voyage into vat
TRANSCRIPT
Voyage Into VAT
Voyage into VAT• Before you set sail….
•Stormy seas?
• Safe harbours!
• With a fair wind….
• Long-range forecast
Before you set sail….
Basic principles
• A world wide tax (almost)
• C130 countries (and growing)
• Compare US SALT taxes
VAT law
• European legislation – EC Sixth VAT Directive• UK legislation – Value Added Tax Act 1994• Secondary/Tertiary legislation (Statutory
instruments etc)• Case Law• HMRC Notices & Leaflets – generally
interpretive only – not law
How VAT works - example
Purchases Gross
(£)
Net (£)
Sales VAT
(£)
Gross (£)
Net VATPaid
£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 26.2552.50
Customer pays
352.50
VAT borne by customer
52.50
Scope of the tax
• VAT shall be charged on:- any supply of goods or services- made in the United Kingdom- where it is a taxable supply- made by a taxable person in the course of furtherance of any business carried on by him
VAT Act 1994 Section 4(1)
… any supply of goods or services …
What is a supply? – no legislative definition, but:
- “includes all forms of supply, but not anything done otherwise for a consideration”
… any supply of 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
… any supply of goods or services …
• Distinguishing between goods and services is important:
- VAT liability- Place of supply- Time of supply
… made in the United Kingdom …
• UK VAT only applies to supplies made in the UK:
- “place of supply” rules
… where it is a taxable supply…
• Taxable supplies:- Standard rate – 20%- Zero rate – 0% (e.g. books, new houses, exports of goods)- Reduced rate – 5% (e.g. domestic fuel & power, residential conversions)
• Exempt supplies (e.g. finance, education, some residential accommodation etc)
• Difference between zero rate and exempt
… where it is a taxable supply…continued
• Other supplies/transactions:- Outside the scope of VAT (e.g. compensation, grants etc)- Disregarded supplies, i.e. neither goods or services (e.g. sales within VAT group, TOGC)- Deemed supplies (e.g. gifts, “movements of own goods” etc)
… made by a taxable person….
• A person who makes or intends to make taxable supplies and is (or is liable to be) registered for VAT:
- Compulsory registration - £79,000p.a.- Voluntary registration- Caution – thresholds differ between EU countries
… in the course of business
• ‘Business’ not defined, but includes ‘any trade or vocation’
- Purely private transactions are outside the scope of VAT
- EC law (VATDirective) refers to ‘economic activity’
- Includes ‘not-for-profit’ activities & organisations
Key principles - recap
•VAT is a tax on business transactions•Collected through the supply chain•VAT systems worldwide – but the
detailed rules vary•Not all transactions are subject to VAT •Need to understand the transaction to
determine the VAT treatment
Input Tax
What is input tax?
VAT you are charged on:
1. Business purchases2. Business expenses
What can be reclaimed?
Considerations1. Has there been a supply?2. Was VAT correctly charged?3. Who is the recipient of supply?4. 'Blocked' input tax5. Valid tax invoice6. Partial exemption
What purchases have VAT on them?
• General rule: standard rate VAT applies unless there is a specific relief.
• 0% VAT: eg books, passenger transport, exports of goods etc
• VAT exempt: eg insurance, certain financial services etc
• Commercial property: generally VAT exempt but supplier may opt to tax
When to claim input tax
• 'Tax point' for the supply• Acquisition date• Importation date
VAT invoice
InvoiceABC Ltd
First Avenue
Anytown
Newco
New Street
London NW1Invoice 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 registrationnumber
VAT charged
Value of supply
Total charged
Evidence for VAT recovery
A ‘valid’ tax invoiceWhere a valid VAT invoice cannot be obtained?Invoices in the name of employees?Less detailed invoices
'Late' claims
• Lack of evidence• Error• Time limit
Employee expenses
Subsistence expenses Removal/relocation expensesDomestic accommodationClothing
Motor cars and fuel
Purchase/leasing a motor carRepairs/maintenance of a motor carFuel bought by the business/employees
Mobile phones provided to employees
Purchase and connectionCalls where business use onlyCharges by business for private useFree private callsFixed monthly charges
Business entertainment
• What is it?• Staff Entertainment (e.g. Christmas
parties)• Exclusions• Astra Zeneca case
Management services
Three key questions:• Is the management charge made to a
different entity or within the same entity/VAT registration?
• What is the nature of the service(s) provided?
• Where does the supply take place for VAT purposes?
Output tax
Value of supply
•Consideration•Barter transactions•Part exchange
Consideration
•Everything received in return for the supply of goods or the provision of services, including incidental expenses•Normally the invoice amount•Includes barter transactions and non-
monetary considerations
Gifts and other deemed supplies
•Genuine gifts or are you expecting something in return?
•Standard-rated gifts of goods costing more than £50. Account for VAT on a deemed supply of the goods at market value. Reclaim VAT on the cost of buying the goods
•Succession of gifts to same person
Time of supply
•Determines when to account for VAT•Goods:–Basic tax point is date when goods are
removed or made available for customer use
•Services:–Basic tax point is time when the
services are performed
Actual tax point
•Actual tax point overrides the basic tax point •Actual tax point created by:–VAT invoice being issued or a payment being
received before the basic tax point; or– Invoice being issued up to 14 days after the
basic tax point. This does not override a tax point created by an early payment
Goods tax point?
•Goods delivered on 8 June 2013•Payment received 31 May 2013•Invoice issued 12 June 2013•What is tax point?•Answer - 31 May 2013
Services tax point?
•Services performed on 27 September 2012•Payment received on 4 November 2012•Invoice issued on 5 October 2012•What is tax point? •Answer - 5 October 2012
Special situations
–Book entries or offsets in inter-company accounts–Deposits–Continuous supplies of services
Place of supply of goods
–For goods being transported = where the goods are when journey begins –For goods not being transported = where
they are physically located –For goods being supplied and installed =
place where the goods are being installed•Special rules for intra-EU movements
(dispatches, distance sales) and exports to non-EU countries
Place of supply – Goods…..continued
•A UK supplier supplies goods to a US customer and the goods are transported to the US•Place of supply = UK•But – export rules may apply
Place of supply – Goods…..continued
•A UK supplier supplies goods to a US customer but goods remain in the UK•Place of supply = UK
•A UK supplier supplies goods to a US customer. Goods are installed in Germany•Place of supply = Germany
Place of supply of services•Basic rule: “where the recipient has established his business”•If recipient has more than one place of business: place of
business which is “most closely connected” to the supply•Exceptions to basic rule for:– Land/immovable property e.g. property management,
surveying, legal services on conveyancing– Transport services – Live artistic, sporting, cultural and exhibition services e.g.
pop concert– Intellectual services e.g. engineering services– Electronic services (will change in 2015)
Place of supply – Services…..continued•A UK supplier supplies office rental property in the
UK to a US customer•Place of supply where the property is located = UK
•A UK supplier supplies office rental property in the UK to German customer•Place of supply = UK
•A UK supplier supplies office rental property in Germany to a German customer•Place of supply = Germany
VAT accounting and compliance
Accounting and record keeping
What records does a taxpayer have to keep?
Preservation of recordsIn what form may records be preserved?
The VAT reporting cycle
• Quarterly • Monthly• Annually• Electronic submission• Submission dates
Completing the VAT return – things to remember
• Box 1: VAT on sales and other outputs• Box 2: VAT on acquisitions of goods from
EU• Box 3: Box 1 + Box 2• Box 4: VAT reclaimed in the period on
purchases and other inputs • Box 5: Net payable/<repayable> = Box 3
less Box 4
Completing the VAT return – things to remember continued
• Box 6: Total value of total sales/outputs exc. VAT (inc full value of reverse charge services)
• Box 7: Total value of purchases/inputs exc. VAT (inc reverse charge services)
• Box 8: Total value of all supplies of goods to EU
• Box 9: Total value of all acquisitions of goods from EU
HMRC control visits
• Frequency of control visits?• What will happen before a visit?• What things will HMRC do during the
visit?• What will happen at the end of the visit?• What will happen after the visit?
HMRC assessments, interest and penalties
• Circumstances when HMRC can issue assessments
• Time limits for assessments• Default interest & ‘commercial restitution’• Other penalties – see “Stormy Seas”!!
International and cross border
Terminology
• Import/Export (non-EU)• Acquisition/Dispatch• Goods vs. Services
European Community•Members (28)Austria Germany The NetherlandsBelgium Greece PolandCroatia Hungary PortugalCyprus Ireland Slovak RepublicCzech Rep Italy SloveniaDenmark Latvia SpainEstonia Lithuania SwedenFinland Luxembourg RomaniaFrance BulgariaUK Malta•Candidate countriesMacedonia Turkey
Imports• Goods from outside the EU• Import VAT - same rate of VAT as if goods supplied in UK- payable as a duty of Customs- payable when duty is due (i.e when goods
cleared)- taxable amount = value for Customs purposes- deferment- import VAT is reclaimable - Box 4
Imports (continued)•Documentation- deferment statement- agent's invoice- C79 (import VAT certificate)•VAT recovery?- C79
Exports• Sale/removal of goods outside the EC• Zero rated providing
- Goods physically removed within 3mths of 'time of supply- Exporter obtains and keeps 'proof of export'- No delivery to UK address (ex. for processing etc)
• Otherwise standard rated
Exports• Official evidence (provided by HMRC)
- Goods Departed Message (GDM)- Export declaration (SAD/C88)
• Commercial evidence- Authenticated sea-waybills/ air-waybills- Bills of landing- Certificates of shipment- CMR/ International consignment note
Proof of export Continued• Supplementary evidence
- orders, contracts, correspondence, etc- consignment note, packing list, etc- insurance/freight charges, evidence and payment
• HMRC make the rules (Notice 703)• Ex-works sales
Intra-EC trading - goods
Supplier:
Germany
Customer:
UK
Goods
Invoice
'Despatch' 'Acquisition'Zero rate sale provided: 'Acquisition tax' (UK
VAT):- quote customer UK VAT No - A/c for VAT on UK return- obtain 'proof of removal' - Reclaimable (subject to
normal rules)
Acquisitions
• Goods from elsewhere in the EC• VAT registered customer responsible for
'acquisition tax' accounting• Acquisition tax
Dispatches • Sale/removal of goods to other EC member states• Zero rated provided:
- goods physically removed from UK - goods 'acquired' by VAT registered customer- supplier quotes customer VAT number- supplier obtains and keeps 'evidence of removal'
• Otherwise standard rated• Movements of own goods• VAT return: boxes 6 and 8
EC Sales List (ESL)• Details of zero rated supplies of goods to EC
customers- customers VAT number- 'total value' of goods supplied
• Calendar quarters• Sent automatically by HMRC (Box 8)• Now required for services
Intrastat• Statistics on trade in goods between EC
countries• Boxes 8 and 9 of VAT return• Supplementary declarations:
- Dispatches (£250k)- Arrivals (£600k)- Monthly
• Physical movements of goods• Penalty regime
Overseas expenses
• EC 8th Directive - recovery of VAT incurred elsewhere in EC
• Conditions - taxable person etc• Claim - period, original invoices• EC 13th Directive – recovery of EU VAT by
businesses not registered or established in the EU
VAT on services: international issuesVAT impact of services supplied into and out of
UK/EU
• Place of supply• “Importation” of services into UK/EU• May be subject to “reverse charge” VAT
Reverse charge VAT
• Concept
• Rationale
• Mechanism
• Impact on business making exempt supplies
Stormy SeasHeadline RateAnti-
Avoidance Rules
Penalties
Disputes & Litigation
Complexity of Regime
“Abuse” Doctrine
HMRC
Common Pitfalls
Headline Rate• SR VAT - 1/6th of gross value
- Impact on margin
• Compare other taxes
• Ignore it at your peril!
Complexity of Regime
• Old legislation – needs updating (e.g. food, handicapped persons)• New legislation – Torture!• Pace of change – Continuous process (Budget Day
no longer “an event”)• Volume of material• Volume and range of case law (FTT – CJEU)
(28 countries)
Anti-Avoidance LegislationExamples:
- Disaggregation
- VAT Grouping
- Option to tax disapplication
Doctrine of “Abuse”• Halifax case• “Abuse of rights”• Impact on VAT planning• Commercial impact• WHA case
Penalty Regime- Criminal offences
- e.g. fraudulent evasion- Up to 7 years in jail
- Civil penalty regime - e.g. errors/misdeclarations- 0% to 100% of the tax
Penalty Regime- HMRC attitude
- Focus on “behaviour” not “tax loss”
- Proportionality
- Mitigation and suspension
HMRC• Aims – plugging the tax gap
• Technical (and other) resources constrained
• Inconsistency
• Easy targets
Disputes & litigation
• Reconsideration route
• To the tribunal …. and beyond
• ADR
Common Pitfalls
• My top 5:
- Liability- OTT- Registration- Place of supply- Property issues
= VAT has never been a bigger risk to business
What can we do?
Safe HarboursUK
Registration Limit
Zero-Rate
Reduced Rate
Bad debt relief
Exemption
Schemes for small
business
UK Registration Limit• Currently £79k annual limit
• Prospective and retrospective tests
• Generous! Compare other EUMS
• Caution: No T/O limit for NETP’s
Zero-Rating• The Holy Grail• VATA 1994, SCH8• (The erosion of?) Hard won reliefs
Food
New build (residenti
al)Exports
Charity reliefs
Exemption• ………. Not quite the Holy Grail• VATA 1994, SCH9• Partial exemption
Health, Welfare & Education
Financial Services & Insurance
Property
Partial exemption• If you make both exempt and taxable supplies,
you may not be able to reclaim all of the VAT you incur
• Special calculation to split the input tax between exempt and taxable supplies
Partial exemption• Taxable supplies– VAT due on income (at prevailing rate)– VAT on related costs can normally be reclaimed
• Exempt supplies:– No VAT on income– VAT on related costs cannot be reclaimed
• VAT on overheads – need to apportion
Partial exemption
• Reclaim input VAT relating to taxable activities • Disallow input VAT relating to exempt activities• Apportion input VAT relating to residual costs.
Standard partial exemption method
VAT on overheads reclaimed according to the formula:
Value of taxable suppliesValue of taxable+exempt supplies x 100
x VAT on overheads
=Recoverable VAT on overheads
Alternative partial exemption methods• If the standard method does not give a 'fair and
reasonable result' businesses can negotiate a special method based on another measure, e.g.
1. Number of transactions2. Headcount3. Floor area4. “Sectorised” methods
Partial exemption method override
• Applies in some cases where the chosen partial exemption method does not produce a 'fair and reasonable' VAT deduction
• If the VAT recovery using the normal partial exemption differs substantially from the VAT recovery based on the taxable use of the good/services
Partial Exemption Special methods (PESMs)
• Require HMRC agreement• Business must sign declaration that the method
is “fair and reasonable”
Reduced Rate• ………. Last but not least• VATA 1994, SCH 7A
• Key areas
Energy saving measures
Certain property
conversions
Bad Debt Relief• 6 month minimum• 4 years and 6 months maximum• “Written off”• Adjust for subsequent payment• Include on box 14• Credit notes are not the answer!
Schemes for Small Businesses
• Cash Accounting• Flat Rate Scheme• Annual Accounting• Other (e.g. retail, TOMS, second-hand goods)
Safe Harbours
- Minimum clients need to do to stay compliant - Minimise VAT risk
With a Fair Wind
Opportunities
TOGC
Property Planning
Challenging HMRC
decisions
Postage Overseas entertainm
ent
VAT recovery methodologi
es
VAT grouping
Other?
Hospitality and Leisure
SectorsNot for profit IFA’s
Property and Construction
RetailOnline traders
Education & Welfare
Energy & Renewables
Case Law Update
BFI
WHA
Deutsche Bank
UEGF
Colaingrove
Put conversion
Long Range Forecast
Proposed changes
Expected Guidance
Case law Outlook variable…
