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Voyage into vat
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- 2. Voyage into VAT •Before you set sail…. •Stormy seas? • Safe harbours! • With a fair wind…. • Long-range forecast
- 3. Before you setsail…. Basic principles
- 4. • A worldwide tax (almost) • C130 countries (and growing) • Compare US SALT taxes
- 5. VAT law • Europeanlegislation – 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
- 6. 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
- 7. Scope of thetax • 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)
- 8. … any supplyof goods or services … What is a supply? – no legislative definition, but: - “includes all forms of supply, but not anything done otherwise for a consideration”
- 9. … any supplyof goods or services … • 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
- 10. … any supplyof goods or services … • Distinguishing between goods and services is important: - VAT liability - Place of supply - Time of supply
- 11. … made inthe United Kingdom … • UK VAT only applies to supplies made in the UK: - “place of supply” rules
- 12. … where itis 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
- 13. … where itis 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)
- 14. … made bya 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
- 15. … in thecourse 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
- 16. 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
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- 18. What is inputtax? VAT you are charged on: 1. Business purchases 2. Business expenses
- 19. What can bereclaimed? 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
- 20. What purchases haveVAT 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
- 21. When to claiminput tax • 'Tax point' for the supply • Acquisition date • Importation date
- 22. VAT invoice Invoice ABC Ltd FirstAvenue 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
- 23. Evidence for VATrecovery A ‘valid’ tax invoice Where a valid VAT invoice cannot be obtained? Invoices in the name of employees? Less detailed invoices
- 24. 'Late' claims • Lackof evidence • Error • Time limit
- 25. Employee expenses Subsistence expenses Removal/relocationexpenses Domestic accommodation Clothing
- 26. Motor cars andfuel Purchase/leasing a motor car Repairs/maintenance of a motor car Fuel bought by the business/employees
- 27. Mobile phones providedto employees Purchase and connection Calls where business use only Charges by business for private use Free private calls Fixed monthly charges
- 28. Business entertainment • Whatis it? • Staff Entertainment (e.g. Christmas parties) • Exclusions • Astra Zeneca case
- 29. Management services Three keyquestions: • 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?
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- 31. Value of supply •Consideration • Barter transactions • Part exchange
- 32. Consideration • Everything receivedin 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
- 33. Gifts and otherdeemed 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
- 34. 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
- 35. 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
- 36. 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
- 37. 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
- 38. Special situations –Book entriesor offsets in inter-company accounts –Deposits –Continuous supplies of services
- 39. Place of supplyof 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
- 40. 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
- 41. Place of supply– Goods…..continued • A UK supplier supplies goods to a US customer but goods remain in the UK • Place of supply = UK • A UK supplier supplies goods to a US customer. Goods are installed in Germany • Place of supply = Germany
- 42. Place of supplyof 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)
- 43. 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 • Place of supply = UK • A UK supplier supplies office rental property in Germany to a German customer • Place of supply = Germany
- 44. VAT accounting andcompliance
- 45. Accounting and recordkeeping What records does a taxpayer have to keep? Preservation of records In what form may records be preserved?
- 46. The VAT reportingcycle • Quarterly • Monthly • Annually • Electronic submission • Submission dates
- 47. Completing the VATreturn – 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
- 48. Completing the VATreturn – 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
- 49. 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?
- 50. HMRC assessments, interestand penalties • Circumstances when HMRC can issue assessments • Time limits for assessments • Default interest & ‘commercial restitution’ • Other penalties – see “Stormy Seas”!!
- 51. International and crossborder
- 52. Terminology • Import/Export (non-EU) •Acquisition/Dispatch • Goods vs. Services
- 53. 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
- 54. Imports • Goods fromoutside 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
- 55. Imports (continued) • Documentation -deferment statement - agent's invoice - C79 (import VAT certificate) • VAT recovery? - C79
- 56. Exports • Sale/removal ofgoods 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
- 57. 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
- 58. 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
- 59. 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)
- 60. Acquisitions • Goods fromelsewhere in the EC • VAT registered customer responsible for 'acquisition tax' accounting • Acquisition tax
- 61. Dispatches • Sale/removal ofgoods 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
- 62. 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
- 63. Intrastat • Statistics ontrade 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
- 64. Overseas expenses • EC8th 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
- 65. 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
- 66. Reverse charge VAT •Concept • Rationale • Mechanism • Impact on business making exempt supplies
- 67. Stormy Seas Headline Rate Anti- Avoidance Rules Penalties Disputes & Litigation Complexityof Regime “Abuse” Doctrine HMRC Common Pitfalls
- 68. Headline Rate • SRVAT - 1/6th of gross value - Impact on margin • Compare other taxes • Ignore it at your peril!
- 69. 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)
- 70. Anti-Avoidance Legislation Examples: - Disaggregation -VAT Grouping - Option to tax disapplication
- 71. Doctrine of “Abuse” •Halifax case • “Abuse of rights” • Impact on VAT planning • Commercial impact • WHA case
- 72. Penalty Regime - Criminaloffences - e.g. fraudulent evasion - Up to 7 years in jail - Civil penalty regime - e.g. errors/misdeclarations - 0% to 100% of the tax
- 73. Penalty Regime - HMRCattitude - Focus on “behaviour” not “tax loss” - Proportionality - Mitigation and suspension
- 74. HMRC • Aims –plugging the tax gap • Technical (and other) resources constrained • Inconsistency • Easy targets
- 75. Disputes & litigation •Reconsideration route • To the tribunal …. and beyond • ADR
- 76. Common Pitfalls • Mytop 5: - Liability - OTT - Registration - Place of supply - Property issues
- 77. = VAT hasnever been a bigger risk to business What can we do?
- 78. Safe Harbours UK Registration Limit Zero-Rate Reduced Rate Baddebt relief Exemption Schemes for small business
- 79. UK Registration Limit •Currently £79k annual limit • Prospective and retrospective tests • Generous! Compare other EUMS • Caution: No T/O limit for NETP’s
- 80. Zero-Rating • The HolyGrail • VATA 1994, SCH8 • (The erosion of?) Hard won reliefs Food New build (residential ) Exports Charity reliefs
- 81. Exemption • ………. Notquite the Holy Grail • VATA 1994, SCH9 • Partial exemption Health, Welfare & Education Financial Services & Insurance Property
- 82. Partial exemption • Ifyou 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
- 83. Partial exemption • Taxablesupplies – 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
- 84. Partial exemption • Reclaiminput VAT relating to taxable activities • Disallow input VAT relating to exempt activities • Apportion input VAT relating to residual costs.
- 85. Standard partial exemptionmethod 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
- 86. 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
- 87. Partial exemption methodoverride • 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
- 88. Partial Exemption Specialmethods (PESMs) • Require HMRC agreement • Business must sign declaration that the method is “fair and reasonable”
- 89. Reduced Rate • ……….Last but not least • VATA 1994, SCH 7A • Key areas Energy saving measures Certain property conversions
- 90. 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!
- 91. Schemes for Small Businesses •Cash Accounting • Flat Rate Scheme • Annual Accounting • Other (e.g. retail, TOMS, second-hand goods)
- 92. Safe Harbours - Minimumclients need to do to stay compliant - Minimise VAT risk
- 93. With a FairWind Opportunitie s TOGC Property Planning Challenging HMRC decisions Postage Overseas entertainme nt VAT recovery methodologies VAT grouping Other?
- 94. Hospitality and Leisure SectorsNot forprofit IFA’s Property and Construction RetailOnline traders Education & Welfare Energy & Renewables
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- 96. Long Range Forecast Proposed changes Expected Guidance Caselaw Outlook variable…
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