VAT Update – September 2019

27 Sep 2019

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This has not been HM Revenue & Customs’ (HMRC’s) month, having lost several cases in the courts, including on VAT recovery and on the application of VAT avoidance rules. HMRC has published news of an error it made in implementing changes back in March and has announced a delay to the introduction of the reverse charge for construction services until 1 October 2020.

In this issue we also remind those businesses that enjoyed a six-month deferral from Making Tax Digital for VAT that they should be well advanced with their preparations now, as the new rules will affect them for VAT periods commencing on or after 1 October 2019. Brexit is never far from the news and we highlight the need to be ready for a possible no deal Brexit again(!) on 31 October 2019.

The American Express First Tier Tribunal Case

The First Tier Tribunal (FTT) decided that American Express (Amex) was correct to recover VAT in respect of income from ‘specified supplies’.

Amex argued it had supplied its services to a group company established outside of the EU. HMRC disagreed. The FTT concluded that both the contractual arrangements and the economic reality indicated that the services were provided to a non-EU company.

Comment: Specified supplies are supplies of certain financial and insurance services to a party established outside of the EU. Such services allow VAT to be recovered on their associated costs even though such services would be exempt from VAT when provided to UK established customers. If the UK leaves the EU without a deal on 31 October, we expect many supplies of financial and insurance services to EU and non-EU established businesses will fall within this favourable treatment.

Therefore, determining who the recipient of a supply of financial services is, will continue to be a critical factor when considering the place of supply and, in this case, the right to VAT recovery. Financial and insurance businesses with customers established outside the UK should be readying themselves for a no deal Brexit or risk missing out on extra VAT recovery.

Please get in touch with your usual Saffery Champness contact or Nick Hart if you wish to discuss further, E: [email protected]

Incoterms updates: impact on international trade

On 1 January 2020 new Incoterms will take effect. Incoterms are a series of predefined commercial terms published by the International Chamber of Commerce (ICC), which are widely used in the international business community in relation to transactions involving goods and, in particular, goods that travel across international borders as part of a supply. The Incoterms define which party (buyer or seller) is responsible for costs throughout the journey of the goods and which party is responsible for import and export declarations, where applicable.

Incoterms are updated every 10 years, and with the 2020 version changes are widely anticipated to address certain weaknesses, uncertainties and gaps.

Some of the changes that might be implemented in 2020 include the splitting of the current Delivered Duty Paid (DDP) into two separate Incoterms, the removal of Free Alongside Ship (FAS), which is seldom used, and the introduction of a new Incoterm, Cost and Insurance (CNI).

Comment: Businesses that are involved in the international shipment of goods, including suppliers and purchasers of such goods, should review the new Incoterms when they are published in January 2020 to ensure up-to-date terms are being adopted, so there is no confusion regarding where cost and risk lies in the supply chain as far as the movement of the goods is concerned.

Please get in touch with your usual Saffery Champness contact or Nick Hart if you wish to discuss this further, E: [email protected]

The Charles John Caton FTT Case

The FTT decided that a business had not artificially split its operations for VAT avoidance reasons.

Mr Canton ran a café business, whilst his wife ran a restaurant business in the neighbouring premises. Neither business was VAT registered. HMRC concluded there was a single business that had an historic liability to register and account for VAT.

Mr Caton was solely named on the alcohol licence, the property leases and on the insurance policies taken out by both businesses. There was also a part of the premises that both businesses shared for washing up. The FTT still decided that two separate businesses existed.

Comment: Disaggregation cases have always been and continue to be subjective and turn on their specific facts. HMRC is not always successful when such cases come to court. Businesses should be careful when the same partners, shareholders and staff are involved in running and managing multiple businesses using the same premises and accounting systems.

Please get in touch with your usual Saffery Champness contact to discuss this further.

Charles John Caton v The Commissioners for Her Majesty’s Revenue & Customs

HMRC issues information on VAT Tour Operators Margin Scheme and retained payments and deposits

Following the change in policy regarding the VAT treatment of retained deposits, which came into effect from 1 March 2019, HMRC made an error in the Public Notice concerning the Tour Operators Margin Scheme (TOMS).

Revenue Brief 9 has been published to alert businesses of this error and businesses using TOMS are urged to check the revised guidance carefully, as HMRC is now inviting reclaims (from 1 March 2019) for businesses that applied the new rules incorrectly as a result of the error.

Domestic reverse charge for construction services delayed

In a surprise move, HMRC has announced a delay to the domestic reverse charge for construction services, which is now expected to be implemented from 1 October 2020.

Comment: Some businesses will welcome the extra time to prepare, but many have already incurred costs to get their systems ready for the change. It remains to be seen whether HMRC will re-engage with businesses and industry bodies to address some of the many problems with the interpretation and application of the new rules.

Please get in touch with your usual Saffery Champness contact or Sean McGinness if you wish to discuss this further, E: [email protected]

Making Tax Digital for VAT: deferred businesses soon to report

It is almost six months since the new rules on mandatory digital VAT reporting came into force for many VAT registered businesses. However, a number of more complex businesses, including those based overseas and VAT groups, enjoyed a six month deferral. For such businesses, VAT return periods commencing on or after 1 October 2019 will come within the scope of the new rules. Affected businesses should now be well advanced in their preparations to ensure they are ready ahead of the first filing deadline.

Please get in touch with your usual Saffery Champness contact if you wish to discuss this further.

No-deal Brexit

HMRC has published and updated a number of business briefs and guidance documents to urge businesses to get ready for a possible no deal Brexit on 31 October 2019. You can access this guidance here.

We highly recommend that those businesses trading with the EU review the guidance and speak to their usual Saffery Champness contact to ensure appropriate planning is undertaken.

One issue requiring urgent attention is where businesses reclaim VAT from other EU member states using the Eighth Directive Reclaim Refund Scheme and submitting claims using the HMRC portal. Some EU members states are likely to reject claims submitted after the end of September and the portal will not be available after 5pm on 31 October 2019. All businesses affected by this should try and submit their refund claims as soon as possible.

Further guidance can be found here.

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

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