Where goods are located in a shop can affect the VAT treatment. Nuts sold in the bakery aisle are VAT free, but those sold with snacks or confectionary are standard rated.
Tag Archives: international-vat
The interaction between Transfer Pricing and VAT
Are Transfer Pricing (TP) adjustments subject to VAT? – Usually no, but…
What is TP?
A transfer price is the price charged in a transaction between two parties. The transfer pricing legislation concerns itself with the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.
The UK’s transfer pricing legislation details how transactions between connected parties are handled and in common with many other countries is based on the internationally recognised ‘arm’s length principle’.
The UK allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss. It is not possible to decrease profits or increase a tax loss.
The UK’s transfer pricing legislation also applies to transactions between any connected UK entities.
The arm’s length principle applies to transactions between connected parties. For tax purposes such transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable conditions by independent parties.
So, is a TP adjustment additional consideration for a supply?
VAT
Value of the supply – what is the consideration?
TP is a direct tax concept which does not necessarily align with VAT considerations. Unhelpfully, there are no provisions in UK legislation which provides for the VAT treatment of TP adjustments. Additionally, there is no case law on this subject.
As a TP adjustment is solely for direct tax purposes, it does not usually affect the value of the supply for VAT purposes. Consequently, such adjustments are usually outside the scope of VAT.
However, price adjustments of previous supply of goods/services must be recognised for VAT market value rules only when:
- the supply is taxable
- the relevant input tax is not fully recoverable and
- HMRC issues an ‘Open Market Value Notice’ to the parties requiring them to apply market values for VAT.
VAT Act 1994, Schedule 6, Part 2, para 1 gives HMRC the vires to issue such a Notice.
Latest
We understand that a case: Arcomet Romania is due to be heard by the CJEU on whether TP adjustments represent consideration and we await the outcome which may provide clarity. (Although after Brexit, the previous position: that the UK VAT Act is to be interpreted with EU case law and general principles of EU law has ended. UK courts whilst still relying on the UK VAT Act and its EU VAT Directive principles, will be able to deviate from ECJ case law).
VAT: Evidence for exports. The H Ripley case
Latest from the courts
In the H Ripley & Co Limited First Tier Tribunal (FTT) case the issue was whether the appellant had satisfactory evidence to support the zero rating of the export of goods (scrap metal).
Background
HMRC denied zero rating on the basis that the appellant did not provide satisfactory evidence to support the fact that the scrap metal was removed from the UK.
The requirements are set out in VAT Notice 725 para 5 and acceptable documentary evidence may include:
- the customer’s order – including customer’s name and delivery address
- inter-company correspondence
- copy sales invoice
- advice note
- packing list
- commercial transport documents from the carrier responsible for removing the goods from the UK, for example an International Consignment Note (CMR) fully completed by the consignor, the haulier and signed by receiving consignee
- details of insurance or freight charges
- bank statements as evidence of payment
- receipted copy of the consignment note as evidence of receipt of goods abroad
- a signed CMR document or note
- a bill of lading
- an airfreight invoice
- an invoice from the carrier of the goods
- official documents issued by a public authority, such as a notary, confirming the arrival of the goods
- any other documents relevant to the removal of the goods in question which you would normally get in the course of business
or a combination of the above.
HMRC advised the appellant that it had received an information request from the Belgian tax authorities in respect of certain transactions and consequently, HMRC required information on the company’s documents in connection with the supplies. On receipt of the information HMRC concluded that the evidence was insufficient to support zero-rating so the sales were treated as standard rated and the appellant’s repayment claim was reduced to reflect this.
In these circumstances the burden of proof is on the appellant to show that it has satisfied the conditions set out in Notice 725 to zero-rate its supplies and provide documentation to show that the goods were removed from the UK.
Decision
The court noted that it was not HMRC’s position that supplementary evidence could not be provided post the required three-months period but that it was entitled to decline the additional evidence when it was provided some 18 to 30 months after the three-month period. It was clear that the evidence of removal must be obtained within three months and not that the valid evidence is brought into existence within the three-month time limit and obtained at some future date.
Notice 725 sets out the conditions which attach to the entitlement to zero-rate supplies. The FTT considered it to be clear from paragraph 4.3 and 4.4 (which have the force of law) that the onus is on the exporter company claiming zero-rating to gather sufficient evidence of removal within three months of the date of the supply. If it does not do so, it is not entitled to zero-rate the supplies.
Specifically, the court considered:
- Sales Invoices – did not provide clear evidence that the goods were removed from the UK. Despite the invoices confirming the sale of scrap metal to a Belgium registered company it did not follow that the address of the purchaser is the same address as the destination that the goods were sent to.
- Bank Statements – simply provided proof of payment they did not confirm who received the goods nor where the goods were delivered.
- Weighbridge Tickets – merely confirm a consignment of scrap metal was sold to a Belgium based company and the goods were collected by a UK registered vehicle.
- CMRs – none of the CMRs were fully completed by the haulier and signed by the receiving consignee.
- P&O Boarding Cards –a taxpayer must have in its possession valid evidence of export within three months from the time of supply. The boarding cards were not provided to HMRC until 30 May 2018, some 18 to 30 months after the disputed consignments took place. It was not disproportionate for HMRC to state that the time limit for obtaining valid evidence of removal was three months and that the substantive requirements of Notice 725 had not been met. In any event, the court did not accept that the boarding cards evidence the exports of the scrap metal; none of the reference numbers on the boarding card match those used in any of the other documents and none of the lead names on the boarding cards match any of the other names in any other document. The boarding cards do not have any identifying features such that they may be matched with any of the disputed consignments.
- E-mails and WhatsApp messages –none of the messages evidence that the loads were exported. At best they evidence a request from the buyer to a carrier to collect goods from the supplier’s yard and the WhatsApp messages were silent on whether the loads were exported from the UK.
The appeal was dismissed, and the assessments were upheld because none of the documents either individually or taken as a whole, were sufficient evidence to support zero-rating.
Commentary
Yet another case illustrating the importance of insuring correct documentation is held. It is not sufficient that goods leave the UK, but the detailed evidence requirements must always be met.
Small businesses/start ups: Should I register for VAT voluntarily?
OK, so why would a business choose to VAT register when it need not? Let’s say its turnover is under the VAT registration limit of £90,000, isn’t it just best to avoid the VATman if at all possible?
Planning
This is not an article which considers whether a business MUST register, but rather it looks at whether it is a good idea to register on a voluntary basis if it is not compulsory. The first time a business would probably consider VAT planning.
Decision
As a general rule of thumb; if you sell to the public (B2C) then probably not. If you sell to other VAT registered businesses (B2B) then it is more likely to be beneficial.
If you sell B2B to customers overseas it is almost certain that VAT registration would be a good thing, as it would if you supply zero rated goods or services in the UK. This is because there is no output tax on sales, but full input tax recovery on costs; VAT nirvana! A distinction must be made between zero rated supplies and exempt supplies. If only exempt supplies are made, a business cannot register for VAT regardless of level of income.
Compliance
Apart from the economic considerations, we have found that small businesses are sometimes put off VAT registration by the added compliance costs (especially since MTD) and the potential penalties being in the VAT club can bring. Weighed against this, there is a certain kudos or prestige for a business and it does convey a degree of seriousness of a business undertaking. We also come across situations where a customer will only deal with suppliers who are VAT registered.
The main issue
The key to registration is that, once registered, a business may recover the VAT it incurs on its expenditure (called input tax). So let us look at some simple examples of existing businesses for comparison:
Examples
- Example 1
A business sells office furniture to other VAT registered business (B2B)
It buys stock for 10,000 plus VAT of 2,000
It incurs VAT on overheads (rent, IT, telephones, light and heat etc) of 2,000 plus 400 VAT
It makes sales of 20,000
If not registered, its profit is 20,000 less 12,000 less 2400 = 5600
If VAT registered, the customer can recover any VAT charged, so VAT is not a disincentive to him
Sales 20,000 plus 4000 VAT (paid to HMRC)
Input tax claimed = 2400 (offset against payment to HMRC)
Result: the VAT is neutral and not a cost, so profit is 20,000 less 12,000 = 8000, a saving of 2400 as compared to the business not being registered. The 2400 clearly equals the input tax recovered on expenditure.
- Example 2
A “one-man band” consultant provides advice B2B and uses his home as his office. All of his clients are able to recover any VAT charged.
He has very few overheads that bear VAT as most of his expenditure is VAT free (staff, train fares, use of home) so his input tax amounts to 100.
He must weigh up the cost (time/admin etc) of VAT registration against reclaiming the 100 of input tax. In this case it would probably not be worthwhile VAT registering – although the Flat Rate Scheme may be attractive.
- Example 3
A retailer sells adult clothes to the public from a shop. She pays VAT on the rent and on the purchase of stock as well as the usual overheads. The total amount she pays is 20,000 with VAT of 4000.
Her sales total 50,000
If not VAT registered her profit is 50,000 less 24,000 = 26,000
If VAT registered she will treat the value of sales as VAT inclusive, so of the 50,000 income 8333 represents VAT she must pay to HMRC. She is able to offset her input tax of 4000.
This means that her profit if VAT registered is 50,000 less the VAT of 8333 = 41,667 less the net costs of 20,000 = 21,667
Result: a loss of 4333 in profit.
As may be seen, if a business sells to the public it is nearly always disadvantageous to be voluntarily VAT registered. It may be possible to increase her prices by circa 20%, but for a lot of retailers, this is unrealistic.
Intending traders
If a business has not started trading, but is incurring input tax on costs, it is possible to VAT register even though it has not made any taxable supplies. This is known by HMRC as an intending trader registration. A business will need to provide evidence of the intention to trade and this is sometimes a stumbling block, especially in the area of land and property. Choosing to register before trading may avoid losing input tax due to the time limits (very generally a business can go back six months for services and four years for goods on hand to recover the VAT). Also cashflow will be improved if input tax is recovered as soon as possible.
Action
Careful consideration should be given to the VAT status of a small or start-up business. This may be particularly relevant to start-ups as they typically incur more costs as the business begins and the recovery of the VAT on these costs may be important. In most cases it is also possible to recover VAT incurred before the date of VAT registration.
This is a basic guide and there are many various situations that require further consideration of the benefits of voluntary VAT registration. We would, of course, be pleased to help.
VAT: HMRC agent update
HMRC have published a recent agent update. In respect of VAT it covers:
- reporting accurate tax turnover for VAT registration
- reporting VAT deregistration to HMRC
- reporting dissolved companies and VAT deregistration to HMRC
- reporting insolvent companies and VAT deregistration to HMRC
- intending traders
- DIY housebuilders’ scheme digitalisation
- changes for goods moving from the island of Ireland to GB from 31 January 2024
Why are Certificates Of Origin important? An overview
What is a Certificate of Origin (CO)?
A CO is a formal, official document which evidences in which country a good or commodity was manufactured. The certificate of origin contains information regarding the product, its destination, and the country of export.
A CO is required for most treaty agreements for cross-border trade and have become more important since Brexit (no more single market alas).
Why is a CO important?
The CO is an important document because it determines whether certain goods are eligible for import, or whether goods are subject to duties.
CO – General
Customs officials expect the CO to be a separate document from other commercial documents such as invoices or packing lists. Officials may also expect it to be signed by the exporter, the signature notarised, and the document subsequently signed and stamped by a Chamber of Commerce. Additionally, the destination Customs authority may request proof of review from a specific Chamber of Commerce.
Some countries accept electronically issued COs which have been electronically signed by a Chamber of Commerce.
Types of CO
A CO can be either in paper or digital format and must be approved by the requisite Customs Authority.
There is no standard CO document for global trade, but a CO prepared by the exporter, has at least the basic details about the product being shipped.
Non-Preferential Cos
Non-preferential COs, also known as “ordinary COs” indicate that the goods do not qualify for reduced tariffs or tariff-free treatment under trade arrangements between countries. If an exporting country does not have in place a treaty or trade agreement with the importing country, an ordinary CO will be needed.
Preferential COs
This is for shipments between countries with a trade agreement or reduced tariffs and proves the goods qualify for reduced import duties.
Legalised CO
Some countries require additional information to demonstrate the authenticity of the information in the CO. A Legalised CO is an ordinary CO that has been further authenticated. The legalisation process usually involves the CO being validated by various appropriate authorities to give more evidence to its authenticity.
Certified CO
A Certified CO is similar to a n ordinary CO. However, it has been certified by a Chamber of Commerce, government agency or other relevant authority to confirm its authenticity.
Certification involves an in-depth review of all of the information declared on the CO, as well as a thorough side-by-side comparison with the requirements of the trade agreement and regulations of the country of import to ensure full compliance.
EUR1
A EUR1 certificate is used in trade between the UK and partner countries. It is used to confirm that goods originate in the EU or a partner country so that the importer can benefit from a reduced rate of import duty.
EUR1 certificates are issued by Chambers of Commerce or Customs offices.
Contents of a CO
A CO will typically contain the following information:
- name and contact information of the manufacturer of the goods
- country of origin
- contact information of the exporting agent
- contact information of the receiver/importing agent
- description of the goods, including the appropriate product codes
- quantity, size, and weight of goods
- A waybill or bill of lading number
- means of transport and route information
- commercial invoice of payment
* A waybill is a document issued by a carrier giving details and instructions relating to the shipment of a consignment of cargo. It shows the names of the consignor and consignee, the point of origin of the consignment, its destination, and route.
How do I find out if I need a CO?
A business will need to check with its local Chamber of Commerce.
VAT: Updated guidance on zero-rated exports
has been updated. The Notice sets out how and when a business can apply zero-rate exported goods.
Information on the types of fuel that the Extra Statutory Concession 9.2 does not apply to, and when you cannot zero rate the export of a motor vehicle has been updated.
And: Information on evidence relating to zero rating and direct exports – paragraphs 6.1, 6.5, 7.3 and 7.4.
VAT: New rules for registration and reporting in the EU from 1 January 2025
EU Member States have agreed to extend similar VAT registration thresholds utilised by domestic businesses to EU non-resident taxpayers.
VAT scheme for Small Businesses
New simplification rules will open the VAT exemption to small businesses established in other member states and help reduce VAT compliance costs. The new regime should reduce red tape and administrative burdens for SMEs and create a level playing field for businesses regardless of where they are established in the EU. The new VAT scheme for SMEs will apply from 1 January 2025.
The new scheme
Current rules on the exemption of supplies under a certain threshold:
- Member States are allowed to exempt supplies by small enterprises with an annual turnover not exceeding a given threshold, different in each Member State.
- Small enterprises not established in a certain Member State have, however, no access to such an exemption.
New rules on the exemption of supplies under a certain threshold
- Member States will be allowed to continue exempting small businesses with an annual turnover not exceeding a given threshold, which cannot be higher than € 85,000 (maximum exemption threshold).
- The new rules will open the exemption to small enterprises established in other Member States than the one in which the VAT is due. The exemption will apply if the turnover in Member State where the SME is not established is below the national threshold and if the annual turnover in all of the EU is below €100,000. This is a safeguard threshold preventing companies with large turnover to benefit from the SME exemption in other Member States. For this purpose, SMEs will be able to use the single registration window in their own Member State.
The new rules will provide exempt SMEs with simplifications in terms of registration and reporting. These rules should reduce the overall VAT compliance costs for SMEs by up to 18% per year.
A VAT Did you know?
We know that burying a deceased person is exempt, but exhumation is standard rated and we now know, thanks to the UK Funerals On-line Ltd FTT case, that the service of the repatriation of the body of a deceased person can be viewed as either an exempt supply of funeral services or a zero-rated supply of transport services.
This being the case, zero rating trumps exemption via of The VAT Act 1994, section 30(1).
Evidence of UK establishment required for certain VAT registered businesses
Businesses registered for VAT at a high-volume address will be asked by HMRC to prove they are established in the UK.
High-Volume Addresses
A high-volume address is where a single UK address is listed as the principal place of business (PPOB) for many VAT-registered businesses. We understand that many thousands of businesses are registered at single addresses in the UK.
HMRC will require proof of a place of belonging in the UK to avoid online marketplaces failing to account for output tax.
Online marketplaces
Online marketplaces are liable for the output VAT from sales on their platforms by overseas traders. HMRC understand that Non Established Taxable Persons (NETPs) have incorporated in the UK and provided UK address details to marketplaces. Since they are then no longer “overseas traders” these rules do not apply. In these situations, the NETP does not declare VAT and the marketplace does not become liable for it.
HMRC is writing to all VAT registered businesses with a PPOB at a high-volume address to ask for evidence to demonstrate that the business is actually established in the UK. If the business does not respond, by default, HMRC will consider the business to be a NETP and seek to recover VAT from the online marketplace business.
Evidence of UK establishment
HMRC will outline what specific evidence it will accept in their letter.