VAT Update – March 2024

HMRC has updated paragraph 2.7 of VAT Notice 700/1, which pertains to businesses registering for UK VAT due to their provision of specified supplies of finance or insurance services to non-UK customers.

When applying for a VAT registration, businesses involved in specified supplies must now specifically denote their status by including ‘SPECIFIED SUPPLIES’ in the provided free-text box. This will ensure that their business activities are correctly classified by HMRC and will avoid unnecessary processing delays generated by HMRC queries, or even outright rejections of the registration application.

But what are specified supplies and what is the opportunity for taxpayers here?

Specified supplies are certain financial or insurance services, or the services of an intermediary facilitating a supply of financial or insurance services, supplied to non-UK parties. Such services are exempt from VAT and when supplied to UK parties they do not entitle the supplier to VAT recovery on associated costs. However, when such services are supplied to non-UK parties, and in the case of insurance transactions, where the underlying insured party is located outside the UK, the supplier is entitled to VAT recovery on the costs associated with making those specified supplies and a proportion of their overhead or non-attributable VAT.

The definition of a specified supply also includes services which relate directly to the export of goods.

Comments

Businesses providing specified supplies can voluntarily register for VAT (if they’re not otherwise liable to register), and it’s recommended they do if the resulting VAT recovery benefits outweigh the cost of VAT compliance.

If you’re operating in the financial services or insurance sectors and you transact with overseas parties, you could be making a specified supply, and we can assist in ensuring you’re maximising VAT recovery on costs.

Please contact Nick Hart or Callum Richards, VAT Directors, if you require advice on this matter.

From 1 March 2024, UK VAT registered businesses in Northern Ireland that sell goods with a value of £135 or less to consumers in the EU from Great Britain, can now choose to register with HMRC’s own IOSS. Previously, IOSS compliance was only possible through an EU Member State. Fulfilling IOSS compliance obligations through the UK should now be more straightforward to account for EU VAT on these sales, and trade with EU consumers.

As well as businesses in Northern Ireland, the scheme is also available for businesses in countries that the EU has concluded and recognises an agreement with, on the mutual assistance for the recovery of VAT. Currently that is only Norway, which limits the scheme.

The IOSS is a scheme designed to help businesses account for local VAT in the EU on low value goods sold to EU consumers and shipped from outside the EU, without the potential need to register for VAT in each EU Member State where you have customers.

IOSS applies to consignments of goods, which must be located outside the EU (and Northern Ireland) at point of sale, must have a value of £135 or less, and be sent to consumers in the EU or Northern Ireland. If the goods are in Great Britain at the point of sale to consumers in Northern Ireland, they’re reported on the businesses normal VAT return, not an IOSS return.

The scheme has been in operation since 2021 and therefore some businesses may have already registered for IOSS through an EU Member State. If you want to register through HMRC, then HMRC say you must cancel your registration in that country before applying.

As a reminder, the scheme cannot be used to sell consignments containing excise goods, for the sale of goods in the UK, or for supplies to VAT registered businesses. Under IOSS you would charge your customer VAT at the rate applying to the goods in the EU country where the customer is based at the point of sale, and you then file monthly returns and remit the total liability.

Please note that if you sell low value goods into the EU through an online marketplace, the online marketplace will generally be responsible for reporting and paying any VAT due.

Comments

The introduction of IOSS reporting for businesses in Northern Ireland selling goods from Great Britain, and Norway, is a welcome one as companies often faced challenges when getting set up for IOSS through an EU Member State. Hopefully this can be extended to businesses in England, Scotland and Wales. One of the issues has been the need to appoint a local representative to manage the IOSS compliance for you. Such representatives have joint liability and therefore the costs of appointing them were higher than would otherwise have been the case.

There is still some confusion regarding the VAT implications of post-Brexit UK-EU supply chains, and when IOSS can be applied is not always clear. The introduction of IOSS compliance is a timely reminder that businesses should be mindful of the VAT complexities which arise when trading with the EU now.

Please get in touch with John Butterfield or Nick Hart, VAT Directors, if you have any questions.

A recent Court of Justice of the European Union (CJEU) decision for Luxembourg has settled a long-standing dispute on whether a director’s fee should be subject to VAT. Historically, the Luxembourg VAT authorities have maintained a view that since directors/board members carry out economic activities independently, their services fall within the scope of the VAT rules.

On this matter, the Advocate General Kokott has recently opined that a director cannot be regarded as carrying out an independent economic activity because they don’t bear any economic risk linked to their activity. The CJEU confirmed that while the director’s activities do constitute economic activities, these are not being carried out independently as the director is not acting on their own behalf, and therefore not bearing the economic risk linked to their activities. Accordingly, director fees are not subject to VAT.

Here’s how director’s fees are treated in the UK, as per current HMRC guidance:

• The supply of a director from one company to another falls under normal VAT rules relating to supplies of staff, and is therefore subject to VAT,
• Where one company pays the costs of a common director on behalf of other companies that the person is also a director of, the recharge of those costs is outside the scope of VAT as there is no supply for VAT purposes. The common director is seen to provide their services as director to each company directly, and there is no supply of staff or services from the company which is paying the director fees and
• A supply of services will be taking place for VAT purposes, where there are contractual arrangements in place for the supply of services from the individual to the other companies.

Comments

We would encourage UK businesses to review whether their company is required to account for VAT on payments made to directors. The key aspect to look at is whether the director has been appointed purely in personal capacity or whether their appointment is a means for your company to provide consultancy services to other companies.

Another area to monitor would be recharges between the companies for director’s costs. This could be for cost sharing purposes or for an underlying supply of staff; the VAT treatment would vary under both the scenarios.

Also, it should be noted that the UK is no longer subject to CJEU jurisdiction following its departure from the EU, so whilst CJEU cases are still of interest from a general VAT principles perspective, they are no-longer binding on HMRC or UK courts.

Decoding VAT treatment of recharges is quite a complex concept and is often misunderstood. Please get in touch with our VAT team if you have any questions.

The recent case of Metatron D.O.O. v Revenue and Customs Commissioners [2024] UKFFT 115 (TC) has highlighted the issues with businesses in EU countries seeking reimbursement of incorrectly charged UK VAT, and the issue of the recourse more generally should a supplier incorrectly charge.

Metatron D.O.O. (‘the Appellant’) is a business established and registered for VAT in Slovenia, operating a computer facilities management and management consultancy business, buying goods from UK suppliers. These supplies should have been zero-rated as the supplies qualified as intracommunity supplies, but the Appellant was incorrectly charged VAT.

Metatron made a claim of £1,138.32 of UK VAT paid in the period 1 January 2019 to 31 December 2019, and a second claim for £179.46 for the period 1 January 2020 to 31 December 2020. These claims were made through the EU electronic VAT refund application process, before the UK left the European Union.

The claims were rejected by HMRC on the basis that there is no right for an EU (but non-UK) established business to claim a refund of UK VAT, where the supply on which VAT has been charged should have been zero rated as an intracommunity dispatch of goods.

The Appellant relied on the case of Reemtsma Cigarettenfabriken GmbH (C-35/05)(‘Reemtsma’), in which the CJEU determined that there are limited circumstances in which tax authorities of an EU Member State may be required to make a direct repayment to a customer where VAT has been incorrectly charged.

Reemtsma was a German company who engaged with an Italian company to provide advertising and marketing services. It had no permanent establishment in Italy. VAT was charged in error and Reemtsma sought reimbursement. It’s a case often relied on when a VAT refund becomes impossible or excessively difficult.

HMRC applied for both Metatron claims to be struck out by the First Tier Tribunal (FTT) on the basis that the Reemtsma precedent was no longer valid due to the European Union (Withdrawal) Act 2018; HMRC argued that the FTT had no jurisdiction to consider the two claims on Reemtsma grounds.

The FTT agreed to strike out both claims on the basis that the appeals had no reasonable prospect of success.

Comments

There was a brief time when HMRC would consider claims under Reemtsma where incorrectly charged VAT could not be recovered from the supplier (which is usually the normal recourse) however that didn’t appear to last long, and Brexit presented the opportunity for HMRC to reject such claims on the basis that the UK was no longer bound to apply EU case law.

Provisions are being implemented that enable the UK to depart from EU case law, and it will be interesting to see the extent to which HMRC or the courts seek to apply principles derived from EU case law when considering technical VAT positions.

In general, it’s important to be comfortable that a supplier has applied the correct VAT treatment when processing purchase invoices. Incorrectly charged VAT is not input tax, and there is no recourse to HMRC in terms of claiming the incorrectly charge VAT from them, in instances where the supplier is not able to amend their position, which can happen for a number of reasons. HMRC will disallow input tax where the VAT has been incorrectly charged by the supplier.

For further information, please contact Nick Hart, VAT Director.