Uncertainty remains over whether a trade deal can be agreed with the EU ahead of Brexit. The UK government has therefore taken steps to prepare for a ‘no deal’ scenario and, as part of this process, HM Revenue & Customs ("HMRC") has issued a raft of VAT and customs guidance including a letter reminding UK businesses that in order to trade in goods with the EU, they will need to:
- Obtain an Economic Operator Registration and Identification number which will be required to enable imports and exports of goods to and from the EU after 29 March 2019;
- Consider if they are able to make customs declarations to HMRC themselves (in which case they will require software that interacts with HMRC’s systems) or whether they need to appoint an agent to do this for them;
- Contact their transport company and establish if they will require additional information relating to safety and security declarations.
For businesses already trading in goods with non-EU countries, the above issues may already be familiar. However, if in the past you have only traded in goods with other EU countries, you will need to prepare in advance if a ‘no deal’ Brexit becomes a reality.
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Making Tax Digital for VAT
HMRC has already advised that the Making Tax Digital implementation date for certain VAT-registered businesses (with a taxable turnover above the VAT registration threshold) can be delayed from 1 April 2019 to 1 October 2019. Businesses that can take advantage of this later date include:
- Not-for-profit organisations that are not set up as a company
- VAT divisions
- VAT groups
- Public sector entities required to provide additional information on their VAT return (such as government departments or NHS trusts)
- Local authorities
- Public corporations
- Traders based overseas
- Those required to make payments on account
- Annual accounting scheme user
HMRC has now stated that all businesses qualifying for the deferral should have received a letter from HMRC confirming this. Any business that thinks it should qualify for the deferral but has not yet received such a letter should contact HMRC.
VAT exemption for domestic service charges - correct application of the Extra Statutory Concession
HMRC has clarified how the concession should be applied from 1 November 2018 and this significantly limits the VAT exemption for services provided by property managing agents.
The exemption applies only where services provided are directly linked to the supply of land (i.e. where a landlord has granted a lease that includes an obligation for the leaseholder or tenant to pay mandatory service charges. For freeholders, there is no direct link to a supply of land, so the VAT exemption cannot normally apply. However, the concession extends the exemption to freeholders where they receive the same common services as leaseholders on the same estate. Therefore, a landlord contractually obliged to provide services to all occupants of a common estate may use the concession to treat these supplies to freeholders and leaseholders as exempt from VAT.
However, where the landlord has engaged a third-party property management company to fulfil their legal obligations to the occupants of an estate, the managing agent’s services are supplied to the landlord and not the tenants (irrespective of whether they are a leaseholder or freeholder). As such, they are not exempt and were never intended to be covered by the concession. Specifically, the management company cannot use the concession to:
- Treat their supplies as if made to the occupants rather than the landlord;
- Exempt recharges of costs to the landlord including staff and personnel cost.
Property management companies, landlords and any other businesses offering similar services connected with residential dwellings, will need to adjust their VAT procedures from 1 November 2018. This could mean an increase in the level of irrecoverable VAT being incurred by the landlord which will almost certainly lead to higher services charges to the occupiers.
Changes to the VAT treatment of retained deposits
Following the announcement in the Autumn Budget 2018, HMRC released the Revenue and Customs Brief 13 (2018) which confirms their new policy from 1 March 2019 where VAT remains payable on all retained payments for services and goods that are not supplied. Where suppliers become aware that a customer has decided not to take up the goods or services after paying for them, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments. The same principles apply where credit card details are taken. VAT is due when payment is taken but, in the event that the supply is not fulfilled, the supplier cannot reclaim the VAT unless a refund is made to the customer.
Reverse charge in the construction industry
With effect from 1 October 2019 a VAT reverse charge on certain B2B building and construction services will come into force. Similar to the domestic reverse charge on mobile phones, computer chips and telecoms services, this is an anti-fraud measure to protect a loss of VAT.
Instead of the supplier charging and accounting for the output tax, the obligation to account for VAT falls to the recipient/customer. The services affected are those with payments subject to reporting under the Construction Industry Scheme ("CIS") as well as on goods supplied as part of these services.
The reverse charge will apply to both standard-rated and reduced-rated construction services. Excluded from the reverse charge are construction services where the customer is the ‘end user’, services between connected parties or between landlord and tenant. End users are recipients that have to report their payments for specified supplies through CIS but do not make supplies of such services themselves. The ‘deemed contractor’ provisions under the CIS do not apply for VAT.
Businesses in the construction industry should familiarise themselves with the changes and prepare to update their processes for the 1 October implementation date.
Policy change in the VAT treatment of pension fund management services provided by insurers
The policy of allowing insurers to treat all pension fund management services as exempt from VAT is coming to an end with effect from 1 April 2019.
By way of background, HMRC’s policy has previously allowed all pension fund management services provided by regulated insurance companies to be exempt from VAT. This treatment arises from the UK’s original interpretation that the insurance exemption included all the insurer’s regulated insurance activities, including the management of pension funds.
However, the Court of Justice of the European Union decided some years ago that this interpretation was too wide an application of the VAT exemption. However, due to ongoing litigation around fund management services and the EU Commission’s review of VAT on financial services, UK policy was not changed immediately. However, with effect from 1 April 2019, insurers will only be able to exempt their fund management services to the extent that they relate to special investment funds.
Looking ahead: The EU Commission agrees on four ‘quick fixes’ to apply from 1 January 2020
The following four short-term quick fixes were agreed to help resolve practical problems in the VAT system until the more expansive ‘definitive EU VAT system’ replaces the current VAT rules which have been in place since 1993.
- The proposals provide for a simplified and uniform treatment for "call-off stock" arrangements, where a vendor transfers stock to a warehouse at the disposal of a known acquirer in another member state.
- To benefit from the zero rating on the intra-EU supply of goods, the VAT identification number of the customer will become a legal requirement for all EU member states.
- To enhance legal certainty, the proposals establish uniform criteria for determining the VAT treatment of chain transactions.
- A common framework is proposed for the documentary evidence required to claim zero rating for intra-EU supplies.
These changes will apply to UK businesses after 29 March 2019 under the proposed Brexit transitional period expected to run until 31 December 2020.
Future European VAT rules for e-commerce
The EU Commission has published proposals for the one-stop-shop to be extended to online sales of goods to come into force in 2021. This will be an electronic portal similar to the mini-one-stop shop which already exists for electronically supplied services. It will avoid the need for B2C suppliers having to register for VAT in each member state under the current distance selling rules.
Again, the effect of this change for UK suppliers will be dependent on the Brexit trade agreement with the EU.
The proposals also clarify when online market places will become responsible for ensuring that VAT is collected on sales of goods by non-EU companies to EU consumers when these sales take place on their platforms. This should ensure that goods sold from storage facilities within the EU will have the correct amount of VAT collected, even when the goods are technically being sold by non-EU businesses.
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.