Tag Archives: VAT-cross-border

VAT: Freeports – what are they? Are they beneficial?

By Marcus Ward 12 October 2021

Further to the background to Freeports here I consider the latest developments.

What are Freeports?

Freeports are a specific port where normal tax and customs rules do not apply. Imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports, before exporting again without paying the tariff on the original imported goods (however, a tariff may be payable on the finished product when it reaches its final destination).

Freeports are similar to Free zones, or “Enterprise Zones” which are designated areas subject to a broad array of special regulatory requirements, tax breaks and Government support. The difference is that a Freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support.

Use

Goods brought into a Freeport are not subject to duties until they leave the port and enter the UK market. Additionally, if the goods are re-exported no duty is payable at all.

If raw materials are brought into a Freeport and processed into final goods before entering the UK market, duties will be paid on the final goods.

Background

If a business chooses to use a Freeport to import or export goods, it will be able to:

get relief from duties and import taxes
use simplified declarations processes to reduce administrative burdens
choose which rate of Customs Duty to use if processing the goods changes their classification

If goods are purchased in the UK, a business will continue to pay duties and import taxes using the normal UK rates.

Where are they?

The eight new Freeports are located at East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside.

Authorisation needed to use a Freeport

A business can apply to use the Freeport customs special procedure (a single authorisation combined with easier declaration requirements) to import goods for:

processing and then export or for sale in the UK
storage and then export or for sale in the UK

Declaring goods entering the UK Freeport

A form C21 is used to declare goods entering the UK. This can be done before the goods arrive in the UK or when the goods have arrived in the UK.

Declaring goods exported

A business will normally need to submit an exit summary declaration when goods are exported from the UK. When an exit summary declaration is not needed, a business will need to give an onward export notification to HMRC.

Disposing of goods which have been processed or repaired

When a business has finished processing or repairing goods, it must leave the Freeport and dispose of the goods by either:

re-exporting them outside the UK
declaring them to another customs procedure
transferring them to another Freeport Business Authorisation holder
destroying them – usually only possible under customs supervision
using other simplified disposal methods

VAT on supplies in the Freeport

A business will be able to zero rate supplies within a Freeport of:

goods declared to the Freeport
services carried out on goods declared to the Freeport

When a zero rated VAT invoice is issued, it must include the reference “Free zone”.

Zero rating of goods applies if:

they are declared to the Freeport
they are sold from one authorised Freeport business to another in the Freeport
both Freeport businesses are registered for VAT (unless they are exempt from registering for VAT and HMRC has approved this exemption)

Benefits

The Government says that Freeports and free zones are intended to stimulate economic activity in their designated areas. Government backed economic studies have found the main advantage of Freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the Freeport can benefit from cheaper imported inputs in comparison to those outside the area. However, some commentators such as the UK Trade Policy Observatory (UKTPO) suggest that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, it is important to ensure that trade is not simply diverted from elsewhere and that wider incentives are needed.

Evasion

Considering that the European Parliament has called for Freeports to be scrapped across the EU because of tax evasion and money laundering and that they are where trade can be conducted untaxed, and ownership can be concealed it is likely that there will be a certain degree of evasion. This a result of the lack of scrutiny on imports and means that high-value items, eg; art, can be bought and easily stored in Freeports without the kind of checks and controls they would normally face.

Summary

Any business that regularly imports and/or exports goods should consider if a Freeport will benefit their business model. This is particularly relevant if work is carried out on imported goods.

VAT: Fiscal representation in the UK

By Marcus Ward 12 January 2021

As Brexit is all completely finished * * hollow laugh * * I look at what overseas businesses operating in the UK need to know in respect of compliance.

What is fiscal representation?

It is a safeguard for the authorities responsible for VAT in the EU (and UK). If it is not possible to collect tax from the taxable person, they can go to the representative who is usually jointly and severally responsible for the debt.

Each EU Member State has its own rules on representatives, but here I look at what overseas businesses need to do in the UK, and what the responsibilities are for a business acting in such a role. A representative must meet a set of tests to ensure that it is fit and proper in order for it to be allowed to act in a representative capacity.

In most cases, overseas businesses with no place of belonging in the UK register as a Non-Established Taxable Person (NETP).

Choices

If a business is a NETP, it will have a choice in how it registers and accounts for VAT in the UK (although in certain circumstances, HMRC have the power to direct a business appoint a tax representative).

Deal with UK VAT itself

In most cases an overseas business can deal with VAT without third party assistance. However, it must be able to:

register for VAT at the correct time
keep a record of everything it buys and sells in the UK
keep all the records needed to complete its VAT Return
produce records and accounts to HMRC for inspection
keep a note of all VAT paid and charged for each period covered by the return
pay the right amount of tax on time

Tax representative

A NETP may appoint a tax representative who:

must keep its principal’s VAT records and accounts and account for UK VAT on its behalf
is jointly and severally liable for any VAT debts the NETP incurs

A NETP is obliged to provide all of the information required to fulfil its obligations.

Tax Agent

A NETP may appoint a tax agent to act on its behalf. Such an arrangement will be subject to whatever contractual agreement the NETP and the agent decide. The significant difference to a tax representative is that HMRC cannot hold the agent responsible for any of the NETP’s VAT debts. This is clearly a better position for a UK business acting on behalf of a NETP. HMRC can decide not to deal with any particular agent appointed. Also, in some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed – this is usually in cases where there is a risk to the revenue. Additionally, HMRC can ask for a financial security.

As with the appointment of tax representatives a NETP:

may only appoint one person at a time to act as its agent (although an agent may act for more than one principal)
must still complete the appropriate form to apply for registration
HMRC require a NETP’s authority before it can deal with an agent
Needs to give the agent enough information to allow them to keep the VAT account, make returns and pay VAT

It is possible to appoint an employee to act as a VAT agent.

Penalties

As is to be expected, get any of the above wrong and there are penalties!

VAT: Changes to services post Brexit

By Marcus Ward 18 November 2020

As we know, the UK will leave the EU on 1 January 2021. A lot of articles have, understandably, focussed on the movement of goods between the UK and the EU, however, there will be significant changes for suppliers and consumers of services. Some of these will be beneficial, and some, charitably, will be a royal pain.

In this article I have tried to summarise the most important changes. Compared to supplies of goods, the changes to services are more certain, so businesses can make preparations with more confidence.

The changes to services

Currently, B2B supplies of services to EU recipients are generally UK VAT free (the customer accounts for VAT via a reverse charge). However, currently, for most B2C supplies UK VAT is chargeable. From next year, there is no need to distinguish between B2B and B2C supplies of services to EU recipients – all will be UK VAT free. Also, there will no longer be the need to differentiate EU and outside the EU customers. A UK business making such supplies will no longer be required to obtain its customer’s VAT number and quote this on the relevant invoice. All that is required is that there is evidence that the recipient belongs outside the UK. I understand that HMRC has announced that VATA 1994, Sch4A para 16 will be amended to bring the EU in line with the rest of the world (well, in VAT terms!)

There will be no significant change to, inter alia; land, admission to events, digital and telecoms services which have special rules and fall outside the general VAT rule. Digital services (MOSS) changes slightly and are considered here.

NB: UK businesses will still be required to apply the reverse charge to services received from the EU as these will be VAT free when purchased.

Reclaiming VAT incurred in the EU. Currently, a singe claim is submitted to HMRC for all VAT incurred in other Member States. This way of claiming will change post Brexit. A business will be required to submit a claim to each individual EU country in which it has suffered VAT. Broadly, this will be what is known as an EU Thirteenth Directive claim. These need to be done in the language of the relevant country and on specific forms. There will, inevitably be different rules for; deadlines, amounts claimable, methods of claim, information required and procedures. Experience insists that there will be a lot more red tape, rejections and hassle. Good luck!

For various reasons, it is likely that more UK businesses will be required to VAT register in the EU. This may be via legal requirements, or commercial planning. As an example, a UK business supplying, say, telecoms services, may be required to register in a country where the supply is consumed (the so-called use and enjoyment rules). Each country has its own rules and some may apply the reverse charge procedure, but businesses supplying:
- telecommunications services
- broadcasting services
- electronically supplied services (for business customers)
- hired goods
- hired means of transport
- insurance repair services

will need to check the requirements of each Member State to which it makes supplies. Also, businesses in the EU making such supplies in the UK are likely to be required to register here.

UK businesses suppling financial services (FS) to customers in the EU will benefit from the post Brexit changes. Currently FS providers to recipients outside the EU are able to recover attributable input tax. Similar services received in the UK and the rest of the EU are deemed to be exempt and there is no input tax recovery (for partial exemption see here), From 1 January 2021 as the UK will be a third country (third country refers to any country outside the EU, and in this case outside its economic structures – the single market and the customs union) so any FS supplied to EU recipients will qualify as “specified supplies” such that attributable input tax will be reclaimable. The legislation here: Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019. So, some rare good news. Full details of FS input recovery here and HMRC guidance here.

It is likely that a UK business which is required or chooses to VAT register in an EU Member State will need to appoint either a formal agent or a fiscal representative. This requirement varies between EU countries, so a business will need to check the rules in each country. This will add complexity and costs. A fiscal representative is jointly liable for any VAT debts and penalties, so most entities acting as representatives will require a bank guarantee or similar to cover its exposure.

EU businesses supplying certain services in the UK. There may be an increased requirement for overseas businesses to VAT register in the UK, regardless of whether they have a place of belonging here. Any EU businesses in this position requiring advice please contact me.

TOMS. The Tour Operators’ Margin Scheme (details here) is an EU-wide arrangement which, broadly, simplifies VAT for tour operators. This is an area which remains uncertain. It is possible that the UK will negotiate a Brexit which does not disturb TOMS (increasingly unlikely I would say). But in a no-deal Brexit the government has announced that UK tour operators can continue to apply TOMS to UK holidays. However, supplies of holidays outside the UK will not be subject to VAT. This will put UK tour operators at an apparent advantage compared to EU competitors. However, it is likely that they will soon be required to VAT register in every EU country in which it sells holidays. Watch this space.

Commentary

A mixed bag of changes to businesses supplying services. It is crucial for all suppliers of services to the EU to review their position and put plans in action sooner rather than later. If you, or your clients, are unsure about these changes, or would like specific advice, please contact me. I can also offer a review of a business to advise on what planning is required, or beneficial. It is important to get this right as there could be significant penalties, back tax and other unwanted outcomes.

VAT: Post Brexit Import licences and certificates

By Marcus Ward 5 November 2020

From 1 January 2021 businesses importing (including bringing in from the EU which were previously acquisitions) certain goods will require licences and certificates. Additionally, there will be new rules for bringing goods into the UK. As the UK will be a third country post Brexit (third country refers to any country outside the EU, and in this case outside its economic structures – the single market and the customs union).

Licences and certificates

A business will need to obtain a licence or certificate to import some types of goods (below) into the UK and it may also need to pay an inspection fee for some goods before they’re allowed into the UK.

The Goods

The goods, with links to details, are as follows;

Further GOV.UK information on importing goods from the EU to Great Britain from 1 January 2021 here.

VAT: Brexit latest

By Marcus Ward 23 June 2020

The European Commission (EC) has published an updated Notice to Stakeholders which covers the UK leaving the EU.

The original document which was published in 2018 has been amended to reflect the latest developments which mainly include the official Brexit on 1 February 2020 and the current transition period, which, as matters stand, will end on 31 December 2020. Until that date, EU law in its entirety applies to the UK

The Notice includes:

The legal position from 1 January 2021
VAT rules for cross-border services
The VAT General Rule
MOSS
Refunds of VAT
Separation provisions of the Withdrawal Agreement
The supply of other services
Refund requests relating to VAT paid before the end of the transition period

The Notice states that; “…during the transition period, the EU and the UK will negotiate an agreement on a new partnership, providing notably for a free trade area. However, it is not certain whether such an agreement will be concluded and will enter into force at the end of the transition period”. I think that this is likely to be a charitable conclusion!

The EC advises businesses:

when they are established in the EU, to familiarise themselves with the rules applicable to services supplied to and received from third countries (which the UK will become from 1 January 2021)
when they are established in the UK, to examine whether new liability rules will apply to them with regard to their services supplied in the EU
to take the necessary steps in respect of services covered by MOSS
consider the changes in the VAT refund request procedures

The Notice does not cover the supply of goods nor digital services themself.

General

After the end of the transition period, the EU rules on VAT for services no longer apply to, and in, the UK. This has, particular consequences for the treatment of taxable transactions in services and VAT.

Businesses need to understand the probable changes and make preparations for a No-Deal Brexit.

VAT: Where do I belong?

By Marcus Ward 7 May 2020

The place of belonging

The concept of “belonging” is very important in VAT as it determines where a supply takes place and thus the rate applicable and the country in which is due. (The so-called “Place Of Supply, or POS). It is necessary, for most supplies, to establish where both the supplier, and the recipient belongs. Because this is a complex area of VAT it is not difficult to be overpaying tax in one country, not paying tax where it is properly due, or missing the tax issue completely.

A relevant business person `belongs’ in the relevant country. A `relevant country’ means:

the country in which the person has a business establishment, or some other fixed establishment (if it has none in any other country);
if the person has a business establishment, or some other fixed establishment or establishments, in more than one country, the country of the relevant establishment (ie; the establishment most directly concerned with the supply); and
otherwise, the country of the person’s usual place of residence (in the case of a body corporate, where it is legally constituted)

A person who is not a relevant business person `belongs’ in the country of his usual place of residence. The `belonging’ definition applies equally to a supplier and the recipient of a supply, where relevant.

Business establishment is not defined in the legislation but is taken by HMRC to mean the principal place of business. It is usually the head office, headquarters or ‘seat’ from which the business is run. There can only be one such place and it may take the form of an office, showroom or factory.

Fixed establishment is also not defined in the legislation but is taken by HMRC to mean an establishment (other than the business establishment) which has both the technical and human resources necessary for providing and receiving services on a permanent basis. A business may therefore have several fixed establishments, including a branch of the business or an agency. A temporary presence of human and technical resources does not create a fixed establishment in the UK.

Usual place of residence. A body corporate has its usual place of residence where it is legally constituted. The usual place of residence of an individual is not defined in the legislation. HMRC interpret the phrase according to the ordinary usage of the words, ie; normally the country where the individual has set up home with his/her family and is in full-time employment. An individual is not resident in a country if only visiting as a tourist.

More than one establishment. Where the supplier/recipient has establishments in more than one country, the supplies made from/received at each establishment must be considered separately. For each supply of services, the establishment which is actually providing/receiving the services is normally the one most directly connected with the supply but all facts should be considered including

for suppliers, from which establishment the services are actually provided
for recipients; at which establishment the services are actually consumed, effectively used or enjoyed
which establishment appears on the contracts, correspondence and invoices
where directors or others who entered into the contract are permanently based, and
at which establishment decisions are taken and controls are exercised over the performance of the contract

However, where an establishment is actually providing/receiving the supply of services, it is normally that establishment which is most directly connected with the supply, even if the contractual position is different.

VAT groups

A VAT group is treated as a single entity. This also applies when applying the ‘place of belonging’. As a result, a group has establishments wherever any member of the group has establishments.

This is an area which often leads to uncertainty, and therefore VAT issues. It is also an area where VAT planning may; save time, resources and avoid unexpected VAT costs, either in the UK or another country.

For more on our International Services

Budget 2020 – VAT implications

By Marcus Ward 11 March 2020

A summary of how the 2020 budget changes VAT rules:

e-publications

Zero rating will apply to e-publications from 1 December 2020. This brings e-publications in line with traditional printed matter. The zero rate will apply to:

e-books
e-newspapers
e-magazines
academic e-journals

Presumably, this brings an end to HMRC’s arguments set out in the News Corp case.

Postponed Accounting

From 1 January 2021 postponed accounting will apply to all imports of goods, including those from the EU. This will provide an important boost to those VAT registered UK businesses which are integrated in international supply chains as they adapt to the UK’s position post Brexit.

Sanitary products

From 1 January 2021 the zero rate will apply to women’s sanitary products. This is calculated to save the average women £40 over her life.

Consultation

A consultation paper will be published to gather views on the potential approach to duty and tax-free goods policy post Brexit.

Cross-border goods policy

An informal consultation process will be launched in spring 2020 on the VAT and Excise treatment of goods crossing UK borders after Brexit.

Fund management

As announced on 4 March 2020 the government is legislating to clarify when fund management services are exempt from VAT.

Financial services

An industry working group will be set up to review how financial services are treated for VAT purposes. Presumably how Brexit will affect such services.

“Quick Fixes” Directive

Legislation will be introduced to simplify rules for the VAT treatment of intra-EU movements of call-off stock, allowing businesses to delay accounting for VAT until the goods are called-off.

Partial Exemption

Following the recent call for evidence on the simplification of the VAT rules on Partial Exemption and the Capital Goods Scheme, the government has said it will continue to engage with businesses in relation to their responses and will publish a response in due course.

Commentary

These proposed measures will be broadly be welcomed by business. Especially those in relation to e-publications and Postponed Accounting. It was widely expected that HMRC would lose its argument that e-publications and hard copy publications should be treated differently in any case. Postponed Accounting takes us back to the pre-1990s era. It looks very much like this means a “No-Deal” and although Postponed Accounting may be an easement for some aspects, it remains unnecessary if an agreement with the EU can be reached. However, there appears to be no political will nor appetite to reach such an agreement, so business suffers.

EC proposes new tools to combat cross-border VAT fraud

By Marcus Ward 1 December 2017

The European Commission has, this week, unveiled new tools to make the EU’s Value Added Tax (VAT) system more fraud-proof and close loopholes which can lead to large-scale VAT fraud. The new rules aim to build trust between Member States so that they can exchange more information and boost cooperation between national tax authorities and law enforcement authorities to fight VAT fraud.

Commentary

One wonders if this is the type of thing that the UK will miss out on after Brexit. Will this increase the threat of fraud? Will fraudsters target the UK? Or will “taking control of our borders” mean that cross-border VAT fraud will be reduced?

We shall just have to wait and see…..

VAT – Intrastat; what is it? If you don’t know, you may be committing a criminal offence…

By Marcus Ward 15 July 2015

Although often viewed as a necessary evil, Intrastat can be used by a business to obtain valuable information on markets in the EC. …Oh, and it may be quite useful to understand it to avoid getting a criminal record! In this article I summarise the basics, provide useful links and look at the pros and cons of the regime.

So, what is Intrastat?

Intrastat is the name given to the system used for collecting statistics on the trade in goods between all 28 Member States of the EC. If certain conditions are met a business must, by law, submit monthly Intrastat Supplementary Declarations (SDs). Intrastat does not cover services, nor is it required for exports to recipients outside the EC.

The data collected under the Intrastat system forms a large part of overall UK trade statistics totals which in turn are an important part of the UK Balance of Payment account and an important indicator of the health of ‘UK plc’. This data is published at uktradeinfo and is used by a wide range of government and international organisations and is particularly useful in helping businesses gauge import penetration and establish new markets for their goods.

Intrastat responsibilities

If a VAT registered business trades with any of the other EC Member States, it will have a responsibility to report the trade to HMRC. How detailed that report is required to be depends on the value of its trade with other EC Member States for either purchases (arrivals) or sales (dispatches). If a business’ trade in goods falls below the Intrastat thresholds then EC Sales Lists may be required.

Reporting Thresholds for SDs

The limits are:

£1,500,000 for arrivals, and;
£250,000 for dispatches

In a calendar year.

Intrastat should not be confused with EC Sales Lists which are used to collect information on all sales from UK VAT registered businesses to business recipients in other EC Member States. A guide to EC Sales Lists here

Classification of goods for Intrastat

Finding the right commodity code for goods is one of the most important aspects of Intrastat. An online classification tool, the Intrastat Classification Nomenclature (ICN) is available to assist businesses find the right commodity code for its goods. Here

The ICN is a fully searchable facility which can be used by everyone from beginner to expert.

Value for SDs

Only the value of goods are included in SDs (plus any related freight or insurance charges where they form part of the invoice or contract price of the goods).

The value does not include:

Commission, legal and financial services
Insurance, freight and/or carriage (unless it is included with the cost of the goods)
Labour
Goods bought and sold within the EU but which do not actually enter or leave the UK
Maintenance costs
Repairs

Submission of SDs

This may be done online or offline (which is preferred for large amounts of data).

Online submission details here

Offline submissions are via pre-prepared Excel spreadsheets available here

Via an email attachment – the file must be converted into the message format Electronic Data Interchange for Commerce and Transport (EDIFACT). Details here

Deadlines for submission of SDs

Intrastat declarations must be submitted on a monthly basis. Complete and accurate declarations must be received by the 21st day of the month following the reference period to which they relate.

Now, the scary part.

Penalties

It is perhaps surprising that if you fail to submit SDs by the due date, or send data that is inaccurate, a business will be committing a criminal offence (Statistics of Trade [C&E] Regulations 1992).

Penalties may be levied in cases where SDs are persistently late, missing, inaccurate or incomplete.

Although the penalty regime is a criminal one and could result in proceedings in a Magistrates Court, HMRC state that it normally prefers to “compound” alleged offences. This involves the offer of an administrative fine in lieu of Court proceedings. However, an administrative fine is only offered when, after receiving a Warning of Possible Criminal Proceedings letter, a business has brought its Intrastat declarations completely up to date. If any declarations remain outstanding Court proceedings will be instigated.

The plus side.

How to use Intrastat for your business

It is possible for a business to find out about; trade markets, competition, suppliers, customers and competitors using data collected via Intrastat. Additionally, the information may be used to create a bespoke data table to suit a business’ specific needs. Information here

Intrastat pros and cons

Yes, businesses are being used as unpaid providers of trade information as well as unpaid collectors of tax. It then does seem rather draconian that HMRC “coerce” businesses to provide information on pain of a criminal record. But the information is then there for a business trading within the EC to use for its commercial advantage. It’s another chore on the VAT checklist I’m afraid.

VAT – The Future for the EC Digital Single Market

By Marcus Ward 11 May 2015

VAT – The Future for the EC Digital Single Market

The EC has announced its plans for its VAT digital single market in respect of online sales. Full details are here and here.

The highlights are:

• Extension of MOSS to intra-EC and third country online B2C sales of goods.

• Introduction of a new EC-wide VAT threshold to help start-up businesses.

• Ending current distance selling thresholds.

• Allowing for domestic controls, including a single audit of cross-border sales.

• Removal of the VAT exemption for the import of small consignments form third countries.

• Removal of barriers to cross-border sales eg; geo-blocking and costs.

This is likely to have a huge impact on the way businesses deal with VAT on sales of goods to individuals overseas. If the introduction of MOSS is anything to go by, we may be in for a bumpy ride.