Tag Archives: VAT-online

VAT: Split payments and e-invoicing

By Marcus Ward 15 October 2024

The recent announcement of an e-invoicing consultation means that businesses should consider the impacts of the intended introduction now.

When this is published (potentially in the Budget on 30 October) it is be anticipated it will cover the intended effective date, how it will affect types of taxpayer, eg; B2B and B2C, how it will be implemented, and its range.

This raises further questions “down the line”, so here we look a step further and consider “split payments” as there has been a lot of conversation and media coverage on this subject.

What are split payments (sometimes known as “real-time extraction”)?

Split payments use card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.

Clearly, HMRC is very keen to introduce such a system, but there are significant hurdles, the biggest being the complexity for online sellers, payment processors, input tax systems, agents, advisers and HMRC itself.

Where are we on split payments?

HMRC has previously published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:

identifying where it is intended that the purchased goods or services are to be delivered and/or consumed
the possibility to apply a split only above or below a certain value threshold
the feasibility for the splitting mechanism to calculate a composite VAT total across a mixed basket of goods and/ or services, each potentially with a different rate of VAT.

This builds on previous information gathering/consultations/discussions carried out some years ago.

Background

The expansion of the online shopping market has brought unprecedented levels of transactions. The results of digitalisation have also brought challenges for tax systems. Jurisdictions all over the world are currently grappling with the question of how to prevent large VAT losses, which can arise from cross-border online sales. This happens when consumers buy goods from outside their jurisdiction from sellers who, through fraud or ignorance, do not comply with their tax obligations. It is costing the UK tax authorities an estimated £1 billion to £1.5 billion (figures for 2015-16) a year. The UK government believes that intercepting VAT through intermediaries in the payment cycle, split payment potentially offers a powerful means of enforcing VAT compliance on sellers who are outside the UK’s jurisdiction.

Fraud

The fraud carried out by online sellers is not particularly sophisticated but is difficult to combat. Simply, sellers either use a fake VAT number to collect VAT without declaring it, or even more basically, collect the VAT and disappear.

Proposed spilt payment methods

The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:

Standard rate split. This assumes that all sales are liable to the standard rate VAT and does not recognise any input tax deduction. Extraction of 20% of tax, regardless of the actual liability (potentially, 5%, or zero) appears unfair and would be very difficult to impose. Cashflow would be negatively affected too.
Flat Rate Scheme (FRS). This is a proposal by HMRC to insist that online sellers overseas to use the FRS using a specific new rate for this purpose. The FRS threshold of £150,000 pa could be increased for overseas businesses, but this would potentially give overseas sellers an advantage over UK businesses, so politically, if nothing else, would prove to be a hard sell.
Net effective rate. This would mean an overseas business calculating its own exact net effective rate, based on its outputs and inputs from the previous year’s transactions (similar to TOMS).
Composite rate. A composite VAT total across a mixed range of goods or services, each potentially with a different rate of VAT. The mechanism for carrying this calculation out is unclear.

There may be more proposals forthcoming, but none of the above proposals appear reasonable and the complexity they would bring would seem to rule them out as matters stand – although this has not previously stopped HMRC introducing certain measures and the obvious benefits to the authorities cannot be ignored.

Overall

The technology for split payments currently exists and is being used in some Latin American countries (and Poland). The concept is part of a larger movement towards real-time taxation and MTD. Our view is that split payments are coming, but we do not know in which form or when.

This article is based on one first published by MWCL on 9 January 2023.

Evidence of UK establishment required for certain VAT registered businesses

By Marcus Ward 2 October 2023

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.

VAT Registration: Top tips for agent submissions

By Marcus Ward 1 March 2023

HMRC has, last week, set out the main reasons why online VAT registration applications submitted by agents are delayed. In such cases a caseworker is required to review the application and usually raise additional queries.

The “Top Five” reasons for delay

If an agent can avoid these, then the chances of a quick and successful registration is enhanced.

Business verification failed or is not completed

It is important to have all the business details available when completing the application. There can be difficulties when an application is started but set aside while more information is sought. There is only a seven-day limit once the process is underway.

Same address used for the business and either the applicant’s home address or agent’s address

This is the Principal Place of Business (PPOB) and should be where the day-to-day activities of the business take place. It is not the applicant’s residence (unless the business is run from home) or the agent’s address.

Bank details provided do not relate to the business

Bank details for VAT repayments must be:

a UK account
in the precise name of the business

If the entity is a partnership the account name may be in the name of a partner. If no UK account exists when the application is being made, this can be added later, but thus itself can cause issues.

ID documents are not provided digitally

These are cases where the applicant has chosen to provide identification documents by post. There is a facility to attach digital ID and this should be used wherever possible to avoid delays. Three items of ID are required: one a photo ID (passport or driving licence) and the other two non-photo documents (utility bills or birth certificates etc).

Verifying the applicant’s business

This is often when the business belongs overseas or does not yet have an Unique Taxpayer Reference (UTR). Again, it is preferrable to have all this information to hand before the process is started.

Information which an agent needs

Government Gateway user ID and password for either agent services account or HMRC Online services
agent’s name
phone number
email address
client’s name
client’s date of birth
details of client’s turnover and nature of business
client’s bank account details
client’s National Insurance number
forms of ID from the client
client’s Corporation Tax Payments, PAYE, Self-Assessment Return, recent payslip or P60

Previously HMRC has commented on delays and set out these additional common errors:

check that the notification of a trade classification matches the supplies the business makes
the VAT treatment of activities must be correctly identified
the correct person must sign the application – eg; for a corporate body it must be a director, company secretary or authorised signatory or an authorised agent
ensure the correct registration date (effective date of registration – EDR) is given. And that the EDR is accurate considering the circumstances that have been outlined for requesting registration elsewhere in the application

And I will add; do not forget form VAT5L when registering a business which is involved in land and property transactions.

VAT: What are split payments?

By Marcus Ward 9 January 2023

The term “split payment” is increasingly cropping up in conversations and in the media, so I thought it would be a good time to look at the concept.

Split payments, sometimes called real-time extraction, uses card payment technology to collect VAT on online sales and transfer it directly to HMRC rather than the seller collecting it from the buyer along with the payment for the supply, and then declaring it to HMRC on a return in the usual way.

Where are we on split payments?

At the end of the year HMRC published a Prior Information Notice (PIN) and associated Request for Information (RFI), seeking views on the outline requirements and proposed procurement process split payments. This should, inter alia, assist HMRC in:

identifying where it is intended that the purchased goods or services are to be delivered and/or consumed
the possibility to apply a split only above or below a certain value threshold
the feasibility for the splitting mechanism to calculate a composite VAT total across a mixed basket of goods and/ or services, each potentially with a different rate of VAT.

This builds on previous information gathering/consultations/discussions carried out a number of years ago.

Background

Fraud

Proposed spilt payment methods

The way in which payments are split represent difficult technical VAT issues, particularly when sales are at different VAT rates. The three proposals are:

Standard rate split. This assumes that all sales are liable to the standard rate VAT and does not recognise any input tax deduction. Extraction of 20% of tax, regardless of the actual liability (potentially, 5%, or zero) appears unfair and would be very difficult to impose. Cashflow would be negatively affected too.
Flat Rate Scheme (FRS). This is a proposal by HMRC to insist that online sellers overseas to use the FRS using a specific new rate for this purpose. The FRS threshold of £150,000 pa could be increased for overseas businesses, but this would potentially give overseas sellers an advantage over UK businesses, so politically, if nothing else, would prove to be a hard sell.
Net effective rate. This would mean an overseas business calculating its own exact net effective rate, based on its outputs and inputs from the previous year’s transactions (similar to TOMS).
Composite rate. A composite VAT total across a mixed range of goods or services, each potentially with a different rate of VAT. The mechanism for carrying this calculation out is unclear.

Overall

VAT: Selling goods using an online marketplace – new guidance

By Marcus Ward 3 January 2023

HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.

It can be used to check when a seller is required to pay UK VAT.

It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.

The guidance covers:

selling goods using an online marketplace
selling goods direct to customers in the UK
checks online marketplaces need to do
VAT when goods are returned to the seller

VAT: New online service for error correction

By Marcus Ward 30 August 2022

HMRC has launched a new online service for the correction of errors made on previous VAT returns. Previously, a business must have emailed a correction to form to: inbox.btcnevaterrorcorrection@hmrc.gov.uk (it is still possible to use this method of reporting). The Form VAT652 – “Tell HMRC about any errors in your VAT Return” is used for any corrections of £10,000 (net of all errors) or more of VAT.

VAT: Treatment of transactions involving cryptoassets. New guidance

By Marcus Ward 8 April 2021

Further to my articles on cryptoassets and Bitcoin HMRC have published an updated Cryptoassets Manual CRYPTO40000 which sets out its interpretation of trading in cryptocurrencies.

It covers:

economic activity
supplies of tokens
exchanges
exemption
value
case law
betting and gaming
other taxes; CGT, CT, CTCG, Income Tax, NIC and Stamp Taxes

Any business dealing in any way with cryptoassets needs to understand the VAT and other tax implications of services to, and by it.

VAT: Brexit outcomes – retailers

By Marcus Ward 19 January 2021

I been asked many times about the VAT position of UK residents buying goods online (and also by more traditional methods) so I thought a brief overview would be helpful.

It has been reported in the media that some overseas retailers have stopped selling to UK customers. This is a commercial decision and is not necessarily solely due to Brexit (although, clearly that hasn’t helped).

What has changed?

Pre Brexit, under the Distance Selling rules, VAT at the rate applicable in the seller’s country would be chargeable by overseas suppliers to UK recipients. This was in the same way as a domestic sale. There were then thresholds which, when breached, resulted in the seller registering in the customer’s country, but these were rarely exceeded by small or SME businesses. The Distance Selling rules still apply to EU Member States, but not the UK.

As the UK is now a ”third country” sales to the UK from the EU which were previously intra-community sales are now imports. From 1 January 2021, sellers of goods B2C (to UK individuals) with a value below £135 – so called low value consignments are required to VAT register in the UK – more details here. Clearly, many businesses are loath to do this hence their refusal to sell to UK customers. This change is not a result of Brexit but was a measure to level the playing field between EU and non-EU supplies (the latter often escaping the tax completely). From 1 July 2021 similar rules will apply to UK businesses selling to individuals in the EU, although there is likely to be a simplification measure; the so-called One Stop Shop (OSS).

Additionally, UK customers are usually responsible for the new post-Brexit import of goods, so there may be unexpected new VAT, duty and courier costs when buying certain goods from EU countries. This is similar to buying goods from any other country in the world.

It would appear that there will be a reduction in cross-border trade (in both directions) with the UK, and that is without factoring in shipping issues and delays at new borders.

VAT: zero rating of e-publications brought forward – to tomorrow

By Marcus Ward 30 April 2020

Further to the history of objection to reduce rating e-publications, and the 2020 budget announcement which stated that e-publications will be zero rated from 1 December 2020, the Chancellor of the Exchequer has today announced that this date is brought forward and zero rating will now apply from 1 May 2020 – which is of course tomorrow.

Further details of the measure here.

Zero rating

This brings electronically supplied sales in line with traditional printed matter. The zero rate will apply to:

books
booklets
brochures
pamphlets
leaflets
newspapers
journals and periodicals (which include magazines)
children’s picture and painting books

What supplied electronically means

The term ‘supplied electronically’ is not defined in legislation. It falls to be interpreted in accordance with its generally accepted meaning and includes supplies made over the internet and by e-mail.

Excluded items

Items that are not entitled to the VAT zero rate:

Advertising

If more than half of an e-publication is devoted to advertising, audio or video content, its supply will remain standard rated for VAT purposes.

Audiobooks

The zero rating extension only applies to the supply of electronic versions of books already zero rated in UK law. As such, zero-rating is limited to electronic versions of books that can be read or looked at. Supplies of audiobooks remain taxable at the standard rate whether supplied in a physical or digital format.

Intellectual property

e-book readers

e-book readers are one form of hardware to which e-books can be downloaded before being read but are not in themselves e-books. Therefore, supplies of e-book readers are standard rated

Software

Software, eg: an app is used to access e-publications but is not in itself an e-publication. Therefore, supplies of such software are standard rated.

Lending of electronic publications

The lending of any of the zero rated e-publications for a charge (for example, by a library) is zero rated.

Summary

Although welcome, as zero rating is VAT nirvana, the short lead in time could catch out some business which make such online supplies. Businesses which provide e-publications may want to consider making a retrospective claim as a result of the News Corp case.

VAT: Digital services to EU customers after Brexit

By Marcus Ward 1 October 2019

HMRC has published guidance on how to account for digital sales to EU customers when the UK’s MOSS system becomes redundant. Full document here.

After Brexit, businesses will no longer be able to use the Mini One Stop Shop (MOSS) to declare sales and pay VAT due in EU Member States.

The final return period for MOSS will be the period ending 31 December 2019.

A business will be able to use MOSS to:

submit a final return by 20 January 2020
amend the final return until 14 February 2020
update registration details until 14 February 2020
view previous returns

For sales made after Brexit, a business will need to register for either:

VAT MOSS in any EU member state
VAT in each EU member state where you sell digital services to consumers.

Registration deadline

A business will need to register by the 10th day of the month following its first sale to an EU customer after Brexit.

A business cannot register before Brexit.

The EC website may be used to:

check whether a business should register for Union or Non-Union MOSS
find out who to contact to register for VAT MOSS in an EU member state.

Further details are provided in the HMRC guidance.

The above assumes that the UK will leave the EU, and that there will be no agreements on VAT before Brexit

What are digital services?

Radio and television broadcasting services

These include:

the supply of audio and audio-visual content
live streaming

Telecommunications services

This means transmission of signals of any nature by wire, optical, electromagnetic or other system and includes:

fixed and mobile telephone services
Voice over Internet Protocol (VoIP)
voice mail, call waiting, call forwarding, caller identification, 3-way calling and other call management services
paging services
access to the internet

Electronically supplied services

These rules only apply to e-services that you supply electronically and includes things like:

supplies of images or text, such as photos, screensavers
supplies of music, films and games
online magazines
website supply or web hosting services
distance maintenance of programmes and equipment
supplies of software and software updates
advertising space on a website