT free, and if this was the case, whether the VAT free treatment continued to the appellant’s clients by way of a disbursement.

This is an interesting case and may create historic difficulties for conveyancing solicitors.

Background

Brabners is a law firm with a real estate department. It offers conveyancing services, both to buyers and sellers, in relation to proposed property transactions, for both commercial and residential property. In order to fulfil certain legal requirements, it used an external third party entity to obtain online property searches. The Appellant stated that it uses the online system for the majority of its searches (as opposed to a postal search carried out by employees of a Local authority, or a personal search at the Local Authority’s premises). The online search is not carried out by the Appellant, but rather, a specialist online search agency (‘Searchflow’) engaged by Brabners. Searchflow obtained the required property searches from the Local Authority’s digitised or dematerialised files and registers, and passed those results back to Brabners.

Searchflow invoiced the appellant for the cost of obtaining access to documents without the addition of VAT. Brabners treated this as a disbursement and invoiced its clients for the same amount without VAT.

The issues were:

Should the supply by the search agency be subject to output tax?
Was there a single or multiple supply?
Whether the charge to the end user of the services should be treated as a disbursement in respect of the search element
Which party consumed Searchflow’s services? (Brabners, or Brabners’ clients)

Note: the disbursement position is only (practically) relevant in this case if it was decided that the search fee was VAT free. Local Authorities now (from March 2017) charge VAT for searches, so the impact is only likely to impact on past situations.

Contentions

The main thrust of the Brabners’ argument is that the firm was requested, or expressly authorised, to obtain a search on the client’s behalf. Consequently, this meant that the firm was simply acting as the client’s agent, and the report belongs to the client. Brabners, argued that the search fees qualified as a disbursement for the purposes of VAT, and were not part of the otherwise taxable supply. It also argued that this separate treatment is intelligible and sensible. HMRC formed the view that the relevant payments cannot be treated as a disbursement as all the tests to do so were not met. For a guide to disbursements and the relevant tests please see here

Decision

The judge decided that the relevant expenses paid to Searchflow had been incurred by the appellant “in the course of making its own supply of services to” (its client) “and as part of the whole of the services rendered by it to” (its client). Therefore Brabners had consumed the service such that it could not be a disbursement. This point in this case proves academic as it was also, unsurprisingly, decided that Searchflow’s services were standard rated, so even if it were a disbursement, the VAT would still be payable by the appellant’s client.

Consequences

All firms which carry out conveyancing should review the VAT treatment of searches. If they have erroneously treated similar transactions as disbursements in the past, this is likely to require correction. Clearly, HMRC will be alive to this decision and it is anticipated that legal firms will be the subject of close inspection.

This case may also mean that third party search entities may be issuing retrospective VAT invoices or work which was previously treated as VAT free. This needs to be recognised and arrangements in place to recover any input tax incurred.

We are able to assist conveyancing firms with a review of the VAT position in light of this case.

VAT Public Notice 700 Updated

By Marcus Ward 25 August 2017

Notice 700: The VAT Guide has been updated.

This HMRC Notice is a “starting point” for general VAT information and provides a guide to all the main VAT rules and procedures. It also provides assistance with the problems faced by business and includes an index which helps users find further information by referring to a particular section or paragraph in one of HMRC’s other, more specialised publications. There have been over 30 changes to the Notice which was last updated in 2016.

A full list of changes is set out in the Notice, but the most salient are as follows:

Additional guidance on MOSS – para 4.8.4
Single and mixed supplies – para 8.1
Continuous supplies to connected persons – para 14.3.1
Various commentary on invoices (including electronic invoicing) – paras 16.6, 16.8, 17.7 17.8
Accounting schemes – para 19.2
Agents registered for VAT acting in their own name when the customer is not registered – para 1.2
Penalties for inaccuracies – para 27.3
Integrity of supply chains – para 27.5.2

The number of changes in just one year highlights the fast pace of the tax and the number of challenges which taxpayers have won. I cannot see this pace letting up in the future either.

As always, if you have any queries about the changes, please contact us.

VAT EU Claims – A Reminder

By Marcus Ward 9 August 2017

Refunds of VAT for UK businesses incurring other EC Member States

If a business incurs VAT in another EC Member State it is possible to recover it. It is not claimed on a UK VAT return, but via a special claim procedure. Details of how this process works and what may be claimed are set out in my previous article

The deadline for these claims is 30 September 2017.

Any applicant must not be registered or registrable in the Member State from which they are claiming a refund, nor must they have a permanent business establishment in that EU country. There are a number of other rules to be considered as well, so it pays to ensure that the claim is valid before time and effort is expended in compiling a claim. We are happy to advise on this.

Applications relating to VAT incurred in the year 2016 must be submitted by 30^th September 2017 and there is no leeway to extend this deadline.

VAT: Latest from the courts –zero rating of sub-contractors’ supplies

By Marcus Ward 8 August 2017

In the First Tier Tribunal case of Summit Electrical Installations Ltd the issue was whether supplies in respect of student accommodation made by an electrical sub-contractor were eligible for zero rating as supplies in the course of construction of buildings designed as a series of dwellings. Alternatively, were they, as HMRC contended; standard rated supplies in the course of construction of a building used for a Relevant Residential Purpose (RRP)?

Background

The appellant was appointed as the electrical subcontractor working to a main contractor on a development known as Primus Place in Leicester. This development is a seven storey block of student accommodation comprising 140 studio flats and associated facilities. Floors one to six are similar in layout with the majority of the studio flats being the same size. There are also a number of larger studios on some floors. On the ground floor there is a communal reception, cycle store, and laundry. In addition management offices, stores, bins and plant rooms are situated on the ground floor. Each of the studio flats was fitted out with a bathroom pod (a unit including shower, sink and toilet) installed in the corner of the room. In addition there was a small kitchenette with dish washing sink, countertop, cooker, fridge and microwave. Through a doorless stud wall is an open plan sleeping area and walk in cupboard.

The planning permission was granted subject to one relevant condition which provided that at the development: “…no person other than a full time student attending the University of Leicester or DeMontfort University…shall occupy these flats at any time”.

The main contractor provided a zero rating certificate to the appellant. This certificate certified that the developer of the site intended to use the buildings for a relevant residential purpose, namely student living accommodation.

Technical

In this case the distinction between the construction of dwellings and RRPs is that sub-contractors may zero rate their supplies if the work is in respect of dwellings, but those same supplies are standard rated if what is being constructed is a RRP. It is useful to consider the distinction here.

Relevant Residential Purpose

RRP means use as:

(a) a home or other institution providing residential accommodation for children

(b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder

(c) a hospice

(d) residential accommodation for students or school pupils

(e) residential accommodation for members of any of the armed forces

(f) a monastery, nunnery or similar establishment, or

(g) an institution which is the sole or main residence of at least 90 per cent. of its residents

but not use as a:

hospital or similar institution

prison or similar institution, or

hotel, inn or similar establishment

Clearly, by the above definition, student accommodation is deemed to be a RRP. Therefore, the Tribunal was asked to consider whether the accommodation would also qualify as dwellings, and if so, whether “designed as a dwelling” takes precedence. The definition of a dwelling is as follows (“Note 2” as referred to below).

Dwellings

A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied:

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

(c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent.

Decision

The judge ruled that the accommodation qualified as dwellings for the purpose of zero rating such that the sub-contractors supplies could also be zero rated. This was the case even though the planning permission contained a condition restricting their use to students of the universities only. The building also qualified as a RRP but via VAT Act 1994, Schedule 8, Group 5, note 2 – designed as a dwelling takes precedence over RRP.

NB: The Tribunal also found that HMRC guidance which sets out that in similar circumstances it is the main contractor who determines which type of zero rating applies to a particular development has no basis in law. It is the responsibility of the sub-contractor to determine whether it is working on a dwelling or a RRP building regardless of the main contractor’s position.

Commentary

HMRC appeared to have relied solely on para (c) of Note 2 (above) to disqualify the accommodation from being dwellings, on the basis that the planning permission prohibited occupation by any other person than students of the universities, but the judge was having none of that. The decision was hardly unexpected, but the comments on there being no legal basis to support HMRC’s published guidance is helpful and provides clarity.

As always, when analysing supplies of construction services (plus associated goods) and transactions involving land and property it pays to get proper VAT advice. There are many traps for the unwary and the values involved are usually high. The cost of getting it wrong can be very harmful to a business.

VAT – Latest from the courts: Fleming claims

By Marcus Ward 26 July 2017

In the First Tier Tribunal (FTT) case of NHS Lothian Health Board “the Board” the judge was asked to consider whether the Board had a valid Fleming claim* in respect of certain laboratory services performed from 1974 to 1997. The relevant services were, inter alia; Nequas work, food-testing, water-testing, non-medical testing of samples, especially for public health, and research and development.

Decision

The appeal was rejected. Although the Tribunal accepted the considerable evidence and testimony from members of staff working for the Board during the relevant years, and had decided that the relevant supplies were subject to VAT (they were not exempt of non-business) unfortunately, there was insufficient documentary evidence to actually quantify the amount of input tax claimed. Of course, in order to recover input tax, it had to relate to taxable (business) supplies made by the appellant. The Tribunal was required to consider whether the business income of the laboratories could be calculated. The FTT considered that whilst the evidence was helpful in determining that taxable supplies were made, that evidence fell short of facilitating its quantification. While the business income was almost certainly significant, the Tribunal did not consider that it has been quantified satisfactorily for the whole period.

The appellant contended that a set percentage representing business income could be projected backwards to earlier VAT periods. The Tribunal did not consider such an approach “reasonable or acceptable” and that the timescale involved also undermined the likely accuracy of the process of extrapolation. (The Tribunal suggested that there is a need to have a verifiable percentage, calculated by reference to prime records at regular intervals. For example, it might well be acceptable in a 25 year period to have verifiable figures every five years, and if there is not significant variation, to use extrapolated figures for the intervening years). There was also uncertainty about the Board’s partial exemption position and how, historically, apportionment was carried out.

Commentary

This case demonstrates the difficulty of making retrospective claims that go back to the early 1970s, that’s over 40 years ago! It is to be expected that certain records may be absent and HMRC has previously agreed that the required information may be established by other methods, however, a claim has to be made on the basis of “something more concrete” than a backwards projection of a percentage figure calculated from more contemporary records. The judge gave an example of evidence that may be acceptable in these circumstances.

The outcome does seem somewhat unfair given the fact that all parties agree that VAT was overpaid due to an error made by HMRC, but the level of evidence required to support a Fleming claim has to be of a certain standard to be accepted.

As always in VAT – record keeping is of the utmost importance.

* Background to Fleming claims

Fleming claims’ are claims for underdeclared or overpaid VAT, potentially going back as far as the inception of VAT in 1973. They followed the House of Lords judgements in January 2008 in the cases of Fleming and Conde Nast (Fleming) which concerned the way that the three year time limit on making claims had been introduced. In Revenue and Customs Brief 07/08, published on 20 February 2008, claims were invited in respect of overpaid output tax for accounting periods ending before 1 May 1997. Subsequent legislation in the 2008 Finance Act limited the scope for making claims for these accounting periods by introducing a new transitional period ending 1 April 2009, before which any such claims had to be made.

VAT – Business Entertainment Flowchart. What input tax may I recover?

By Marcus Ward 26 June 2017

VAT – Recovery of input tax incurred on entertainment

One of the most common questions asked on “day-to-day” VAT is whether input tax incurred on entertainment is claimable. The answer to this seemingly straightforward question has become increasingly complex as a result of; HMRC policy, EC involvement and case law.

Different rules apply to entertaining; clients, contacts, staff, partners and directors depending on the circumstances. It seems reasonable to treat entertaining costs as a valid business expense. After all, a business, amongst other things, aims to increase sales and reduce costs as a result of these meetings. However, HMRC sees things differently and there is a general block on business entertainment. It seems like HMRC does not like watching people enjoying themselves at the government’s expense!

If, like me, you think in pictures, then a flowchart may be useful for deciding whether to claim entertainment VAT. It covers all scenarios, but if you have a unique set of circumstances or require assistance with some of the definitions, please contact me.

We have recently carried out a series of presentations, which, amongst other subjects, covered business entertainment. Should you require VAT training or presentations, don’t forget our comprehensive service here which can be tailored to your needs.

VAT -Business Entertainment Flowchart

Download here: VAT Business Entertainment Input tax recovery flowchart

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.