VAT Connect – June 2016
VAT Implications of Leaving the EU
Following the decision to leave the EU where does that leave VAT, and what might it mean for businesses?
Without knowing for certain what the outcome of this decision will be (as The House of Commons Briefing Paper Tax after the EU Referendum confirms), the UK’s exit from the EU could have a significant impact on businesses that buy and sell goods and services with other Member States. Of course, the UK may still successfully negotiate terms to join the European Economic Area agreement (which currently includes the existing 28 member states, Norway, Iceland and Lichtenstein), in which case the UK will continue to have access to the single market without being a member of the EU. Here are some of the issues UK businesses may have to consider as a non-EU country.
UK VAT Returns
Boxes 2, 8 and 9 will no longer be required on your UK VAT return, and UK businesses will no longer be required to complete EC Sales List or Instrastat forms.
Goods sold to EU Businesses
Cross-border sales of goods sold Business to Business (B2B) are VAT free on provision of a valid EU VAT number. Once the UK officially leaves the EU, and subject to any terms agreed under the EEA, these supplies will be imports and exports. Currently zero-rated with proof that the goods have moved, the supplies from the UK they will be subject to the import VAT in the country of destination. The costs involved in the Customs procedures are expected to hit businesses hardest with freight forwarders and couriers charging more for the increased paperwork required at the border.
Distance Selling Thresholds
The current distance selling thresholds in each EU country will go. These thresholds allowed relief from UK businesses having to register for VAT in every member state where they sold goods to consumers (private individuals). Post exit, UK businesses will treat their sales to the EU as zero-rated exports, although they will have the additional cost of complying with Customs regulations when importing goods.
VAT Recovery in other Member States
Some UK businesses incur VAT in other Member States (e.g. trade fairs or conferences), and can currently claim VAT refunds via a UK online system from that Member State. The same entitlement to recover EU VAT by non-EU countries is also available, although the non-EU process is not administered online, and UK businesses are required to submit a paper claim which is far less efficient and leads to delayed repayments.
Electronically supplied services from the EU, such as software licenses, are normally subject to the reverse charge through the buyer’s UK VAT return. Post exit, VAT will be charged at the EU local rate (e.g. 23% in Ireland). This will remain a cost to the business unless they endure the laborious reclaim task noted above.
Whichever way the VAT landscape changes in the next few years, businesses and VAT advisors will need to keep in touch with the process in order to prepare for the changes ahead. If you have any questions before then, please get in touch.
Friends of the Earth
The well-established charity Friends of the Earth Trust has been blocked from claiming £1m VAT on training their street fundraisers.
The Trust had previously recovered VAT on training the fundraisers training as input tax on the basis that there was a direct link between their fundraisers successfully signing up passers-by to a £3 per month membership and the taxable magazine Earthmatters which the member then received.
During the hearing, the First Tier Tribunal reviewed the Trust’s literature and facts surrounding the street fundraisers training and tactics, and determined that the monthly £3 paid by members was a ‘donation’ and that the magazine and other benefits (such as shop discounts) were ‘complimentary’. As such, the VAT incurred on the street fundraisers training was consumed for the purpose of the Trust receiving non-business income (donations), and could not be recovered as input tax.
VAT Groups and the Acquisition of Going Concerns
HMRC confirms that a VAT-free transfer of a going concern can apply when acquired into a VAT group.
Revenue & Customs Brief 11/2016 confirms that a going concern acquired into a VAT group to be used in making supplies to other members of the VAT group, can be treated as a VAT-free transfer of a going concern, or (‘TOGC’), for VAT purposes.
Normally, VAT would be chargeable at the standard-rate on the sale of a business (assets, goodwill etc.) transferred to someone as a going concern. But subject to certain conditions within the TOGC rules (including the intention to use the assets for the same business activity of the transferor), a TOGC can be ignored for VAT purposes. This means the seller does not need to account for VAT on the sale, and the acquirer has no input tax to recover.
HMRC’s clarification follows the case of Intelligent Managed Services Ltd (IMS), in which HMRC had refused to accept that there was a TOGC. IMS had been acquired by one member of a VAT group to supply another member of the VAT group who ultimately made supplies outside of the VAT group. As supplies between VAT group members are disregarded for VAT purposes, HMRC considered that the transferor’s business had effectively ceased at the point of transfer. The Upper Tribunal determined that there was nothing in the VAT grouping rules that prevented TOGC’s.
The colourful world of VAT
Some of you may have seen the more adult-themed versions of colouring books for adults, but did you know that they are subject to VAT whilst the children’s versions are not?
Books and other printed matter are zero-rated; this includes “children’s picture books and painting books”. In the last couple of years, colouring books aimed at adults have been introduced, and HMRC expect these adult versions to be subject to 20% VAT.
It is understood that the Government are now writing to publishers reiterating that VAT is due on their adult dot-to-dot and colouring-in titles. The publishers however, consider that they still fall within the zero-rating of books in general, and are due to meet with HMRC soon to seek to resolve the issue.
If any of these articles raise further questions for you, please contact any member of our VAT team.
Alan Davis – VAT Partner & Head of Tax