Tag Archives: Brexit

VAT and partial exemption post Brexit

Leaving the European Union has implications for partial exemption special methods (PESMs) that incorporate provisions relating to VAT recovery in relation to non-EU transactions, since the pre –Brexit legislation would have allowed recovery of VAT on UK transactions that became ‘non EU’ when the UK left the European Union. To mitigate this problem a new regulation 102(2A) has been inserted into the VAT Regulations 1995.

The new regulation enables the current VAT recovery position – exempt from VAT and with no recovery available – for UK to UK supplies of financial services to be maintained within all PESMs.   This removes the need for PESMs to be redrafted by the business and reapproved by HMRC with the associated administrative burden this would have created.  No action by business is necessary as a result of these regulations as they retain the status quo.

 

The new regulation can be found here  SI 2019513

Constable VAT Focus 28 March 2019

HMRC NEWS

Trading With the EU if the UK Leaves Without a Deal

HMRC has updated its guidance on  leaving the EU  in particular to reflect the fact that there is to be an extension to arrangements already announced regarding the use of Transitional Simplified Procedures (TSP), which will make importing goods easier.

Impact Assessment for VAT and Services if the UK Leaves Without a Deal

HMRC has released an impact assessment on the effect on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU.

VAT Treatment of Pension Fund Management

The policy of allowing insurers to treat all pension fund management services as exempt from VAT under the insurance exemption is to be discontinued. This policy change applies from 1 April 2019.

 

CASE UPDATE

CJEU

1. Exemption for Letting Immovable Property

This case concerned the interpretation and applicability of the VAT exemption for the letting or leasing of immovable property. The Portuguese tax authorities assessed Mr. Mesquita for VAT on contracts relating to the transfer of the use of vineyards for agricultural purposes for a period of one year. These transactions had been treated as exempt from VAT.

The question before the Court was whether the exemption for letting immovable property related to this contract.

The Court considered that the purpose of the EU law conferring the exemption on certain transactions was owing to the fact that the leasing of immovable property is normally a relatively passive activity which does not generate a large amount of income.

Where services are supplied along with the immovable property in a single transaction, such as supervision or maintenance, then the whole transaction is subject to VAT. However, the Court found that there were no services provided with the vineyards so the exemption could be applicable.

Constable Comment: The contract in the main Portuguese proceedings led to what the tax authorities believed to be a transfer of assets thus creating a taxable supply. The Court held that even if assets are transferred in this type of contract, they are ancillary to the main supply and the exemption still applies to the whole contract value.

 

Supreme Court

2. Education Exemption: Meaning of “eligible body”

This appeal concerned the criteria to be applied when determining if a particular body is eligible for the purposes of the VAT exemption afforded to certain bodies providing education to students.

The appellant, SEL, the English subsidiary of a Dutch company, contended that its supplies of UK education were exempt from VAT as it was a college of Middlesex University (MU). It appealed against assessments to VAT raised by HMRC. The appeal was allowed in the First Tier Tax Tribunal but it was escalated by HMRC and eventually ascended to the Supreme Court.

MU is a UK university and as such benefits from the exemption from VAT. This exemption is, under UK law, extended to “… a university and any college, school or hall of a university”. The Court, therefore, gave some consideration to what constituted a college of a university and observed that the “integration test” employed initially by the First Tier Tribunal was correct. The following five factors must be considered in arriving at a conclusion as to whether a particular undertaking can be considered a college of a university:

  • Whether they have a common understanding that the body is a college of the university
  • Whether the body can enrol students as students of the university
  • Whether those students are generally treated as students of the university
  • Whether the body provides courses of study which are approved by the university
  • Whether the body can present its students for examination for a degree from the university

In examining whether or not these criteria applied to SEL and its arrangements with MU, the Court concluded that the exemption did apply to SEL which had been referring students for degrees from MU since the beginning of their arrangement in the 1980s. It was found that there is no need for there to be a constitutional association with a university in order to be a college of that university.

Constable Comment: The criteria laid down in this instance for determining whether or not a body is eligible are not intended to be definitive and the Court observed that, in each instance, regard must be had to the individual facts of each arrangement between a university and an associated body.

 

Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

This case concerned whether or not input VAT incurred by a company in defending its director was deductible by that company as input tax. Mr. Ranson left a company, CSP, and set up his own rival firm in the same area, taking three employees with him. It was alleged by CSP that he had breached his fiduciary duties and also that he had misused a contact list from CSP for establishing his own business. CSP sought an account of profits earned by Mr. Ranson as a result of his breach of duty and sought to recover funds from Praesto.

In defending against these claims, Mr. Ranson instructed solicitors who were successful in his defence. The issue arose as a result of the solicitors addressing one invoice to Praesto and a further eight to Mr. Ranson individually. HMRC did not dispute the deductibility of the input VAT in relation to the invoice addressed to the firm but disputed the others as a result of the addressee.

VAT incurred is deductible so far as it has a “direct and immediate” link with the company’s taxable supplies. However where the legal costs form a part of the cost components of the company’s supplies it is also accepted that they have a direct link with the company’s economic activity as a whole.

HMRC placed a lot of emphasis on the fact that the invoices being disputed were addressed to Mr Ranson. Mr Ranson argued that Praesto were party to the proceedings in all but name and there was a direct benefit to the company in defending him. The economic reality of the situation was the solicitors were defending both Mr Ranson and Praesto.

The Court agreed with Mr Ranson that there was a direct benefit to Praesto in defending claims against him as if the claims had succeeded against Mr Ranson, CSP would have sought to recover profits made by Praesto. It was concluded that the VAT incurred by Praesto in mounting a defence against the allegations of CSP was, indeed, deductible.

Constable Comment: This is an interesting topic as, more often than not, the actual receipts and contracts are looked through to the economic reality of the supply. Whilst this appeal was allowed, one judge dissented, believing the fact that the invoices were addressed to Mr Ranson personally to be fatal to the appeal. This type of case will always need to be considered carefully, it is prudent to seek professional advice in relation to input VAT recovery in this scenario.

 

4. Default Surcharge: Reasonable Excuse

This appeal against a default surcharge turned on whether or not the applicant had a reasonable excuse for late payment. The appellant argued that he was unable to log in to the online gateway necessary for making VAT payments.

Mr Farrell received a notice of liability to surcharge which required payment by 7 May 2017. He was unable to log in to the Gateway using the information he previously saved in his computer. When he contacted the webchat he was told that he needed to speak to technical support. Technical support informed Mr Farrell that they could not deal with his enquiry until after 8 May 2017; after the due date for payment of the surcharge.

On the 8 May he spoke to the technical support team and was told that he had been using an incorrect User ID, a new one was sent to him but it turned out to be the first ID he was given before having it changed by HMRC when the Commissioners updated the system. Based on the changing of his logon details, he contended that he was not to blame for missing the payment date.

HMRC denied that his logon details had ever been changed and said there was no record of the webchat which Mr Farrell claimed to have had. Mr Farrell had clear evidence that this was not the case in the form of a saved conversation with Alexander form HMRC’s webchat and his “Browser Password Recovery Report”. This showed that his ID had indeed been changed when HMRC updated their system and that it had changed back to the original.

HMRC sought to argue that Mr Farrell had been using an incorrect ID number and therefore that he was responsible and did not have a reasonable excuse.

The Court held that Mr Farrell made reasonable efforts to pay the VAT due and that it was not clear why HMRC did not have the facilities to deal with Mr Farrell’s enquiry. The appeal was allowed; there was a reasonable excuse.

Constable Comment: This case demonstrated that HMRC do make mistakes when dealing with the taxpayers. It is a useful reminder that it is always prudent to maintain your own records of conversations with HMRC officers in order to evidence advice given or any mistakes made on HMRC’s behalf. We would recommend obtaining an officer name and a “call reference number” when speaking with HMRC.

Constable VAT Focus 28 February 2019

HMRC NEWS

Find Software that is Compatible with Making Tax Digital for VAT

Check which software packages are compatible with Making Tax Digital for VAT.

HMRC Impact Assessment for the Movement of Goods if the UK leaves the EU without A Deal

The impact assessment originally published on 4 December 2018 has been updated to include the impacts on the customs, VAT and excise regulations laid before Parliament in January 2019.

HMRC Impact Assessment for the VAT Treatment of Low Value Parcels

Again, the original impact assessment has been updated.

 

BREXIT ALERT

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then. It is essential that any traders or businesses which may be affected by changes in VAT procedures make plans to ensure a smooth transition.

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 as soon as possible after 29 March if there is no deal.

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

  • Maybe VAT registrations are 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 above, which can be viewed here.

Contact Constable VAT if any of the above will affect you or your business, we are happy to advise on any VAT related matter.

 

CONSTABLE VAT NEWS

Remember to enrol for Making Tax Digital on time and during the right enrolment window for your VAT accounting periods. Constable VAT have analysed the enrolment windows and our summary can be found here.

 

CASE REVIEW

CJEU

 

1. The Exemption for Goods Imported to be dispatched to Another EU Member State

This case concerned whether the exemption for import VAT on goods arriving in an EU member state to be dispatched immediately to another EU member state and whether domestic tax authorities can disapply the exemption where tax evasion is involved.

Vetsch is an Austrian company which acted as a tax representative for two Bulgarian companies, “K” and “B”. Vetsch submitted declarations stating that goods imported from Switzerland, by K and B, benefited from the exemption for goods imported for subsequent dispatch. However, the subsequent dispatch did not occur and Vetsch became liable under Austrian law, as representative, for the import VAT which should have been paid.

Vetsch appealed against a decision from the domestic tax authorities to that effect but the appeal was refused. Vetsch brought an appeal on a point of law before the domestic Courts which led to the CJEU referral.

The Court came to the conclusion that, as Vetsch was unaware and there was no evidence to support the idea that it knew or ought to have known about the subsequent evasion that the exemption could not be refused.

Constable Comment: This case shows how at an EU level, the strict interpretation of the law is not always adhered to if it creates inequitable results. In finding that Vetsch did not know and would not have known if carrying on business as a reasonable person would, the Court has upheld the idea of equity.

 

2. Retroactive Application of Implementing Decisions

This case concerned the application of the Decision authorising the Hungarian Government to apply the reverse charge procedure enshrined in EU law. The Hungarian tax authorities were notified of their authorisation in December 2015 but sought to rely on the implemented provision to retroactively assess Human Operator Zrt. for the January 2015 VAT return.

The question before the Court in this instance was whether EU law precludes national legislation from retroactively applying measures authorised in an Implementing Decision where that Decision does not make a comment on the retroactive applicability of that Decision or give a date on which it comes into effect.

The Court gave consideration to the principles of legal certainty and the protection of legitimate interests. They concluded that the requirement of legal certainty must be observed very strictly when it comes to rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which the rules impose on them. It was also held that these principles must mean that EU law can only apply to situations after they have explicitly come into force.

In the absence of a provision in the Decision suggesting a different date for it to bite, the Court considered that it must be taken to be effective from the date on which it was published.

Constable Comment: This case is a good demonstration of how the CJEU seeks to protect the rights of individuals and businesses against the State. The fundamental principles of the EU and the spirit of the law are given a great degree of influence in the European Courts. This decision has prevented a seemingly unconscionable result.

 

First Tier Tribunal

3. Electric Blinds in a DIY Build

This case concerned the right to deduct input VAT incurred in relation to a DIY house build by Mr David Cosham. Mr Cosham designed an “eco-build” property and sought to recover input VAT on building materials used under the DIY housebuilders scheme. HMRC accepted certain elements of the claim but rejected the element which related to electric blinds installed at the property, asserting that electric blinds are not within the definition of “building materials” for VAT purposes associated with the scheme.

Appealing HMRC’s decision, Mr Cosham claimed that the blinds did fall within the definition as they are “ordinarily incorporated by builders in a building of that description”. He contended that “buildings of that description” should, in this case, be taken to mean “eco-builds”.

Giving some consideration to relevant case law, the Tribunal found that “eco-builds” were a well-established market sector and could be recognised as a distinct type of property. The onus was put on Mr Cosham to show that blinds such as those in question were “ordinarily incorporated” into properties of this description. Mr Cosham could produce no such evidence so his appeal was denied, the Tribunal holding HMRC’s decision to be correct.

Constable Comment: This conclusion drew on previous case law such as Taylor Wimpey and came to the conclusion that “eco-builds” are to be treated as a class of property in themselves. This is interesting as it could be argued that, compared to older housebuilding practices, the vast majority of new build homes are definable as “eco”. This case has opened up the question of what exactly is ordinarily incorporated into an “eco-build”. It is unsurprising that HMRC pursued this point. Blinds more generally are objected to by HMRC despite losing a previous case at the First Tier Tribunal on a related point.

 

4. Deception: A Supply of Goods or Services?

This case concerned Mr Owen Saunders who had been found guilty of taking money in exchange for work he promised to perform but never had the intention of performing. He had been found guilty as a criminal and been sentenced to time in prison as well as having been served a confiscation order for in excess of £60,000. The confiscated funds had been divided equally amongst his victims by way of compensation for their loss.

HMRC contended that Mr Saunders was engaged in a business activity and should have been registered for VAT. The Tribunal believed that the crucial issue was whether or not there had been a supply for a consideration made in the furtherance of business. Giving consideration to the examples of drug dealers (who can pass title in goods) and fences (who cannot as they never gained title) as well as the definition of a supply in accordance with VAT law, the Tribunal held that there was no supply by Mr Saunders for the monies he received.

The assessment and associated penalties against Mr Saunders were quashed, it was held that his conduct had led to a “total failure of consideration” which was evidenced by the fact that 100% of the confiscated money was paid back to the victims.

Constable Comment: This was an interesting case in that it analysed Mr Saunders as akin to a drug dealer or someone fencing stolen goods. A particularly interesting point raised was the fact that a drug dealer can pass title to his goods and thus his turnover represents supplies and consideration so, in turn, could create an obligation to register for VAT. This illustrates the point that a lack of compliance with the law does not discount the supplies made from turnover for VAT purposes.

 

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.

CVC VAT Focus 18 October 2018

HMRC NEWS

HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT.  The businesses regarded as complex and a list of the new guidance can be found on our website.

 

CONSTABLE NEWS

Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “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?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

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. Our coverage of this opinion can be found on our website.

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 input VAT recovery position now. Constable VAT will be happy to assist in this exercise.

 

CASE REVIEW

CJEU

1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.

 

First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment:  This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.

 

3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services.  It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.

 

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.