Tag Archives: tribunal

VAT – Are overpayments subject to output tax?

By   19 June 2017
0

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

By   19 May 2017
0

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: Hardship applications

By   15 May 2017
0

The recent case of Elbrook (Cash & Carry) Ltd here brings into focus the concept of “hardship”.  In this case Elbrook successfully appealed to the Upper Tribunal (UT) against HMRC decision that the appellant should seek additional finance to pay the VAT said to be due rather than allow the case to be heard without that payment on the grounds of hardship.

So what is the process and what is “hardship”?

Background

If a taxpayer wishes to appeal to the Tribunal against a decision made by HMRC he must pay any disputed VAT before the case can be heard. The reason for this is understandable, without this rule taxpayers could make an appeal merely to delay the payment of tax and it is a difficult test to satisfy. However, if the applicant is able to demonstrate that payment of the VAT would cause financial hardship the rule may be waived  by HMRC. This decision is an appealable matter. (NB: There is no requirement to pay interest or penalties before appealing but interest will continue to accumulate on an assessment).  If a business believes that paying the amount it wishes to appeal against would cause it hardship it can ask HMRC not to collect the payment due until the appeal has been considered by the tribunal. It will need to:

  • write to the officer who made the original decision
  • explain how paying this amount before the appeal hearing would cause the business hardship

Depending on the size of the business, the explanation should include detailed evidence of its financial position and the impact of paying the disputed tax. I have seen many applications fail as a result of incomplete evidence, or general statements that are not evidenced by documentation.  It pays to put a comprehensive application together and have this reviewed by an adviser before it is submitted.

HMRC will write and tell you whether or not they agree with delaying the payment. If they do not, the business can go to Tribunal

The law

The rules where applicable are set out in the VAT Act 1994, section 84(3)

 “Where the appeal is against a decision… it shall not be entertained unless—

 “(a) the amount which the Commissioners have determined to be payable as VAT has been paid or deposited; or

 (b) on being satisfied that the appellant would otherwise suffer hardship the Commissioners agree or the tribunal decides that it should be entertained notwithstanding that that amount has not been so paid or deposited.”

Section 84(3) is intended to strike a balance between, on the one hand, the desire to prevent abuse of the appeal mechanism by employing it to delay payment of the disputed tax, and on the other to provide relief from the stricture of an appellant having to pay or deposit the disputed sum as the price for entering the appeal process, where to do so would cause hardship.

 Hardship

Unhelpfully, this term is not defined in the legislation, nor in HMRC guidance. Consequently, we must look at case law.  The following comments in the “original” Elbrook case – (2016) UKFTT 0191 (citing various previous cases, mainly “ToTel 1 and 2”) assist in understanding a hardship appeal:

  • Decisions on hardship should not stifle meritorious appeals
  • The test is one of capacity to pay without financial hardship, not just capacity to pay
  • The time at which the question is to be asked is the time of the hearing. This may be qualified if the appellant has put themselves in a current position of hardship deliberately (eg; by extraction of funds otherwise readily available from a company by way of dividend), or if there is significant delay on the part of the appellant
  • The question should be capable of decision promptly from readily available material
  • The enquiry should be directed to the ability of an appellant to pay from resources which are immediately or readily available (a business is not expected to seek funding outside its normal sources, nor sell assets)
  • The test is all or nothing. The ability to pay part of the VAT without hardship does not matter
  • If the Tribunal has fixed a cut off point for the admission of material, it is not an error of law for the Tribunal to ignore any later furnished evidence
  • The absence of contemporaneous accounting information is a justification for the Tribunal to conclude that it can place little if any weight on the appellant’s assertion that it is unable to afford to pay

The onus of proof in such cases is on the taxpayer to demonstrate hardship and without persuasive evidence such applications are unlikely to succeed.

Action

If your business, or your client’s business is the subject of a disputed decision, it should review its financial position and consider appealing against the decision even if paying the disputed amount would cause hardship.  A business should not be put off appealing just because it would suffer hardship. We are able to assist in any review required.

VAT – Input tax recovery by holding companies

By   10 May 2017
0

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 Update on Associated Newspapers case – treatment of vouchers

By   24 April 2017
0

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.

VAT legislation – relationship between EU and UK law. A guide

By   10 April 2017
0

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:

  • Harmonisation of VAT law
  • Harmonisation of content and layout of the VAT declaration
  • Regulation of; accounting, providing a common legal accounting framework
  • Common framework for detailed description of invoices and receipts
  • Regulation of accounts payable
  • Regulation of accounts receivable
  • Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

  • Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system
  • Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
  • Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
  • Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

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:

  • Equality of citizens
  • Subsidiarity and proportionality
  • Non-discrimination on grounds of nationality
  • Fiscal neutrality
  • Legal certainty and the protection of legitimate expectations.

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.

VAT Legal impact of The Great Repeal Bill and Article 50

By   3 April 2017
0

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:

  • It will repeal the ECA and return power to UK institutions.
  • The Bill will convert EU law as it stands at the moment of exit into UK law before we leave the EU. This allows businesses to continue operating knowing the rules have not changed significantly overnight, and provides fairness to individuals, whose rights and obligations will not be subject to sudden change. It also ensures that it will be up to the UK Parliament (and, where appropriate, the devolved legislatures) to amend, repeal or improve any piece of EU law (once it has been brought into UK law) at the appropriate time once we have left the EU.
  • The Bill will create powers to make secondary legislation. This will enable corrections to be made to the laws that would otherwise no longer operate appropriately once we have left the EU, so that our legal system continues to function correctly outside the EU, and will also enable domestic law once we have left the EU to reflect the content of any withdrawal agreement under Article 50.

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

VAT Latest from the courts – Employment businesses

By   21 March 2017
0

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 Latest from the courts – Allocation of payments

By   13 March 2017
0

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.

VAT Latest from the courts – Evidence for zero rated exports

By   10 March 2017
0

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:

  • Authenticated sea-waybills
  • Authenticated air-waybills
  • PIM/PIEX International consignment notes
  • Master air-waybills or bills of lading
  • Certificates of shipment containing the full details of the consignment and how it left the EC, or
  • International Consignment Note/Lettre de Voiture International (CMR) fully completed by the consignor, the haulier and the receiving consignee, or Freight Transport Association own account transport documents fully completed and signed by the receiving customer

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:

  • customer’s order
  • sales contract
  • inter-company correspondence
  • copy of export sales invoice
  • advice note
  • consignment note
  • packing list
  • insurance and freight charges documentation
  • evidence of payment, and/or
  • evidence of the receipt of the goods abroad.

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?

  • The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:
  • the supplier
  • the consignor (where different from the supplier)
  • the customer
  • the goods
  • an accurate value
  • the export destination, and
  • the mode of transport and route of the export movement

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:

  • kept for six years, and
  • made readily available to any visiting VAT Officer to substantiate the zero-rating of your exports

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:

  • The supply is to a recipient in the EU
  • Where the supplier does not arrange shipment of the goods
  • Where an overseas customer arranges his own export
  • Merchandise in baggage (MIB)
  • Groupage or consolidation transactions
  • Postal exports
  • Exports by courier and fast parcel services
  • Exports by rail
  • Exports through packers
  • Exports through auctioneers
  • Exports from Customs, Excise and/or Fiscal warehouses
  • Supplies to the Foreign and Commonwealth Office
  • Exports to the Channel Islands

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.