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Are you ready for the new Construction Industry Reverse Charge?

Background

HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result a reverse charge for building work is to be introduced, to combat fraud. This was originally due to be introduced on 1 October 2019, but its implementation has been delayed several times. Once implemented the new legislation will mean, essentially, that building contractors will not pay VAT to their sub-contractors, but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced on 1 March 2021.

Reverse charge accounting already exists in other areas seen as susceptible to fraud, notably mobile phones and computer chips. The reverse charge also applies (for reasons not associated with combating avoidance) to some goods and services, including building work, received from outside the UK. The proposed construction reverse charge mechanism is therefore sometimes referred to specifically as the ‘domestic reverse charge’, or DRC.

How will the new reverse charge work in practice?

The reverse charge will apply to VAT-registered building contractors engaging VAT-registered sub-contractors and, similarly, to sub-contractors engaging others through the supply chain. A final customer for building work, such as an occupier or a developer, will not have to apply the reverse charge, and will continue to incur VAT in the same way as now.

The reverse charge is aligned with the Construction Industry Scheme (CIS), and will only apply to supplies that are within the scope of the CIS but with some notable differences.

  • Not all supplies within the CIS will be subject to the reverse charge. There will be various exclusions which will be particularly relevant to ‘deemed contractors’.
  • The reverse charge will not apply to zero-rated supplies.
  • The reverse charge will extend to building materials included within a supply of building work.
  • Deductions under the CIS do not affect the amount of VAT.

Contractors and sub-contractors include anyone who is acting in that capacity by making a supply of building work, whether or not this is their normal activity. HMRC have confirmed that staff agencies acting as such are not seen as supplying building work, so that their services are outside the scope of the reverse charge.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due. If VAT is charged incorrectly it will not be recoverable as input tax. This is particularly important because when HMRC disallows a VAT refund claim, the customer will need to seek a recovery of overcharged VAT from the supplier which may be straightforward but can be difficult or impossible, for example, if the supplier is no longer trading. In this context it is important to note that, despite CJEU judgments to the effect that customers who cannot obtain rebates from suppliers should have available a mechanism to obtain a refund from HMRC, HMRC has, at time of writing, refused to accommodate this and whilst accepting claims may be possible it has adopted a policy of requiring businesses to make claims via the High Court, an expensive and uncertain approach. In essence HMRC is only too pleased to accept windfalls, collecting VAT from suppliers that have charged it incorrectly whilst refusing to offer any practical solution to reclaiming that VAT other than via the supplier.

There are various situations, set out in the relevant legislation, where the reverse charge will not apply, otherwise, the presumption is that the reverse charge does apply. In particular, there will be no de minimis threshold.

The supplier should not charge VAT unless:

  • The payment is outside the scope of the CIS;
  • The customer is not (and is not required to be) VAT-registered; or
  • The customer is treated as or like an ‘end user’ or is not acting in a business capacity.

Additionally the supplier should not charge VAT if the supply is zero-rated, or if it is not VAT registered or required to be registered.

Accounting for the reverse charge

If the reverse charge does apply, its actual application may be relatively straightforward, at least once accounting systems have been adapted to deal with it.

The customer needs to declare as output tax whatever VAT the supplier would have charged, without the reverse charge, and to do so in the period when the tax point arises.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due: if not, it will not be recoverable as input tax. Otherwise, the customer can treat the same amount of VAT as input tax, in the same period. It will normally be directly attributable to an onward supply of building work, and recoverable in full. If so, the reverse charge has no net effect.

Impact of the reverse charge

The reverse charge may have some significant commercial implications, particularly for small sub-contractors. There will be an impact on cash flow where businesses have used VAT collected to finance their business. Additionally if a business is in a repayment position as a consequence of no longer having to pay VAT to HMRC they will have to wait for the refund to be processed by HMRC rather than offsetting input VAT against output VAT on a VAT return. Businesses that expect to be regularly in a repayment position may wish to switch to monthly VAT returns.

Contracts for building work will need to accommodate the new regime and in cases of uncertainty professional advice should be sought. This blog is intended to give an overview and where there is uncertainty Constable VAT would be happy to assist further. It may also be helpful to consider HMRC’s guidance.

Brexit guidance updated

HMRC is extending arrangements already announced for traders to use Transitional Simplified Procedures (TSP) which will make importing easier.

This includes

  • an extension of the date when the first supplementary customs declarations must be submitted, and any import duties must be paid, to 4 October 2019, with subsequent declarations submitted monthly
  • making TSP available at all UK ports if the UK leaves the EU without a deal

HMRC has updated its guidance on  leaving the EU without a deal to reflect this  extension.

Preparing for a no-deal Brexit

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then.

It is therefore very important that businesses are prepared and we would recommend acting now to prepare in case there is no deal.

Businesses trading with the EU need to consider the following:

If goods are moved

  • Getting an EORI number
  • Registering for simplified import procedures

If electronic services are supplied

  • Registering for non-Union MOSS in an EU member state

If goods are supplied to consumers in the EU under distance selling rules

  • Are VAT registrations required in other EU countries?

If VAT is paid in other EU member states

  • Claims for 2018 must be submitted before 29 March 2019
  • How will this VAT be claimed after Brexit?

HMRC has updated its online guidance on the the above, which can be viewed here.

 

 

 

VAT IT system rules and processes post-Brexit

HMRC has issued guidance on changes to the rules and processes for VAT IT systems in the event that the UK leaves the EU without a deal. From 11pm GMT on 29 March 2019, many UK businesses will need to apply the same processes to EU trade that apply when trading with the rest of the world.

The guidance impacts on businesses that:

  • claim VAT refunds from EU countries
  • need to check the validity of UK VAT registration numbers
  • report sales of digital services to consumers in the EU using the UK VAT Mini One Stop Shop
  • are under the VAT digital services threshold and make sales of digital services to consumers in the EU

In summary the changes are as follows. However, if you are affected please read the detailed guidance on HMRC’s website.

Claiming EU VAT refunds

Refund claims for 2018 must be submitted by 11pm on 29 March 2019. If claims are submitted after that, HMRC will not be able to send your claim on to the relevant EU member state.

After 29 March, VAT refunds from EU member states must be claimed by using the relevant member state’s existing process for businesses based outside the EU.

The requirements of each state may vary in terms of deadlines, evidence and the need for a tax representative.

Checking a VAT number

From 30 March 2019:

  • UK-only VAT registration numbers can be checked on GOV.UK .
  • Businesses can continue to use the VIES system to check the validity of EU VAT numbers

Using the UK’s VAT Mini One Stop Shop

Businesses using the UK’s VAT Mini One Stop Shop (MOSS) to declare sales of digital services to consumers in the EU should continue to use the UK’s MOSS portal in respect of sales made between 1 Jan 2019 and 11pm on 29 March 2019 (the quarter 1 2019 return

However, after the UK leaves the EU these businesses will need to register for MOSS in an EU member state. To allow this, they will be automatically deregistered from the UK MOSS system with effect from 1 April 2019.

Sales of digital services in the EU and UK after 29 March 2019

UK businesses currently using the UK VAT MOSS Union scheme can continue to use the MOSS system but must register for the VAT MOSS non-Union scheme in an EU member state.

If you want to continue to use MOSS, you must register for the scheme by the 10th day of the month following your first sale after the UK leaves the EU. For example, register by 10 April 2019 if you make a sale between 29 and 31 March.

UK businesses will only be able to register after 29 March 2019. Alternatively, you can register in each EU Member State where you make sales.

Non-UK businesses currently using UK VAT MOSS non-Union scheme will need to register for the scheme in an EU member state.

Non-UK businesses will need to declare sales of digital services to UK consumers by registering for VAT in the UK and declaring the sales via a UK VAT return.

Digital services threshold

When the UK leaves the EU, all supplies of digital services to consumers in EU member states become liable for VAT in the consumer’s member state. The £8,818 annual threshold for cross borders sales of digital services to EU consumers will no longer apply.

 

 

Post Brexit VAT Recovery -Specified Supplies

We have received an update on Specified Supplies.  New legislation was laid before Parliament on 5th February 2019 and the link is as follows.

https://www.legislation.gov.uk/uksi/2019/175/contents/made

Just to recap, this is the legislation which deals with VAT recovery on respect of certain types of transactions specified in law. The supplies of services currently specified in the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121) are:

3.Services–

(a) which are supplied to a person who belongs outside the member States;

(b) which are directly linked to the export of goods to a place outside the member States; or

(c) which consist of the provision of intermediary services within the meaning of item 4 of Group 2, or item 5 of Group 5, of Schedule 9 to the Value Added Tax Act 1994 in relation to any transaction specified in paragraph (a) or (b) above,

provided the supply is exempt, or would have been exempt if made in the United Kingdom, by virtue of any item of Group 2, or any of items 1 to 6 and item 8 of Group 5, of Schedule 9 to the Value Added Tax Act 1994.

The new legislation seems to maintain the status quo and continues to deny VAT recovery in respect of specified supplies to UK and EU customers. It does so by the following amendments:

  • in paragraph (a) “the member States” is substituted by  “the United Kingdom and the member States”; and
  • in paragraph (b) “the export of goods to a place outside the member States” is substituted by “the export of goods from the United Kingdom or a member State to a place outside the United Kingdom and the member States”.

HMRC has advised that:

As Brexit decisions affecting the regulatory treatment of financial services, are still to be made, the government is keeping the issue of a post Brexit VAT effective zero-rate for exports of financial services to the EU under review. Announcements on any such changes would be made in due course.”

There is also a comment in the Explanatory Memorandum to the effect that:

This legislation will be kept under review through communication with key stakeholder groups including the Joint VAT Consultative Committee“.

Dean Carey of Constable VAT represents the ACCA as a member of the JVCC and will be involved in those discussions if businesses have issues that they wish raised.

For the moment, businesses making specified supplies are likely to retain their current VAT recovery rights. It remains to be seen if anyone will challenge this new legislation on the basis that it is discriminatory. If there is any uncertainty on future VAT recovery of any of your clients please contact Constable VAT.

We will continue to keep our website updated as and when we receive updates.

 

Post-Brexit VAT accounting legislation

New legislation has been laid before parliament in preparation for the UK’s exit from the EU. This takes the form of statutory instruments including 2019/59 and 2019/60.

The changes that these new Regulations will introduce will have effect once the Treasury brings them into force when the UK leaves the EU.

2019/59

The commentary to the SI states that the Regulations are made to address failures of retained EU law to operate effectively, and other deficiencies arising from the withdrawal of the United Kingdom from the European Union.

The Regulations:

  • amend secondary legislation relating to VAT to reflect the fact that the United Kingdom will no longer be a member State of the EU and that EU member States are now treated in the same way as the rest of the world vis-à-vis the United Kingdom. Amendments are made as a consequence of the abolition of acquisition VAT and extension of import VAT to EU member States and to reflect the new definition of importation and other new terminology.
  • Amend the Value Added Tax (Payments on Account) Order take account of new accounting procedures for import VAT introduced 2019/60
  • revoke legislation relating to VAT which is inoperable as a result of the abolition of acquisition VAT by, and introduction of new customs procedures under, the Taxation (Cross-border Trade) Act 2018 (TCTA) . It also revokes legislation relating to VAT which is spent as a result of these revocations.

2019/60

These Regulations  make provision in relation to accounting and payment for import VAT on the importation of goods by persons registered for VAT following the UK’s withdrawal from the European Union.

Among other things, the Regulations include provisions:

  • that will allow a person registered for VAT and liable to pay import VAT on relevant imported goods to have any such goods delivered or removed without payment of import VAT where that person accounts for the import VAT under the Regulations.
  • that provide that a person registered for VAT and choosing to account for import VAT under these Regulations may do so on the return that person is required to make for a prescribed accounting period.

CVC will be issuing a detailed commentary on these provision and other matters relating to Brexit planning in the next few days.

Christmas and New Year closure

We will be closing on the afternoon of  Monday 24 December and will reopen on Wednesday 2 January 2019 at 9am. If you have any urgent queries during this time please contact your usual CVC partner by email and they will respond to you as soon as possible.

We would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

Morgan Stanley: Recovery of input tax by branches

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your VAT recovery position now. Constable VAT can help with this.

Typically, the provision of services by a branch to its head office is disregarded for the purposes of VAT. Since the transaction is between parts of the same legal entity it is not a supply. Whilst this means that output VAT need not be charged on intra-company supplies, it is necessary to establish when, and by whom, input VAT incurred by the branch to provide such a service is recoverable.

The Morgan Stanley case

Morgan Stanley has a branch in France (MSFR) and has its head office in the UK (MSUK). The French branch incurred costs for multiple reasons;

  • To provide services to MSUK,
  • To provide services to third parties and to MSUK.
  • To provide services to third parties, these services being taxable in France.

MSFR was VAT registered in France so sought to recover all the input VAT on costs incurred by its French branch on its VAT return, asserting that because services provided to MSUK are disregarded, that only supplies to third parties should be taken into account. These third party supplies were all taxable, giving rise to 100% recovery of input VAT in France.

The French tax authorities disagreed with this, claiming that input tax incurred in relation to transactions for the benefit of MSUK related to services that are outside the scope of VAT with no recovery right (an internal head office/branch transaction).

The appeal is ongoing and the French domestic courts referred two main questions to the CJEU.

Which Member State’s input tax recovery rules should apply where:

  • Expenditure is incurred exclusively for providing support to MSUK
  • Expenditure is incurred for both transactions to third parties and for MSUK?

The Advocate General (AG) divided the answer to these questions into distinct categories of transaction and suggested how VAT recovery should be dealt with in each case. The categories were expenditure:

  1. Used exclusively to support MSUK for the purposes of allowing MSUK to carry out exempt transactions.
  2. Used exclusively to support MSUK for the purposes of allowing MSUK to carry out taxable transactions.
  3. Used to support MSUK for the purposes of both MSUK’s exempt and taxable supplies.
  4. Used by both MSUK and MSFR to allow MSFR to make its own supplies and MSUK to make a combination of taxable and exempt supplies.

The AG stated that VAT incurred on expenses relating to exempt supplies made outside France is not recoverable and, moreover, should be specifically blocked even if those transactions would be taxable if taking place in France. [MSFR had elected to make its domestic supplies subject to VAT but this option did not apply to MSUK’s supplies.] It is also stated that partial exemption or pro rata methodology should be used to calculate the recoverability of input VAT incurred in relation to both exempt and taxable supplies and this method should also be used when the costs can be split between branch and head office, both making taxable and exempt supplies.

With regard to costs relating to MSUK making only taxable supplies, the input VAT should be recoverable only if the transaction would have been taxable in both member states. This is the ‘double layer’ test which arises as a result of straddling two different taxation system and answers the question of whose recovery rules should be applicable in situations akin to the main proceedings.

The AG’s opinion could be said to be contradictory to some previous CJEU decisions, for example the Credit Lyonnaise case. The AG tried hard to explain how earlier judgments could be interpreted so as to support its opinion but HMRC did not seem to see this latitude in the Credit Lyonnaise case when it changed UK law to align with the CJEU judgment!

 

 

The Brexit Gamble

A VAT Brexit gamble that you might like to consider?

This blog considers the right to reclaim VAT on costs associated with operating businesses in the financial service and insurance sector.  If your business is not involved in these sectors then, academic interest aside, this is probably not for you.

If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?

If your guess is “It is likely that we will not be allowed to reclaim VAT post Brexit” perhaps now is the time to start preparing or take steps to lobby.

If your guess is “It is likely that we will be able to reclaim more VAT post Brexit” then you may still wish to consider whether there is something that you can do to make this more likely and maximize benefits.

I will say at the outset that the UK Government has been very non-committal on this subject.  In its impact paper of 23 August 2018 it simply said:

 For UK businesses supplying insurance and financial services, if the UK leaves the EU without an agreement, input VAT deduction rules for financial services supplied to the EU may be changed. We will update businesses with more information in due course.

This leaves businesses guessing – which is why I have spent some time looking at the factors that need to be weighed.

Setting the scene

Current rules

UK businesses can reclaim input VAT to the extent that the VAT bearing cost in question relate to “taxable” or “specified” supplies.

A “specified” supply is an exempt supply that is explicitly referenced in the VAT Specified Supplies Order 1999.

Only certain supplies of finance or insurance (and related intermediary services) are specified supplies based on the legal definition.  Also, these services are only specified supplies when they are:

  1. provided to a customer outside the EU;
  2. directly related to an export of goods from the EU; or
  3. intermediary services relating to 1. or 2. above.

As a simplistic illustration if the supplies by a business are:

  • 30% exempt services provided to UK customers;
  • 30% exempt services provided to EU customers; and
  • 40% exempt (specified) supplies to non-EU customers,

the businesses VAT recovery percentage might be 40%.  Not an insignificant amount, for some perhaps the difference between making a profit or a loss.

Looking beyond Brexit

Under World Trade Organisation rules the tax policies of a member country must be nondiscriminatory.

Whilst the UK is a member of the EU (and the European Single Market) it is acceptable to apply different rules in the manner illustrated above.  However, in a no deal Brexit situation, it would be discriminatory for the UK to allow a sale of services to a US customer to carry different VAT recovery rights than a sale to, say, a French customer.

This points to one of two approaches if the UK leaves the EU without an agreement, (or perhaps even if there is an agreement depending on its form).

  1. The UK could say sales of qualifying services to EU customers are “specified” supplies and carry the same VAT recovery rights as existing sales to non-EU customers.
  2. The UK could, with its escape from the strictures of the EU VAT Directive, adopt the policy “We will afford no rights of VAT recovery to sales of financial services to any customers” no matter where they are based.

If the Government takes the first approach then the level of VAT refunds to the business in the example above would increase from 40% to 70%.

If the Government decided to simply cease refunding input VAT to those engaged in financial services then the level of VAT refunds in the above example would fall from 40% to nil.

Your choices

  1. There will be an exit arrangement that keeps the status quo.
  2. There will be an exit arrangement that leads to increased input VAT recovery.
  3. There will be an exit arrangement that reduces VAT recovery.

Even if you think that you are likely to get the outcome you would prefer, now is the time to start lobbying if you are anything short of 100% certain.

There is also an immediate issue of how to price the potential outcomes into your business plans.  A business that is currently reclaiming VAT in full because it provides only specified supplies could see its input VAT recovery fall to zero.  Conversely a business that is currently making only EU supplies could see its VAT recovery rise from zero to 100%.  In essence this has a potential impact of an 8% price rise or fall in respect of all VATable expenditure.  This may be difficult to factor into contract prices.

Of course most financial service businesses will sit between these extremes and there are lots of additional complications – for example if new operations have been set up in another EU territory to ensure a continuing ability to trade, “What will be the VAT liability/impact as regards the provision of services from the residual UK operations to the new EU operation?”

 Why did the Government make such a tepid statement?

The most obvious reason is that it really hasn’t decided what it will do – in which case it is certainly time to start lobbying!

A second reason is that it has decided what it intends to do and does not want to encourage businesses to adopt planning measures to circumvent any change.  For example, if a business knew its VAT recovery rate would fall from 100% to 0% it might take steps to pre-empt the position and lock in a 100% recovery in respect of post Brexit costs, and vice versa (for example by delaying expenditure).

Pros of greater recovery restrictions

Blocking input VAT within the financial services and insurance sectors would:

  • raise very large sums of tax at a time when most projections predict that the UK will be in desperate need of the money without breaking commitments given on other taxes;
  • it would raise tax in a non-transparent manner. [It would be less visible to the electorate than putting up VAT, corporations or personal taxes];
  • raise tax from a sector that does not engender a huge amount of public sympathy (the response of many voters would be “good!”); and
  • lead to a simplification of rules.

Cons of greater recovery restriction

  • It would impact on the competitiveness of the UK as a location from which to provide financial services and undermine the so called global economy benefit of Brexit. (Adopting the UK as a place of operations would be a huge disadvantage if businesses incurred, 20% irrecoverable VAT on many operating costs);
  • In the long term it would adversely affect tax collection. It is only possible to collect VAT on transactions that are actually occurring.  If the UK becomes a more expensive location to operate from then business will locate elsewhere.

The “forestall tax planning” motivation is also interesting.  It is easy to see why the Government might want to delay a statement that restrictions will increase as there are measures that could be taken – some as simple as accelerating expenditure.  However, if the Government planned to adopt rules that increased future recovery rights then the planning options would be more limited.  Businesses could perhaps defer expenditure hoping to benefit from higher VAT recoveries or adopt planning structures.  However, this seems far less likely.

The context of existing Brexit planning also needs to be considered.  The standard approach is to:

  • Pick an EU location to operate from and set up a subsidiary there;
  • Transfer as little as possible to that location to obtain regulatory approvals, etc.
  • Provide as many services as possible from the existing UK business to that new EU entity. This is easier than recruiting in large numbers and trying to inject local expertise (when the staff and expertise already exists in the UK).

EU regulators do not want brass plate operations within their territories and from the EU’s perspective “The more of a business that gets moved the better”.

The opposite is true from the UK’s perspective and the last thing it wants is to take measures that might accelerate that transfer of resources.

It seems obvious that in this context that the most sensible way of discouraging the migration of services from the UK is to say to financial service providers “Your VAT recovery rights will be increased if we exit the EU without an agreement”.  So why is the government not saying this?

The “to discourage VAT planning” reason can surely be discounted as a trifling consideration looking at the big picture.  Conversely, if the Government intended to apply greater restrictions to VAT recovery it might well want to avoid admitting it now.  The planning option open to businesses would be greater and more obvious and perhaps, most importantly, a public statement to that effect might well increase the movement of operations to the EU as part of Brexit planning.

My guess is that Brexit will lead to “increased VAT recovery rights”.  The simple logic for this would be “Surely the Government would not further disadvantage such an important part of the UK economy just as it is reeling from the other adverse impacts of Brexit”.  However, I am now having doubts that I did not previously harbour.  I keep coming back to the question “Why would the Government not say so if this was its plan?”

Your guess may have a lot of money riding on it.  If the Government really has not made up its mind (or has made up its mind and simply doesn’t want to tell us yet) then those that need to should certainly be lobbying now.  It is far more likely that a decision will be changed if the lobbying happens before it is announced.

As for the planning options, well that is a whole different book – a very large one.  These range from the simple and almost impossible to challenge to the complex and less certain.  I am certainly not an advocate of aggressive VAT planning and do not propose to change my views now.  However, any business that has very large sums riding on these outcomes would be unwise not to at least consider its options.  Some potential savings may have a lot more to do with complex legal arguments than any artificial structures.  Preparing for and winning complex legal arguments is something that I approve of and that Constable VAT specialises in.

 

2018 Spring Statement and VAT

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT.

VAT threshold

One of the conclusions of a recent Office of Tax Simplification (OTS) report regarding UK VAT was that the relatively high VAT registration threshold has a distortionary impact on business growth. The OTS recommended that the ‘government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism’. As a result the government has now published a call for evidence.

This call for evidence is split into three chapters.

  • the first explores in more detail how the threshold might currently affect business growth
  • the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
  • the third considers possible policy solutions, based on international and domestic examples

Responses to the questions raised by the consultation should be submitted by 11:59pm on 5 June 2018

Split Payment Method of VAT collection

HMRC is also consulting on an alternative method of VAT collection to help combat VAT losses arising as a result of the expansion of e-commerce. A split payment method would see VAT separated and paid at the time of the transaction, rather than on a periodic basis via the VAT return process. Through this consultation, HMRC are asking for views on potential options for a split payment mechanism, whilst also further assessing the overall viability of split payment by seeking the views of a wider range of stakeholders.

Responses to the questions raised by the consultation should be submitted by 11:45pm on 29 June 2018

Christmas and New Year closure

We will be closing on the afternoon of Friday 22 December and will reopen on Tuesday 2 January 2018 at 9am. If you have any urgent queries during this time please contact your usual CVC partner by email and they will respond to you as soon as possible.

We would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

Pension Fund update

There are two important updates to note as regards VAT and pension schemes.

The first relates to VAT chargeable on supplies of fund management services by insurers.

In its Revenue and Customs Brief 3/17 HMRC announced a change in policy regarding the VAT treatment of pensions fund management services provided by regulated insurance companies.

Following the conclusion of several related CJEU cases in this area HMRC intended to discontinue the policy of allowing insurers to treat supplies of managing pension funds (other than Special Investments Funds-SIFs) as VAT exempt. This policy change was to take place on 1 January 2018 and would have resulted in VAT being charged by insurers on the services of managing non-SIF pension funds.

Since the Brief was published HMRC has held meetings with industry representatives and we understand it has agreed to postpone the implementation date until late 2018/early 2019. A revised implementation date is expected to be notified soon.

The second update is in respect of recovery of VAT on costs incurred by employers providing occupational pensions schemes.

HMRC has updated its internal guidance to bring it up to date regarding the rules for recovering input VAT incurred in respect of occupational pension funds following the judgement in the PPG Case.

Transitional rules were introduced by HMRC, following PPG, which allowed employers a full recovery of VAT incurred on administration management costs as well as a 30/70 split recovery of mixed supplies of investment and administration management services. The transitional period was due to expire of 31 December 2017. However, the updated guidance confirms that the transitional rules will continue to be available after that date, along with the option of applying the PPG decision, which allows the employer to recover VAT on investment management services where it contracts directly for those services or where tripartite contracts are in place (in respect of defined benefit pension schemes).

The guidance can be read in full here.

The interaction of VAT and pension funds is complex and advice should be sought if there is any doubt as regards the correct treatment of supplies or input VAT recovery.

 

 

Amazon and eBay traders may be targeted by HMRC

It has recently been reported in the press that MPs on the Public Accounts Committee (PAC) have criticised HMRC for being ‘too cautious’ in pursuing tax lost because third party sellers on Amazon and eBay are not charging VAT on sales they make in the UK. It is estimated that the tax lost is around £1.5bn.

The tax loss arises because firms based outside the UK and selling goods via online marketplaces keep some stock in UK warehouses in order to provide next day delivery. Since the goods are dispatched in the UK the sellers should be registered for UK VAT, but many do not do so.

HMRC has already introduced rules to hold online marketplaces jointly liable for lost VAT. However, the PAC’s report concludes that further action is required and it is likely that HMRC will introduce further measures.

It is therefore important that all overseas businesses supplying goods from UK warehouses take action to comply with UK VAT law as soon as possible. There is no VAT registration threshold for overseas businesses and making any supplies in the UK will give rise to the need to register for UK VAT. CVC is able to assist overseas businesses meeting their UK VAT obligations and can assist in the VAT registration process.

It should be noted that where businesses have been making sales in the UK but have not VAT registered HMRC will be able to seek back payment of VAT due on these sales and it may be very difficult to recover this VAT from customers.

*Budget Update* HMRC announced anti-avoidance measures in this are in the Autumn 2017 Budget more details can be viewed here

VAT Treatment of Disbursements

A recent First Tier Tax Tribunal (FTT) decision has highlighted a risk in relation to the VAT treatment of disbursements.

“HMRC guidance states that to treat a payment as a disbursement all of the following must apply:

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services”

Traditionally, for professional services firms such as solicitors this has meant that expenses such as printing, postage, travel etc are incorporated into the fee charged to clients and VAT is added to this cost, whereas the recharge of expenses such as local authority searches are itemised separately and VAT is not added to the cost.

The recent case was concerned with charges made by a conveyancing firm, Brabners LLP, which offered conveyancing services and often obtained local authority and local land charge ‘searches’ on behalf of its clients. The majority of the searches were carried out by a specialist online search agency, Searchflow. Brabners treated the fees paid to Searchflow as disbursements and invoiced its clients without VAT. HMRC assessed Brabners for £67,776 together with interest, contending that these fees formed part of the charges for Brabners’ services as the information within the search results was used by Brabners to give advice to its clients. The Tribunal agreed with HMRC and dismissed the appeal, this was regardless of whether or not Brabners prepared a separate report on the search results.

Although FTT cases are not binding on anyone other than the parties involved, the outcome of this case is a concern and solicitors and other professional service firms who pass through VAT free disbursements should take note. If there is doubt as to the VAT treatment of disbursements further advice should be sought.

DIY Housebuilder Article

The latest issue of i-build magazine includes, on page 30, an article by Helen Carey of CVC on recovering VAT on DIY self build projects.