VAT Issues and Opportunities

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VAT Issues and Opportunities

• Presented by Jo Huxtable for the GSCCA
• 15 June 2006

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Background

• VAT originated as a European tax prerequisite
  of joining EC
• Now replicated all over the world
• Isle of Man is within EU for VAT purposes
  (essentially part of UK) and has a special
  arrangement with the UK relating to VAT receipts
• Channel Islands are outside the European Union
  for VAT purposes (but inside for customs duty
  purposes)

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Basic Principles

• VAT is not a tax on profits
• VAT is a tax on turnover
• It is a multi-stage tax borne by the final
  consumer
• Businesses act as tax collectors

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Taxable Supplies

• Under UK VAT legislation, VAT is due where there
  is
• - A taxable supply of goods or services
• - In the UK
• - By a taxable person
• - In the course or furtherance of a business
• Note Supply means anything done for a
  consideration. Consideration is something done
  in return which is capable of being expressed in
  money.

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Rates of VAT

• The following rate of VAT apply to Taxable
  Supplies in the UK
• Standard rate 17.5
• Most goods and services
• Reduced rate 5
• Domestic fuel, residential conversion, childrens
  car seats
• Zero rate - 0
• Food, books, residential property, transport,
  exports
• N.B All taxable supplies give rise to full VAT
  recovery on costs

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Other Supplies

• Outside the scope
• Compensation, salaries, dilapidations
  (contractual obligation to pay the sum), TOGC,
  international services
• Exempt (no VAT recovery)
• Property, Finance and Education
• Deemed supplies
• Gifts of business assets

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Registration

• CI businesses register with Aberdeen Overseas
  Traders Unit
• Compulsory taxable turnover in excess of
  61,000 per annum
• Voluntary to recover input tax on costs e.g.
  property development evidence required
• Exemption e.g. if supplies are all zero-rated
• Group group of companies treated as a single
  taxable person registered in name of a
  representative member
• Deregistration compulsory where cease to make
  taxable supplies, voluntary where prospective
  supplies not to exceed threshold deemed supply
  of all trading stock and goods on hand take place
  on deregistration

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Compulsory Registration

• Current threshold - 61,000
• Two tests
• Historic test if at the end of any month the
  taxable turnover for last 12 months exceeds
  61,000 effective date is from end of month
  following relevant month
• Future prospects test if at any time there are
  reasonable grounds for believing taxable turnover
  will exceed 61,000 in the next 30 days
  effective date is from beginning of 30 day period
• Notification within 30 days of end of relevant
  month
• Penalties for belated notification up to 15 of
  net VAT

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Output Tax

• Due at the time of supply (tax point)
• Value includes customs and excise duties
• SDLT paid on VAT inclusive amount
• Bad debt relief debts gt 6 months old, written
  off in VAT control account to be claimed by
  original supplier only

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Input Tax

• Recoverable if incurred for business purposes and
  evidenced by original valid VAT invoice (or
  equivalent document e.g. C79 for imports)
• Blocked relates to exempt supplies,
  entertainment, private use
• Non recoverable VAT becomes a PL expense or BS
  item
• Pre-registration goods must be still on hand
  services no more than 6 months before date of
  registration
• Documents should be retained for 6 years

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Partial Exemption

• Affects businesses which make both taxable and
  exempt supplies (e.g. banks, insurance companies,
  property funds)
• Not all input tax is recoverable
• A partial exemption method must be applied as a
  means to calculate the recoverable input tax
• Standard method is turnover based
• Non standard (special) methods must be agreed
  in writing with HMRC otherwise may not be valid
• Again, non recoverable element is a PL and/or BS
  issue

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Admin, assessments and appeals

• Self assessed tax
• Returns monthly or quarterly
• Errors - lt2,000 on next return otherwise
  voluntary disclosure required to avoid penalties
• Errors may lead to a VAT assessment
• Appeals to local VAT office or to the VAT
  tribunal within 21 days of assessment
• VAT under assessment may be material to the
  accounts

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International Supplies of Goods

• Place of supply broadly where the goods are
  with special rules for intra EU movements and
  exports
• CI businesses selling or buying goods in the EU
  may have a VAT registration liability
• Intra EU
• Acquisitions and despatches
• EU statistics - ESLs and Intrastats
• Distance sales UK threshold currently 70,000
• Outside EU
• Imports and Exports
• Temporary importation relief

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International Supplies of Services

• Basic rule is the VAT is due where the supplier
  is established there may be more than one
  establishment
• Specific exemptions etc
• - Land/Immovable property where land is
• - Transport services where takes place
• - Live artistic, sporting, cultural and
  exhibition services where performed
• - Intellectual-type services where received
• - Electronic services where received plus use
  and enjoyment

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The Reverse Charge

• Arises from principle of destination
• Payable by the recipient of certain international
  services
• Recipient acts as both supplier and recipient
• Net impact may be nil
• Services provided by a CI company to EU business
  may be liable to the reverse charge in the EU

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Property - Dwellings

• First grant of a major interest (freehold sale or
  21 year lease) by person constructing is
  zero-rated all subsequent supplies are exempt
• Lease less than 21 years - first grant and all
  future supplies exempt
• Construction services may be zero-rated as well
  as building materials incorporated in the
  building when supplied by same person
• Construction services does not include
  architects, surveyors or other consultants
• Similar provisions for listed buildings, RCP and
  RRP

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Property Commercial

• Sale/lease is exempt unless
• - Less than 3 years old compulsorily standard
  rated
• - Option to tax notified and agreed by HMRC in
  writing
• - TOGC (e.g. property rental business)
• - Other specific exemptions (Group 1, Schedule
  9, VAT 1994)
• Issues all potentially relevant to property funds

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Transfer of a going concern (TOGC)

• Mirror transaction transferee steps into
  shoes of transferor
• Outside the scope
• Conditions must be satisfied but it is a matter
  of fact
• Contract terms need to be reviewed - buyer and
  seller may have conflicting needs
• Getting it wrong can give rise to a real VAT cost
• SDLT payable on VAT inclusive amount

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Topical Issues

• Offshore Planning
• Low value consignment relief
• Carousel fraud
• GST in Jersey

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Offshore VAT Planning

• Channel Islands have played an important role in
  many classic VAT structures due to their non EU
  status e.g.
• Boost VAT recovery for financial services
• Supplies of advertising to individuals
• Outsourcing arrangements e.g. for banks
• Telecoms and e commerce
• Yacht structures commercialise purchase to
  obtain VAT paid certificate
• But planning is becoming more difficult due to
• Case law developments passing the substance
  test
• Changes in the law use and enjoyment rules
• Halifax Abuse of rights doctrine may be widely
  applied
• HMRC greater focus on avoidance, new methods
• VAT Disclosure Rules includes hallmarks of
  avoidance

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Low Value Consignment Relief

• EU wide relief applied by most but not all
  countries
• Available where individual items worth less than
  22 (18 in UK) are imported into EU
• Islands have special arrangements between postal
  authorities, HMRC and local Customs
• Potential threat that UK Government could seek to
  withdraw/curtail relief revenue loss 80M
• Meanwhile islands have taken their own steps
• Jersey written policy
• Guernsey published statements
• Unlikely to affect businesses properly
  established on the islands with staff and
  premises

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Carousel Fraud

• Complex web of supplies involving intra EU
  movements of goods such as mobile phone or
  computer ships
• VAT is skimmed off as goods enter a new country
• Costing UK Exchequer 1.1-1.9bn in 2004/5
• EU being consulted to derive a solution
  possibly a reverse charge on the end consumer?

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GST in Jersey

• A key part of Jerseys fiscal strategy
• VAT style tax to be introduced in 2008
• Expected to raise 40-45m
• 3 on most goods and services - 300K
  registration threshold
• Draft GST legislation under consultation
  responses by 20 June
• Heavily drawn from EU system and UK VAT law
• Zero rated Residential property, exports,
  international services
• Exempt Finance, insurance, postal
• Treatment of finance more complex - consultation
  now underway with responses required by 31 August

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Questions?

• Or contact Jo Huxable on
• 01481 703308
• jhuxtable_at_deloitte.co.uk
• Thank you for your attention!

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GSCCA and prepared solely for your information in
connection with the purpose of our work.
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