Voyage into vat

Voyage into VAT
• Before you set sail….
•Stormy seas?
• Safe harbours!
• With a fair wind….
• Long-range forecast

Before you set sail….
Basic principles

• A world wide tax (almost)
• C130 countries (and growing)
• Compare US SALT taxes

VAT law
• European legislation – EC Sixth VAT
Directive
• UK legislation – Value Added Tax Act 1994
• Secondary/Tertiary legislation (Statutory
instruments etc)
• Case Law
• HMRC Notices & Leaflets – generally
interpretive only – not law

How VAT works - example
Purchases
Gross
(£)
Net
(£)
Sales
VAT
(£)
Gross
(£)
Net VAT
Paid
£
Producer 100 17.50 117.50 17.50
Manufacturer 117.50 150 26.25 176.25 8.75
Retailer 176.25 300 52.50 352.50 26.25
52.50
Customer
pays
352.50
VAT borne by
customer
52.50

Scope of the tax
• VAT shall be charged on:
- any supply of goods or services
- made in the United Kingdom
- where it is a taxable supply
- made by a taxable person
in the course of furtherance of any
business carried on by him
VAT Act 1994 Section 4(1)

… any supply of goods or services …
What is a supply? – no legislative definition,
but:
- “includes all forms of supply, but not
anything done otherwise for a
consideration”

• Supply of goods = transfer of title (the right
to dispose of)
• Supply of services = anything which is not
a supply of goods .. done for a
consideration

• Distinguishing between goods and services
is important:
- VAT liability
- Place of supply
- Time of supply

… made in the United Kingdom …
• UK VAT only applies to supplies made in
the UK:
- “place of supply” rules

… where it is a taxable supply…
• Taxable supplies:
- Standard rate – 20%
- Zero rate – 0% (e.g. books, new houses,
exports of goods)
- Reduced rate – 5% (e.g. domestic fuel
& power, residential conversions)
• Exempt supplies (e.g. finance, education,
some residential accommodation etc)
• Difference between zero rate and exempt

… where it is a taxable supply…continued
• Other supplies/transactions:
- Outside the scope of VAT (e.g.
compensation, grants etc)
- Disregarded supplies, i.e. neither goods
or services (e.g. sales within VAT group,
TOGC)
- Deemed supplies (e.g. gifts,
“movements of own goods” etc)

… made by a taxable person….
• A person who makes or intends to make
taxable supplies and is (or is liable to be)
registered for VAT:
- Compulsory registration - £79,000p.a.
- Voluntary registration
- Caution – thresholds differ between EU
countries

… in the course of business
• ‘Business’ not defined, but includes ‘any
trade or vocation’
- Purely private transactions are
outside the scope of VAT
- EC law (VATDirective) refers to
‘economic activity’
- Includes ‘not-for-profit’ activities
& organisations

Key principles - recap
• VAT is a tax on business transactions
• Collected through the supply chain
• VAT systems worldwide – but the detailed
rules vary
• Not all transactions are subject to VAT
• Need to understand the transaction to
determine the VAT treatment

What is input tax?
VAT you are charged on:
1. Business purchases
2. Business expenses

What can be reclaimed?
Considerations
1. Has there been a supply?
2. Was VAT correctly charged?
3. Who is the recipient of supply?
4. 'Blocked' input tax
5. Valid tax invoice
6. Partial exemption

What purchases have VAT on them?
• General rule: standard rate VAT applies
unless there is a specific relief.
• 0% VAT: eg books, passenger transport,
exports of goods etc
• VAT exempt: eg insurance, certain
financial services etc
• Commercial property: generally VAT
exempt but supplier may opt to tax

When to claim input tax
• 'Tax point' for the supply
• Acquisition date
• Importation date

VAT invoice
Invoice
ABC Ltd
First Avenue
Anytown
Newco
New Street
London NW1
Invoice
No: 1608
15 May 2011
For professional advice
provided period 01 01
11 – 31 05 11
£
VAT @ 20%
Total
1000.00
200.00
1200.00
VAT No 128 5525 35
Customers name
and address
Date Suppliers name
and address
Description of service
Identifying number
VAT rate
VAT registration
number
VAT charged
Value of supply
Total charged

Evidence for VAT recovery
A ‘valid’ tax invoice
Where a valid VAT invoice cannot be
obtained?
Invoices in the name of employees?
Less detailed invoices

'Late' claims
• Lack of evidence
• Error
• Time limit

Employee expenses
Subsistence expenses
Removal/relocation expenses
Domestic accommodation
Clothing

Motor cars and fuel
Purchase/leasing a motor car
Repairs/maintenance of a motor car
Fuel bought by the business/employees

Mobile phones provided to employees
Purchase and connection
Calls where business use only
Charges by business for private use
Free private calls
Fixed monthly charges

Business entertainment
• What is it?
• Staff Entertainment (e.g. Christmas
parties)
• Exclusions
• Astra Zeneca case

Management services
Three key questions:
• Is the management charge made to a
different entity or within the same
entity/VAT registration?
• What is the nature of the service(s)
provided?
• Where does the supply take place for VAT
purposes?

Value of supply
• Consideration
• Barter transactions
• Part exchange

Consideration
• Everything received in return for the
supply of goods or the provision of services,
including incidental expenses
• Normally the invoice amount
• Includes barter transactions and non-
monetary considerations

Gifts and other deemed supplies
• Genuine gifts or are you expecting
something in return?
• Standard-rated gifts of goods costing
more than £50. Account for VAT on a
deemed supply of the goods at market value.
Reclaim VAT on the cost of buying the
goods
• Succession of gifts to same person

Time of supply
• Determines when to account for VAT
• Goods:
–Basic tax point is date when goods are
removed or made available for customer
use
• Services:
–Basic tax point is time when the
services are performed

Actual tax point
• Actual tax point overrides the basic tax point
• Actual tax point created by:
–VAT invoice being issued or a payment being
received before the basic tax point; or
–Invoice being issued up to 14 days after the
basic tax point. This does not override a tax
point created by an early payment

Goods tax point?
• Goods delivered on 8 June 2013
• Payment received 31 May 2013
• Invoice issued 12 June 2013
• What is tax point?
• Answer - 31 May 2013

Services tax point?
• Services performed on 27 September 2012
• Payment received on 4 November 2012
• Invoice issued on 5 October 2012
• What is tax point?
• Answer - 5 October 2012

Special situations
–Book entries or offsets in inter-company
accounts
–Deposits
–Continuous supplies of services

Place of supply of goods
–For goods being transported = where the
goods are when journey begins
–For goods not being transported = where
they are physically located
–For goods being supplied and installed =
place where the goods are being installed
• Special rules for intra-EU movements
(dispatches, distance sales) and exports to non-EU
countries

Place of supply – Goods…..continued
• A UK supplier supplies goods to a US
customer and the goods are transported to
the US
• Place of supply = UK
• But – export rules may apply

Place of supply – Goods…..continued
• A UK supplier supplies goods to a US customer
but goods remain in the UK
• A UK supplier supplies goods to a US customer.
Goods are installed in Germany
• Place of supply = Germany

Place of supply of services
• Basic rule: “where the recipient has established his business”
• If recipient has more than one place of business: place of
business which is “most closely connected” to the supply
• Exceptions to basic rule for:
– Land/immovable property e.g. property management,
surveying, legal services on conveyancing
– Transport services
– Live artistic, sporting, cultural and exhibition services e.g.
pop concert
– Intellectual services e.g. engineering services
– Electronic services (will change in 2015)

Place of supply – Services…..continued
• A UK supplier supplies office rental property in the
UK to a US customer
• Place of supply where the property is located = UK
• A UK supplier supplies office rental property in the
UK to German customer
• A UK supplier supplies office rental property in
Germany to a German customer
• Place of supply = Germany

Accounting and record keeping
What records does a taxpayer have to keep?
Preservation of records
In what form may records be preserved?

The VAT reporting cycle
• Quarterly
• Monthly
• Annually
• Electronic submission
• Submission dates

Completing the VAT return – things to remember
• Box 1: VAT on sales and other outputs
• Box 2: VAT on acquisitions of goods from
EU
• Box 3: Box 1 + Box 2
• Box 4: VAT reclaimed in the period on
purchases and other inputs
• Box 5: Net payable/<repayable> = Box 3
less Box 4

Completing the VAT return – things to remember
continued
• Box 6: Total value of total sales/outputs exc.
VAT (inc full value of reverse charge services)
• Box 7: Total value of purchases/inputs exc. VAT
(inc reverse charge services)
• Box 8: Total value of all supplies of goods to
EU
• Box 9: Total value of all acquisitions of goods
from EU

HMRC control visits
• Frequency of control visits?
• What will happen before a visit?
• What things will HMRC do during the
visit?
• What will happen at the end of the visit?
• What will happen after the visit?

HMRC assessments, interest and penalties
• Circumstances when HMRC can issue
assessments
• Time limits for assessments
• Default interest & ‘commercial restitution’
• Other penalties – see “Stormy Seas”!!

International and cross border

Terminology
• Import/Export (non-EU)
• Acquisition/Dispatch
• Goods vs. Services

European Community
• Members (28)
Austria Germany The Netherlands
Belgium Greece Poland
Croatia Hungary Portugal
Cyprus Ireland Slovak Republic
Czech Rep Italy Slovenia
Denmark Latvia Spain
Estonia Lithuania Sweden
Finland Luxembourg Romania
France Bulgaria
UK Malta
• Candidate countries
Macedonia Turkey

Imports
• Goods from outside the EU
• Import VAT
- same rate of VAT as if goods supplied in UK
- payable as a duty of Customs
- payable when duty is due (i.e when goods
cleared)
- taxable amount = value for Customs purposes
- deferment
- import VAT is reclaimable - Box 4

Imports (continued)
• Documentation
- deferment statement
- agent's invoice
- C79 (import VAT certificate)
• VAT recovery?
- C79

Exports
• Sale/removal of goods outside the EC
• Zero rated providing
- Goods physically removed within 3mths of
'time of supply
- Exporter obtains and keeps 'proof of export'
- No delivery to UK address (ex. for processing
etc)
• Otherwise standard rated

Exports
• Official evidence (provided by HMRC)
- Goods Departed Message (GDM)
- Export declaration (SAD/C88)
• Commercial evidence
- Authenticated sea-waybills/ air-waybills
- Bills of landing
- Certificates of shipment
- CMR/ International consignment note

Proof of export
Continued
• Supplementary evidence
- orders, contracts, correspondence, etc
- consignment note, packing list, etc
- insurance/freight charges, evidence and
payment
• HMRC make the rules (Notice 703)
• Ex-works sales

Intra-EC trading - goods
Supplier:
Germany
Customer:
UK
Goods
Invoice
'Despatch' 'Acquisition'
Zero rate sale provided: 'Acquisition tax' (UK VAT):
- quote customer UK VAT No - A/c for VAT on UK return
- obtain 'proof of removal' - Reclaimable (subject to
normal rules)

Acquisitions
• Goods from elsewhere in the EC
• VAT registered customer responsible for
'acquisition tax' accounting
• Acquisition tax

Dispatches
• Sale/removal of goods to other EC member states
• Zero rated provided:
- goods physically removed from UK
- goods 'acquired' by VAT registered customer
- supplier quotes customer VAT number
- supplier obtains and keeps 'evidence of removal'
• Otherwise standard rated
• Movements of own goods
• VAT return: boxes 6 and 8

EC Sales List (ESL)
• Details of zero rated supplies of goods to EC
customers
- customers VAT number
- 'total value' of goods supplied
• Calendar quarters
• Sent automatically by HMRC (Box 8)
• Now required for services

Intrastat
• Statistics on trade in goods between EC
countries
• Boxes 8 and 9 of VAT return
• Supplementary declarations:
- Dispatches (£250k)
- Arrivals (£600k)
- Monthly
• Physical movements of goods
• Penalty regime

Overseas expenses
• EC 8th Directive - recovery of VAT incurred
elsewhere in EC
• Conditions - taxable person etc
• Claim - period, original invoices
• EC 13th Directive – recovery of EU VAT by
businesses not registered or established in the
EU

VAT on services: international issues
VAT impact of services supplied into and out of
UK/EU
• Place of supply
• “Importation” of services into UK/EU
• May be subject to “reverse charge” VAT

Reverse charge VAT
• Concept
• Rationale
• Mechanism
• Impact on business making exempt supplies

Stormy Seas
Headline
Rate
Anti-
Avoidance
Rules
Penalties
Disputes &
Litigation
Complexity of
Regime
“Abuse”
Doctrine
HMRC
Common
Pitfalls

Headline Rate
• SR VAT - 1/6th of gross value
- Impact on margin
• Compare other taxes
• Ignore it at your peril!

Complexity of Regime
• Old legislation – needs updating (e.g. food,
handicapped persons)
• New legislation – Torture!
• Pace of change – Continuous process (Budget Day
no longer “an event”)
• Volume of material
• Volume and range of case law (FTT – CJEU)
(28 countries)

Anti-Avoidance Legislation
Examples:
- Disaggregation
- VAT Grouping
- Option to tax disapplication

Doctrine of “Abuse”
• Halifax case
• “Abuse of rights”
• Impact on VAT planning
• Commercial impact
• WHA case

Penalty Regime
- Criminal offences
- e.g. fraudulent evasion
- Up to 7 years in jail
- Civil penalty regime
- e.g. errors/misdeclarations
- 0% to 100% of the tax

Penalty Regime
- HMRC attitude
- Focus on “behaviour” not “tax loss”
- Proportionality
- Mitigation and suspension

HMRC
• Aims – plugging the tax gap
• Technical (and other) resources constrained
• Inconsistency
• Easy targets

Disputes & litigation
• Reconsideration route
• To the tribunal …. and beyond
• ADR

Common Pitfalls
• My top 5:
- Liability
- OTT
- Registration
- Place of supply
- Property issues

= VAT has never been a bigger risk to business
What can we do?

Safe Harbours
UK
Registration
Limit
Zero-Rate
Reduced Rate
Bad debt
relief
Exemption
Schemes for
small business

UK Registration Limit
• Currently £79k annual limit
• Prospective and retrospective tests
• Generous! Compare other EUMS
• Caution: No T/O limit for NETP’s

Zero-Rating
• The Holy Grail
• VATA 1994, SCH8
• (The erosion of?) Hard won reliefs
Food
New build
(residential
)
Exports
Charity
reliefs

Exemption
• ………. Not quite the Holy Grail
• VATA 1994, SCH9
• Partial exemption
Health, Welfare
& Education
Financial
Services &
Insurance
Property

Partial exemption
• If you make both exempt and taxable supplies,
you may not be able to reclaim all of the VAT
you incur
• Special calculation to split the input tax between
exempt and taxable supplies

Partial exemption
• Taxable supplies
– VAT due on income (at prevailing rate)
– VAT on related costs can normally be reclaimed
• Exempt supplies:
– No VAT on income
– VAT on related costs cannot be reclaimed
• VAT on overheads – need to apportion

Partial exemption
• Reclaim input VAT relating to taxable activities
• Disallow input VAT relating to exempt activities
• Apportion input VAT relating to residual costs.

Standard partial exemption method
VAT on overheads reclaimed according to the
formula:
Value of taxable supplies
Value of taxable+exempt supplies x 100
x VAT on overheads
=Recoverable VAT on overheads

Alternative partial exemption
methods
• If the standard method does not give a 'fair and
reasonable result' businesses can negotiate a
special method based on another measure, e.g.
1. Number of transactions
2. Headcount
3. Floor area
4. “Sectorised” methods

Partial exemption method override
• Applies in some cases where the chosen partial
exemption method does not produce a 'fair and
reasonable' VAT deduction
• If the VAT recovery using the normal partial
exemption differs substantially from the VAT
recovery based on the taxable use of the
good/services

Partial Exemption Special methods
(PESMs)
• Require HMRC agreement
• Business must sign declaration that the method
is “fair and reasonable”

Reduced Rate
• ………. Last but not least
• VATA 1994, SCH 7A
• Key areas
Energy saving
measures
Certain
property
conversions

Bad Debt Relief
• 6 month minimum
• 4 years and 6 months maximum
• “Written off”
• Adjust for subsequent payment
• Include on box 14
• Credit notes are not the answer!

Schemes for Small
Businesses
• Cash Accounting
• Flat Rate Scheme
• Annual Accounting
• Other (e.g. retail, TOMS, second-hand goods)

Safe Harbours
- Minimum clients need to do to stay compliant
- Minimise VAT risk

With a Fair Wind
Opportunitie
s
TOGC
Property
Planning
Challenging
HMRC
decisions
Postage Overseas
entertainme
nt
VAT recovery
methodologies
VAT grouping
Other?

Hospitality
and Leisure
SectorsNot for profit IFA’s
Property and
Construction
RetailOnline
traders
Education &
Welfare
Energy &
Renewables

Case Law
Update
BFI
WHA
Deutsche Bank
UEGF
Colaingrove
Put conversion

Long Range Forecast
Proposed
changes
Expected
Guidance
Case law
Outlook
variable…

Contact
vat@taxadvicedirect.com

Voyage into vat

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