Brexit and customs update
In view of the current uncertainty around Brexit and the amount of announcements on this subject from HM Revenue & Customs (“HMRC”), we recommend that you visit our Brexit and Customs & Excise Duty pages for more information. However, we would highlight two points that businesses should consider in case of a no-deal scenario:
- VAT refunds from other EU member states for the year ending 31 December 2018 should be submitted as early as possible and before 11pm on 29 March 2019 at the very latest.
- UK and EU businesses moving goods between the UK and the EU should consider applying for an Economic Operator Registration and Identification number as soon as possible.
Making Tax Digital for VAT update
With Making Tax Digital (“MTD”) being introduced with effect from 1 April 2019, HMRC has updated its guidance to confirm that businesses that are not established in the UK, but make taxable supplies in the UK only need to comply with the MTD requirements if their taxable turnover exceeds the current UK registration threshold of £85,000.
HMRC has further confirmed that the 12 month ‘soft landing period’ in relation to the digital link between software applications applies to all businesses, i.e. also to those which have been deferred from 1 April to 1 October 2019.
In addition, HMRC has provided more details on the circumstances under which businesses can be exempt from the MTD requirements. Businesses which believe they are exempt from MTD on the grounds that it would not be reasonably practicable, or would be incompatible with religious beliefs, or because the business is subject to an insolvency procedure, should approach HMRC who will subsequently issue a decision in writing.
More insights on MTD can be found on our website here.
Spring Statement 2019
No major VAT changes were announced but it may be worth noting the following:
- MTD - The Government has confirmed its light touch to penalties in the first year of implementation.
- Isle of Man - The Treasury will publish the findings and recommendations following its review of the Isle of Man’s VAT administration processes in relation to the importation of aircraft and yachts in the coming months.
- Partial exemption methods and Capital Goods Scheme - The Government will publish a call for evidence with a viewm to make the system as simple and efficient as possible for taxpayers.
- Public Sector - The Government will explore a potential reform to VAT refund rules for central government to reduce administrative burdens and improve public sector productivity.
Hire purchase agreements with final optional payment
The Court of Justice of the European Union (“CJEU”) clarified in a recent decision (Mercedes Benz Financial Services) when a hire purchase contract for a car needs to be treated as a supply of goods and when it falls to be treated as a supply of services.
HMRC has now released Revenue and Customs Brief 1 (2019) stating that the VAT treatment of personal contract purchases and similar contracts depends on the level at which the final optional payment is set.
Under the rules that apply to new contracts from 1 June 2019, hire purchase contracts will continue to be treated as a taxable supply of goods and a separate exempt supply of credit where, at the start of the contract, the final optional payment is set below the anticipated market value at the time the option is exercised.
Where, at the start of the contract the final optional payment is set at or above the anticipated market value, the contract will be regarded as a taxable supply of leasing services from the outset.
The Brief also contains information on how to correct errors for past periods, how to deal with error correction notices submitted with a view to the outcome of the CJEU judgment and how to make related input tax adjustments for suppliers and customers.
VAT groups and bought-in services
As announced in the Budget, HMRC has revised its guidance to clarify which services received from overseas need to be regarded as ‘bought-in services’ (as opposed to services provided in-house) and are therefore subject to UK VAT under the reverse charge when supplied cross border. The guidance includes clarifications and examples of how to calculate the reverse charge on such services.
HMRC also says it has clarified “existing policies” and it is well worth noting that this includes HMRC’s “protection of the revenue” powers. One explicitly stated example of when these powers may be applied is in relation to supplies from an overseas establishment to other VAT group members. This is likely to be the case where the supplies in the UK between the UK establishment and the other VAT group companies are ‘disproportionately small’ compared to the supplies between an overseas establishment and the other VAT group companies.
The changes apply from 1 April 2019 and we recommend any VAT group with an overseas establishment immediately review their arrangements in light of HMRC’s guidance.
UK VAT refunds for businesses established outside the EU
Following Revenue and Customs Brief 12 (2018) HMRC has now updated its guidance in relation to clarifying the details required to be shown on a ‘certificate of status proving your business activity’ and in particular the business address. HMRC also confirm under which circumstances electronic certificates will be accepted.
Partial exemption: Input tax recovery for branches providing cross-border services to head office
In Morgan Stanley (C-165/17) the CJEU had to rule on how to determine input tax recovery where a branch in one member state uses local overhead costs not only for its own supplies but also for transactions to its head office located in another member state. Complexity not only arose from partial exemption and the fact that transactions between branch and head office are disregarded for VAT purposes, but also from different VAT rules in the respective Member States including the option to tax financial services. Businesses in a similar position may want to review their input tax recovery in light of this decision.
VAT treatment of commodities
Despite Brexit being just around the corner, the European Commission has nevertheless referred the UK to the CJEU over extending the original scope of the zero-rate under the Terminal Markets Order. The Treasury has confirmed that during the infraction procedures the tax treatment of commodity derivatives
Property: Sale and leaseback constitutes a ‘change of use’
In Balhousie, a company acquired a new care home free of VAT under the zero-rated relief for residential accommodation. As obtaining bank finance was considered difficult at the time, the decision was made to sell and lease back the property whilst there was no change to the actual use of the property as a care home.
The Court of Session, however, confirmed that the sale and the leaseback were two distinct transactions and that the sale therefore led to a disposal of the entire interest in the property. This triggered a self-supply charge of VAT on the original purchase price which had been zero-rated at the time. Businesses acquiring zero-rated property should ensure they are aware of the VAT implications before restructuring its financial arrangements.
If you wish to discuss anything in this article, please speak to your usual contact at Blick Rothenberg or Alan Pearce, Simon Newark, Simon Sutcliffe or Antje Forbrich.