VAT Update – April 2019

10 Apr 2019

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HM Revenue & Customs (HMRC) has recently published confirmation of the correct process for reclaiming import VAT where the person does not own the imported goods. In other news, we look at the draft legislation introducing changes to the VAT position of energy saving materials; the EU undertaking a new financial services VAT review; and finally we have some insight into one aspect of the domestic reverse charge being introduced in October 2019, which will apply to construction services.

Import VAT deduction by non-owners

HMRC’s Revenue & Customs Brief (RCB) 2 (2019) provides clarity on its position regarding import VAT recovery by those who do not own the goods that have been imported and against which import VAT has been incurred.

HMRC has been aware that in particular sectors, including the pharmaceutical sector, UK VAT-registered businesses have been importing goods that they do not own, on behalf of overseas principles, and reclaiming the import VAT accordingly. HMRC has confirmed this approach is incorrect and has no basis in law.

RCB 2 also provides guidance on instances where a supply of goods has already taken place outside the UK, and the supplier completes the import declaration, paying and reclaiming the import VAT. HMRC has confirmed this approach is also incorrect and in these instances the customer should act as importer of record, pay the import VAT and reclaim it accordingly, subject to its own VAT status in the UK.

HMRC is allowing an amnesty period until 15 July 2019, for businesses to review their current process for reclaiming import VAT and determine if the correct approach is being adopted, or whether they need to liaise with others in their supply chains to ensure that the owner of the goods is the importer of record, pays the import VAT and then has the opportunity to reclaim it.

HMRC will not seek to correct historic errors if there has been no overall loss of VAT. The owner’s entitlement to full import recovery will determine whether or not there has been such a VAT loss.

Comment: Before 15 July 2019, businesses that are currently claiming import VAT in relation to the import of goods that they do not own, should take steps to ensure the correct party in the supply chain is acting as importer of record, paying the import VAT and deducting it through the appropriate channels. This may require those parties to register for VAT in the UK or, alternatively, to apply for VAT refunds through the overseas VAT refund mechanism if the importer is not a UK established or resident and the uncertainty is likely to continue for the present. We recommend discussing ‘hard Brexit’ contingency planning and readiness with your usual Saffery Champness contact.

Revenue & Customs Brief 2 (2019)

Forthcoming changes in the VAT liability of energy saving materials

HMRC has published draft legislation on the scope of the 5% VAT relief for energy saving materials. In 2015, the EU ruled that the scope of the UK’s VAT relief was too wide and should be restricted.

The draft legislation would remove the 5% rate for the installation of wind and water turbines but protects relief for elderly people (over 60) and certain vulnerable groups for installations in residential accommodation.

The most complex part of the changes is that the 5% rate will be retained for other installations of qualifying energy saving materials in residential accommodation where the cost of the materials does not exceed 60% of the total cost of the installation. If the materials element of a purchase exceeds 60% then the whole supply will be subject to VAT at 20%.

The draft legislation is currently in consultation. The changes above, if confirmed, are expected to apply from 1 October 2019.

Comment: We had long expected these changes after the EU’s ruling in 2015. The changes will negatively impact some sectors, but a good deal of the 5% reduced rate relief has been preserved. It remains to be seen how practical and effective both the ‘60% test’ and the more detailed rules on over 60s and vulnerable groups will be to administer in practice.

Draft legislation: VAT (Reduced Rate) (Energy-Saving Materials) Order 2019

EU Financial Services Review

The EU has proposed undertaking a review of the VAT treatment of financial and insurance services. Currently the majority of these services are exempt from VAT, but the EU believes that the market has changed dramatically since the exemption was introduced in 1977. It has cited various reasons behind the review, including the introduction of new forms of transaction such as cryptocurrencies and crowdfunding, increased outsourcing of functions leading to higher costs for financial services providers, and inconsistencies in rules being applied by member states. Furthermore, the EU feels providers of such services from outside the EU are at a competitive advantage compared to EU operators that are faced with irrecoverable VAT on costs.

Several recent cases at the Court of Justice of the European Union (CJEU) concerning cost sharing groups have likely brought this issue to the forefront. Cost sharing groups are essentially co-operatives formed by several bodies that aim to achieve cost savings by buying in services as a group. The onward supply of these services to the group members are exempt from VAT. Financial services companies used cost sharing groups in order to mitigate their VAT costs. However, the CJEU has ruled that the cost sharing group legislation is restricted to bodies who act in the public interest, not those who provide financial services.

UK-based financial services companies will clearly be interested in the outcome of the review, but what is likely to be of more interest to them is the outcome of the Brexit negotiations. The UK government has confirmed that, in the event of a ‘no deal’ Brexit, UK financial services companies will be able to recover the VAT on costs associated with the provision of their services to customers in the EU – something they are currently unable to do.

Comment: This is not the first time the EU has undertaken a review into the VAT treatment of financial services. In 2007 it proposed introducing some limited legislative changes, but this was ultimately withdrawn in 2016 due to a lack of agreement between member states. It is not expected there will be any change soon, as the outcome of the review is not expected until the summer of 2020.

Domestic reverse charge on construction services: supply of staff not included

We are another month closer to the introduction of the domestic reverse charge (DRC) applicable to certain construction services, which is due to take effect from 1 October 2019. HMRC’s initial guidance advised that the DRC will apply to those services reportable for Construction Industry Scheme (CIS) purposes. However, it is understood that HMRC’s latest position is that the provision of staff by an employment business will not be subject to the DRC even though these supplies fall under the CIS regime. Normal VAT accounting rules will therefore continue to apply to such supplies.

This will be welcome news for the temporary recruitment sector. The key action required prior to 1 October will be to review contracts and identify whether the supply is defined under VAT law as a supply of staff or a supply of construction services.

One of the principles of the DRC is that supplies to customers who are ‘end users’ are subject to the normal VAT accounting rules and the DRC does not apply. An end user in this context is a person who uses construction services for any purpose other than making further supplies of construction services. Generally, these will be landowners and occupiers of property.

The DRC rules also include an exception for supplies of construction services to a person who is connected to an end user, which makes the position regarding end users a little more complicated. This includes connection through a landlord and tenant relationship, which will limit the impact of the rules on housing associations and businesses with rental portfolios.

The challenge for suppliers will be to identify whether supplies of construction services are being made to an end user or not.

Comment: The DRC has wide-reaching implications for those supplying and receiving construction services and it is imperative that stakeholders begin to plan now to ensure they are prepared for 1 October 2019. We expect clarifications in respect of certain key aspects of the new provisions from HMRC. The latest consultation on the new rules closed at the end of March and therefore further draft guidance is anticipated shortly.

For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.