The Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) have issued the first in a series of fact-sheets on the impact of the UK’s withdrawal from The European Union. The main purpose of the first fact-sheet is to outline the purpose and effect of The Taxation (Cross-border Trade) Act 2018, which received Royal Assent on 13 September 2018.
The government has published the first 25 of a series of technical papers on how the UK will be affected by Brexit if on 29 March 2019 no deal with the EU has been reached. The “no deal” scenario is possible if the UK government and the EU cannot agree terms and the UK therefore becomes a third country at 11pm GMT on 29 March 2019 without a Withdrawal Agreement or a framework for a future relationship in place between the UK and the EU.
A no-deal Brexit could mean lorry queues building up at ports as the previously smooth import and export of goods in the Single Market ends, to be replaced by new customs checks. Goods which are meant to arrive ‘just in time’ or are perishable, could be subject to delay, affecting stocks, production and ultimately sales.
Below is a summary of the main VAT issues. More detail on trade, import and export procedures can be found here.
VAT before 29 March 2019
Under current VAT rules:
- VAT is charged on most goods and services sold within the UK and the EU.
- VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU or non-EU country.
- goods that are exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale.
- goods that are exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds.
- for services the ‘place of supply’ rules determine the country in which you need to charge and account for VAT.
VAT after 29 March 2019 if there’s no deal
The UK will continue to have a VAT system after it leaves the EU. The VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now.
If the UK leaves the EU on 29 March 2019 without a deal, the government’s stated aim will be to keep VAT procedures as close as possible to what they are now. However, if the UK leaves the EU with no agreement, then there will be some specific changes to the VAT rules and procedures that apply to transactions between the UK and EU member states.
UK businesses importing goods from the EU
In a no deal scenario the current rules for imports from non-EU countries will also apply to imports from the EU. Customs declarations would be needed when goods enter the UK (an import declaration). This means customs duty may also become due on imports from the EU customs checks may be carried out and any customs duties must be paid – import VAT would be payable on such goods.
If the UK leaves the EU without an agreement, the government will introduce ‘postponed accounting’ for import VAT on goods brought into the UK. This means that UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that the goods arrive at the UK border. This will apply both to imports from the EU and also non-EU countries. More detail on these processes can be found in the ‘Trading with the EU if there’s no Brexit deal’ technical notice. More guidance setting out further detail on accounting and record keeping requirements will be issued in due course.
Goods entering the UK as parcels sent by overseas businesses
VAT will become due on goods sent as parcels from overseas busniesses. If the UK leaves the EU without an agreement then Low Value Consignment Relief (LVCR) will no longer apply to any parcels arriving in the UK. For parcels valued up to and including £135, the Government states that a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HM Revenue & Customs (HMRC) digital service and account for VAT due.
For goods worth more than £135 sent as parcels VAT will continue to be collected from UK recipients in line with current procedures for parcels from non-EU countries.
Exporting goods to the EU
UK businesses would need to plan for customs and VAT processes, which will be checked at the EU border. So they should check with the EU or relevant Member State the rules and processes which need to apply to their goods.
Exporting goods to EU businesses –VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses, but will not be required to complete EC sales lists. UK businesses exporting goods to EU businesses will need to retain evidence to prove that goods have left the UK, to support the zero-rating of the supply. The required evidence will be similar to that currently required for exports to non-EU countries with any differences to be communicated in due course.
Import VAT at the rate due on the Member State and customs duties will be due when the goods arrive into the EU. UK businesses nwoudl need to check the relevant import VAT rules in the EU Member State concerned.
Exporting goods to EU consumers -if the UK leaves the EU without an agreement, the VAT distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers.
Current EU rules would mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties becoming due when the goods arrive into the EU.
Supplying services into the EU from the UK
If the UK leaves the EU without an agreement, the main VAT ‘place of supply’ rules (which determine the country in which you need to charge and account for VAT) will continue to apply in broadly the same way that they do now, with areas of potential change flagged below.
Digital services to non-business customers – the ‘place of supply’ will continue to be where the customer resides. VAT on services will be due in the EU Member State within which your customer is a resident.
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.
Tour Operators -businesses that buy and sell on certain travel services that take place in the EU use the Tour Operators Margin Scheme. HMRC state that they will continue to work with businesses to minimise any impact.
VAT Mini One Stop Shop (MOSS)
MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.
If the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU.
Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019.
Alternatively, a business can register for VAT locally in each EU Member State where sales are made.
EU VAT refund system
If the UK leaves the EU without an agreement, then UK businesses will continue to be able to claim refunds of VAT from EU member states but in future they will need to use the existing processes for non-EU businesses.
EU VAT Registration Number Validation – accessed via the EU Commission’s website
If the UK leaves the EU without an agreement, UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers. UK VAT registration numbers will no longer be part of this service. HMRC is developing a service so that UK VAT numbers can continue to be validated.
Businesses in Northern Ireland importing and exporting to Ireland
There is no detail on trade between Northern Irleand and Ireland except that the paper states that in a no deal scenario, the UK would ‘stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland’.
Under rules to come in on 1 October 2019 builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.
The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.
Following an initial consultation in March 2017, HMRC has now published draft legislation, a draft explanatory memorandum and a draft tax information and impact note on the so-called “Reverse Charge (RC) for construction services”. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.
Under the new rules, supplies of standard or reduced rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.
The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.
Type of work affected
Despite the rather misleading reference to ’construction‘ the RC will in fact apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.
Some works will not be covered and invoicing for these will not change. These include
- professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
- drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- signwriting and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters or the installation of security.
Questions and preparation
In addition to the technical consultation HMRC has been engaging with trade bodies, and discussions are ongoing.
One of the main concerns is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ’white goods‘ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.
The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. But this is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cashflow projections will also need to adjust.
Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.
We are less than a year (or only 4 VAT returns to go) before the ‘Making Tax Digital’ deadline of 1 April 2019.
The first stage of Making Tax Digital (MTD) will apply to all VAT registered businesses who are over the VAT turnover threshold (£85,000 until March 2020) from the first VAT return which starts after 1 April 2019. The regulations passed into law in March 2018. HMRC have published an Explanatory Note, a draft VAT Notice and a draft Addendum document outlining ‘user journeys’, which uses diagrams to explain the digital links required between records. These can be accessed here but are subject to future amendment. A detailed chart which compares the current rules with those expected under MTD for VAT can be found on the CIOT website here and we reccommend reading this.
The regulations provide that VAT registered businesses (including charities) must keep an electronic account of information specified in the amended regulations, and must use an approved form of software to prepare and render VAT returns. Under MTD, businesses must keep certain mandatory records in a digital format within ‘functional compatible software’, able to interface with HMRC’s systems, and thus send and receive information to and from HMRC. Taxpayers using multiple accounting software packages to record or calculate information that drives VAT return data must digitally link them to be MTD compliant.
Most of our clients use software to keep their accounting records. However, we are aware that very few of them actually use that software to calculate and declare VAT returns, due to the complexities of partial exemption and business/non-business adjustments. If you are using spreadsheets for that you need to start thinking about how any adjustments calculated via spreadsheet are going to get back into a digital format for submission to HMRC under MTD. At the very least we recommend contacting your software supplier to check whether they will be providing any support, and looking at the ‘user journey’ Addendum document from HMRC. You may need to upgrade to use ‘cloud’ based accounting software.
The main and important issue is that information transfer between internal interfaces and with HMRC must be ‘digital’ (and via third party software) where the records are part of the Making Tax Digital for Business (MTDfB) journey, but adjustments (such as partial exemption) will still apparently be able to be calculated separately and manually via spreadsheet– i.e. this step is not part of the ‘MTDfB journey’. It is noted that the information to be recorded also includes a requirement to separately identify the value of income into standard rated, reduced rated, zero-rated, exempt or outside the scope outputs. HMRC plans a “soft landing” in the first year to allow organisations to transition to the new rules.
The draft regulations provide for exemptions from the digital requirements based on turnover, inability to use electronic systems for religious or practical reasons, and for businesses subject to insolvency. Exempted businesses may opt for the obligations in the regulations to apply to them if they so wish. The amended regulations also provide rules for how business records should be preserved.
Businesses can sign up to take part in a MTD pilot exercise from 1 April 2018. The benefit of taking part in the pilot will be being ahead of the game, getting access to support, being kept up to date on how the system is developing, an opportunity to influence the look and feel of the final version, and feedback on how you are getting on with the submissions. There is more information on the pilot here, but please contact us if you need more help.
As was expected in the Spring Statement the Chancellor announced a call for evidence into the effect of the current VAT registration threshold on growth, The Government believes that the current ‘cliff edge‘ VAT registration threshold may act as a disincentive to growth of small businesses and to consequent improvements in productivity. This was noted by the Office of Tax Simplification in its review of VAT published last year, and which recommended that the Government examine the current approach to the VAT threshold.
Business views on the threshold are divided. Some argue that having a high threshold has the benefit of keeping the majority of small businesses out of VAT altogether, avoiding all the administrative requirements that accompany the tax. Others consider that a lower threshold would reduce distortions of competition.
The Government’s call for evidence is split into three sections:
- 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.
We recommend that any small enterprises, including charities, which are currently trading below or near the threshold explore the paper and the questions it asks as this could mark a fundamental change to the way VAT operates in the UK.
On 7 November 2017 the Office of Tax Simplification (OTS) laid in Parliament and published its first report on VAT setting out a range of proposals for simplifying the tax. What was meant to be a simple tax has become highly complex and the OTS report says it has not kept pace with changes in society.
The report contains 23 recommendations for simplifying the tax. Its lead recommendation on the future level and design of the VAT threshold has prompted debate. By enabling many small businesses to stay out of the VAT system the high threshold is a form of simplification, but it costs the UK around £2bn per annum, and evidence suggests that many growing businesses are discouraged from expanding beyond this point. The report looks at options for reducing the current ‘cliff edge’ effect resulting in a ‘bunching’ of businesses just before the VAT threshold, and an equally large drop off in the number of businesses with turnovers just above the threshold.
The 8 core recommendations are:
- 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
- HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty
- HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed
- HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS
- The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations
- HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications
- the government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold
- HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
Welcome to our Summer news update. Since the last one we don’t seem to have much more clarity on what the post-Brexit business landscape will look like, but we have seen the publication of the European Union (Withdrawal) Bill, which is the most significant piece of constitutional legislation for decades.
We’ve also seen some important cases on property development in relation to pub conversions and student accommodation, and VAT has now become the focus of the upcoming changes to the government’s Making Tax Digital programme.
Pub and shop conversions
We report on the VAT pitfalls that can occur in converting commercial buildings into residential as illustrated by two recent cases. Get in touch if you are not clear on the rules. Read more
When is student accommodation a dwelling for VAT?
A recent case has highlighted some important VAT differences that contractors and sub-contractors need to be aware of when working on student accommodation. Read more
UK VAT Brexit and EU law- an example
The European Union (Withdrawal) Bill in clause 4(1) aims to convert EU law applicable in the UK the day before the UK leaves the EU into domestic law. This will then be “frozen” and any question as to the meaning of EU-derived law will be determined in the UK Supreme Court by reference to the Court of Justice of the EU (CJEU) case law as it exists on the day we leave the EU.
This is not such a change for us VAT practitioners, because the legislative structure of the UK VAT Act and domestic VAT Regulations are, in principle anyway, meant to reflect EU principles. One of these is that UK VAT laws are as far as possible, meant to be construed in accordance with the Principal VAT Directive (PVD) and the case-law of the Court of Justice of the EU. Where UK law deviates from EU law that principle can be an important benefit for UK taxpayers, who can argue against HMRC for the ‘direct effect’ of the EU provisions, as can be seen from the case of The Learning Centre (Romford) Ltd in which the tribunal has ruled that HMRC were wrong to force the company to charge VAT on welfare services.
The Bill however provides that the principle of ‘direct effect’ is abolished as from exit day. From exit day, therefore, it will no longer be possible to base a tax claim on the PVD itself, and the case above, if heard after then, might therefore have had a different outcome.
Making Tax Digital
The Government announced major changes to the timeline for the implementation of Making Tax Digital (MTD). Under the new timetable only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for VAT purposes, though they can volunteer to do so for other taxes. There is still a lot of detail to flesh out. Read more
Welcome to our Spring/Summer news update. It’s been a busy few months since our last update in January. There’s more detail in the links below.
The triggering of Article 50 and the UK’s eventual departure from the EU will have a major impact on UK VAT in the future as we discuss here.
Making Tax Digital
HMRC’s proposals to ‘Make Tax Digital’ will eventually affect how all businesses make tax and VAT returns (though there is a proposed exemption for charities) and is likely to require all businesses to adopt digital accounting and /or adapt their software packages. Whilst the legislation was cut from the Finance Bill due to the election we are told this is a deferral only. There is more detail on the proposals here.
Cultural and Educational exemptions
The European Court has recently decided that the UK is entitled to deny exemption to film screenings by non-profit making bodies in the case of BFI. That means there will be no extension of exemption to other areas, but Brockenhurst College was successful in arguing that the catering and theatrical activities its students provided to third parties were exempt because they were closely related to the education of the students.
Finally HMRC have updated their guidance on deduction of VAT by holding companies following cases hear on the CJEU. It was expected this would be issued as an HMRC brief but instead HMRC have updated several parts of their Manuals. This will affect recovery of VAT on mergers and acquisitions
As always if you have any questions on VAT give us a call on 0208 492 1901 or drop us an email.
HMRC have finally published updated guidance on recovery of VAT by holding companies. The update had been expected to take the form of a Brief which would be published on Gov.uk but instead HMRC have updated the VAT manuals (also on Gov.uk) instead.
Following the CJEU decision in the joint cases Larentia +Minerva, HMRC has been reviewing their policy in respect of holding companies and deduction of VAT incurred on acquisition costs.
The CJEU held that VAT incurred by a holding company on the costs of acquiring shareholdings in subsidiaries to which it also intended to provide taxable management services, must be regarded as part of a holding company’s general overhead expenditure and thus as deductible (subject to any partial exemption restriction).
Prior to this case HMRC’s previous policy had been that VAT incurred on the acquisition costs of shares by a holding company was only deductible where it was directly attributable to the provision of taxable services. They also considered that VAT on costs incurred by holding companies was only recoverable if the intention was to recoup the expenditure by providing taxable services to subsidiaries within a ‘reasonable’ period of time.
The guidance covers:
- when a shareholding is regarded as bring used as part of an economic activity;
- whether a holding company is the recipient of a supply;
- whether a holding company is undertaking economic activity for VAT purposes;
- whether a shareholding is acquired as a direct, continuous and necessary extension of a taxable economic activity of the holding company;
- whether there is an intention to make taxable supplies;
- contingent consideration for management services;
- the effects of a holding company joining a VAT group;
- stewardship costs; and
- mixed economic and non-economic activities.
Businesses considering mergers, acquisitions and corporate restructures should read this guidance.