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June 2018

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Appeals processes are an important part of the world of tax, but are complex and often poorly understood. This quarter we thought we’d shine a light on this area by inviting Gill Hunter to answer a few questions. Gill sits on the judgment panel for First Tier Tax Tribunals in the UK, which are the UK’s first point of legal appeal against official actions or demands.

What do you see as the key role of a tribunal?

The key role of the First-tier Tax Tribunal is to hear appeals against decisions by HM Revenue and Customs (HMRC), Border Force and the National Crime Agency (NCA).  The tribunal is independent of government and will listen to both sides of the argument before making a decision. Hearings are governed by The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 and the overriding objective is to deal with cases fairly and justly and that is what we try to do so that both parties feel they have had a fair hearing at the end of the process.

Do you normally find in favour of taxpayers or the authorities?

I’m sure there are statistics on case outcomes somewhere but I don’t know the answer.  I’m sure some people must think we’ve made up our minds one way or another before we hear the case but that just isn’t so. Sometimes Appellants arrive at the Tribunal for their hearing believing that we are part of HMRC so we explain at the very beginning who we are and that we are completely independent. The First-tier Tribunal is a court of first instance so our responsibility is to find the facts of the case. Our decision is then made on the basis of the law as applied to these facts. Every case is decided on its own merits.

Do you see any patterns or trends in the cases tribunals are hearing?

There are always a high number of appeals against VAT penalties and default surcharges (these are the UK penalties for late return filings and payments -Ed) and for the last few years Missing Trader Intra-Community (MTIC) Fraud cases, involving mobile phones have produced hard-fought battles between HMRC and Appellants with large amounts of VAT at stake.  These have slowed to a trickle though variants of the scheme can still be seen from time to time involving goods other than mobile phones.

What is the most challenging case you have heard?

My background in VAT in the early days, over 30 years ago, was in VAT fraud investigation so I have been allocated a number of MTIC cases.  These are challenging partly because they can take several weeks to hear, with many bundles of documents to refer to and witnesses to hear from, from both sides, HMRC and the appellant.

For HMRC to be successful in defending an appeal against their decision to disallow input tax in an MTIC case, they have to prove that the appellant ‘knew or should have known’ that the transactions on which input tax has been denied were connected to a fraudulent tax loss somewhere else in the chain of transactions.  They have to prove this to the civil standard, ‘on a balance of probabilities’ ie that it was more likely than not.  Quite rightly this is a challenge and usually involves HMRC’s counsel cross-examining the Appellant’s witness closely about the business and the transactions at issue.

This proved too much for the director of one Appellant company who was taken ill in the early stages of the hearing but requested that the appeal be adjourned until he was well enough to attend. As the case had been listed to continue for several weeks, we adjourned to give the witness time to recover, but after a few weeks, we concluded that the illness was caused in part by the stress of the case and that this would not be eased no matter how long an adjournment we granted.  In the end, we decided it was in the interest of justice that we proceed with the case in the director’s absence. That was not an easy decision to make and the Appellant, perhaps not surprisingly, appealed our decision to the Upper Tribunal, where our decision was upheld.

Is the tribunal system adequately accessible to small taxpayers?

That’s a tough question for me to answer as I’m not involved in the administration of the appeal process; only preparing myself for the hearing, hearing the case and making the decision on the facts, so I can’t say with any certainty.  What I can say though is that any of us could find ourselves disagreeing with a decision of HMRC on our tax affairs and, if we were unable to resolve the dispute with them directly, the First-tier Tax Tribunal might be our only recourse and if it were me, I would take it.

Keeping in mind the overriding objective, i.e. the requirement to deal with cases fairly and justly including avoiding unnecessary formality as well as ensuring,  so far as practicable, that the parties are able to participate fully in the proceedings means that, in my experience, where there is an unrepresented appellant, the judge, and member and, where HMRC has a legal representative, they too provide as much assistance as possible to ensure the appellant receives a fair hearing.

What would be your advice for a taxpayer considering an appeal to a tribunal?

Ensure you have exhausted all other avenues to resolve the dispute but then don’t hesitate to proceed to Tribunal.  If you are representing yourself, make sure you are prepared. Nobody knows your business like you do so be confident in your knowledge.  Of course, it can be stressful appearing in any court setting, however informal we try to make it, but the Tribunal will try to help you. Remember, its job is to find the facts and then make a decision based on the relevant law. That is what it will be trying to do.

 

An HMRC barrister has told a tax tribunal that Aria PC’s managing director “must have known” that 11 disputed deals his company made a decade ago have a “connection to fraud”.

Reseller Aria PC, has been accused by HM Revenue and Customs, of playing a key part in a missing trader intra-community fraud (MTIC fraud). In 2006 the company struck a deal to sell Intel Computer Processors and TFT monitors and reclaim the VAT on them from HMRC. Eleven of those deals were traced by the taxman to a tax loss.

HMRC are alleging that Aria PC (or ATL as they registered) knew these deals were part of a fraudulent scheme. In 2016, specialist tax court, Tax and Chancery Chamber of the First-Tier Tribunal (FTT) ruled against Aria PC. They found that ATL’s managing director, Aria Taheri “knew or ought to have known” about the fraud because he oversaw each of the deals. These series of sales ended up depriving HMRC of over £758,000.

Aria PC used MSN Messenger to advertise its wares to its trade contacts, using a spreadsheet to collate offers and work out a suitable markup. In two of the deals, the goods were released “without payment having been received” to which Frank Harasiwka, ATL’s finance man, could provide no explanation. It was also claimed that Taheri “was unaware that goods had been released to the customer prior to receiving full payment”.

The taxman initially ruled that Aria PC needed to produce an extra £313,000 to cover the company’s own VAT bill, with the Tribunal upholding that. ATL appealed against the lower tier Tribunal’s decision and a three-day hearing took place last week in the Upper Tribunal.

Barrister for HMRC, Janes Puzey, told the tribunal “In period 07/06 the Appellant entered 11 wholesale transactions which lifted its quarterly turnover to the unprecedented level of £9.9m, £2m higher than the previous highest figure,” in his written submissions. He went on to further state “Those 11 wholesale deals accounted for 50 percent of its turnover in 07/06 and 25 percent of its profit.”

Evidence given during the appeal stated the deals were said to have been negotiated by Harasiwka and Eddie McFadden, ATL’s purchasing manager. In his closing speech to Mr. Justice Roth and Tribunal Judge Richards, Puzey accepted that Taheri “had little or no involvement in the deals”. He did, however, question why Harasiwka and McFadden “gave the impression of knowing little about the details of the deals while claiming responsibility for them”.

Both sides provided conflicting arguments, Mr. Justice Roth commented on the final day “As regards the customers, it is the sort of trading where one can fairly say and infer you expect negotiation… someone got involved in the details. And Mr. Taheri said it was Mr. McFadden and the tribunal is saying here that Mr. McFadden gave the impression in his evidence that he didn’t know much about the detail”.

Mr. Justice Roth also said, “We will obviously take some time to consider our decision.” Judgments in Upper Tribunal cases usually take months to be published.

The UK will remain in the EU VAT regime until the end of the 19-month Brexit transition period, as confirmed by The European Commission and UK Brexit negotiators. Brexit is currently scheduled for 29 March 2019, however, the UK will not exit the EU VAT system until 31 December 2020. During this time, the UK will have to accept rule changes and will still be subject to rulings of the European Court of Justice. The late December 2020 date was set by the EU, in order to coincide with the ending of its 5-year budgetary cycle.

The details were provided on 19 June 2018 as part of an update of negotiations under Article 50 TEU, on the UK’s withdrawal from the EU.

Cooperation of UK HMRC and EU Tax Authorities

Other areas of cooperation between the UK’s HMRC and EU tax authorities will also be extended:

  • Cooperation on tax fraud will continue until December 2024
  • The collection and application of duties for goods moved prior to December 2020
  • Until December 2025 there will be mutual assistance on the collection of taxes due prior to December 2020
  • Access to UK VAT registration status on VIES until December 2024.

Once the UK leaves the EU VAT regime at the end of 2020, it is estimated that 132,000 UK and many more EU companies that trade with the UK, will lose many VAT reporting simplifications. These companies may also face import VAT bills for the first time on goods sold cross-border.

Implications for UK Businesses

  • Importers face a UK 20% VAT bill and cash flow recovery admin on all their goods entering the UK
  • 27,000 small businesses could face potential £720m VAT compliance costs, to continue to sell online after the loss of the EU distance selling threshold relief
  • Unrecoverable custom tariffs of 4% on average for importers of goods into the UK from the EU
  • UK sellers of digital services (streaming media, apps and ebooks) lose their right to the EU MOSS single VAT registration and filing facility
  • UK exporters of goods to the EU will have to appoint special tax representatives for tax reporting in 19 of the 27 EU states.

What does leaving the EU VAT regime mean for international traders?

Once out of the EU, the UK will become a ‘third country’ for VAT trading purposes. This will have a huge impact on importers and exporters, including a number of significant implications.

Firstly, there will be an obligation for small e-commerce companies to register VAT immediately in any EU country where they are selling, due to the loss of the EU distance selling threshold simplification.

Secondly, a 20% UK import VAT bill will be introduced on all goods coming in from the EU. However, this will be recoverable.

Finally, an average of 4% non-recoverable tariff costs will be introduced on all imports. UK companies that export to the EU, of which there are approximately 132,000, will face the same profit-margin hit.

The commerce industry is becoming increasingly vocal (through the CBI and Chambers of Commerce) about the need to end the uncertainty of Brexit becoming the next financial crisis since 2008.

New Rules for Digital Sellers in the US…

Change is in the offing for sellers of digital downloads into the USA. Many US states levy sales taxes on digital products such as software, videos, and games. Some have sought to implement an equivalent of the EU VOES system and force out-of-state retailers selling downloads into the state to register as sales taxpayers. Up until now, these efforts have failed due to the protection retailers could claim from a 1992 US Supreme Court case, Quill Corporation v North Dakota. That case found that a retailer with no presence in a state other than reliance on public postal systems for delivery of goods was not locally registrable. However, the case stemmed from a pre-internet age and its degree of applicability to modern business models has been somewhat doubted.

Things have now been clarified in the new case, South Dakota v Wayfair Inc North Dakota’s Southern cousins enacted a law creating an “economic nexus”, or taxable presence, once sales into the state exceed USD 100,000 or 200 transactions. On 21 June, the Supreme Court has upheld this law as valid

This case could potentially open a floodgate for US states to tax international digital services. Although both the above cases involved sales between US states, the principle applies equally to foreign vendors and the USA’s tax treaties do not afford any protection against state-level sales taxes. States including Alabama, Massachusetts, Tennessee, and Washington have already implemented laws introducing the economic nexus concept.

We would recommend that any digital retailer selling downloads to the US reviews the location and volume of its sales accordingly.

And in Latin America….

Colombia and Argentina have introduced VAT registration for digital sellers selling into those countries, as of 1 July and 1 April and respectively.

Hungary: Real-Time Invoice Reporting

As of 1 July, Hungarian taxpayers are required to report larger invoices to the authorities automatically in real time. The threshold for reporting is a VAT amount of greater than HUF 100,000 (approximately EUR 300/USD 350/GBP 270) for invoices generated on a computer system (handwritten ones are also covered but with slightly delayed reporting). Reports must be made in the required XML format without human intervention, so this poses a new systems and IT challenge to Hungarian taxpayers.

Poland: Split VAT Payments

Also from 1 July, Poland has introduced a split payment scheme whereby VAT registered suppliers must maintain separate VAT and general bank accounts and a customer can choose to pay the VAT separately. The VAT account is controlled by the bank so that it can only be used for certain things such as paying VAT to the authorities. The incentive for the customer to make the split is that if it does so it will be protected for any inquiries in the event of fraud being detected in the supply chain. Taxpayers who “clear down” their VAT accounts and pay the VAT authorities early can claim a small discount on the amount payable.

Although the system is currently voluntary this, especially taken in conjunction with other countries’ initiatives in real-time invoice reporting, is clearly a step on the road toward a future VAT world a few years hence where the norm will be linkage of the authorities directly into supply chains with real-time VAT reporting and payment. It is notable that other countries such as the UK are following Poland’s lead and beginning discussions on implementing split payment regimes.

Colombia VAT on e-services July 2018

Colombia has imposed VAT on electronic services to their consumers by non-resident providers, which will come into effect on 1 July 2018.

The national tax and customs authority, DIAN (Dirección de Impuestos y Aduanas Nacionales) requires foreign providers to VAT register. DIAN also require the reporting of any income from digital services. Any service provided to a consumer must have its tax residence, domicile and permanent establishment in the country. This involves a simplified registration and filing process, completed online to gain a unique TIN (tax identification number) for the supplier. VAT returns are due bi-monthly in Colombia.

The Netherlands increasing reduced VAT rate to 9%

October 2017 saw the incoming of a coalition government in The Netherlands, where new potential tax plans involved talk of increasing reduced VAT rate of 6% to 9%. The estimated revenues that this increase will generate, will be used amongst other things to finance the proposed reduction of income tax.

Coming into effect from 1 January 2019, the Dutch reduced VAT rate will apply to the following:

  • Food and drinks in shops
  • Medicines, bandages and other items intended for medical use
  • Books
  • Flowers, plants and arboricultural products
  • Sport facilities
  • Bicycles, footwear and clothing repair
  • Services of hairdressers
  • Transport of people
  • Accommodation in hotels and campsites
  • Food and drinks in restaurants
  • Admission to circuses, zoos, public museums, musical performances, theatres, cinemas, sports events and amusement parks
  • The cleaning of residences

Hungary raises VAT registration threshold

The country’s VAT registration threshold is set to raise from €35,000 to €48,000 per annum, from 1 January 2019.

This registration threshold will only apply to resident companies, as non-resident companies must immediately VAT register if they are undertaking taxable sales in Hungary.

The Ministry for National Economy in Hungary announced plans to increase VAT exemption threshold for small businesses to HUF 12 million in annual turnover. Hungary’s VAT rules state that all businesses are generally required to register. For those with an annual turnover below the threshold, applications may be made for exemption status. Once exemption status is granted, the business will not have to charge VAT on its supplies or recover input VAT on purchases and is generally not subject to VAT return requirements.

However, this is still subject to The European Commission’s approval.

Angola introduces 14% VAT Jan 2019

Angola is set to replace its existing 10% Consumption Tax regime with a 14% VAT system from 1 January 2019. Angola is the last country in the Southern African Development Community to introduce VAT. Until the start of 2021, VAT will be mandatory for large taxpayers and only voluntary for small taxpayers but will become compulsory for all from January 2021.

More goods and services will be held liable to VAT than the existing Consumption Tax. No formal VAT code or implementation guidance has been published at present.

Angola is seeking to broaden its revenue sources and become less dependent on volatile oil duty revenues since the country’s debt level increased following the 2014 oil price collapse. Like the Arab Gulf States, this has led the country to introduce VAT as a reliable source of state income.

Croatia VAT rate to drop by 1%

In a statement made by The Croatian Prime Minister, Andrej Plenkovic, the VAT percentage is set to drop by 1%. At a congress of Croatian export business, Plenkovic reiterated his government’s measure to decrease VAT from 25% to 24%.

The Prime Minister also stated that lowering the rate of VAT will be part of a range of measures “It will be part of measures which won’t endanger the budget’s revenue side. On the contrary, we believe that the combination of various measures will facilitate better revenues, reducing the fiscal pressure on both taxpayers and enterprises” hoping to make Croatian exporters more competitive.

Despite the drop, set to be in force by 2019, Croatia will still have one of the highest VAT rates in the world. Some of Europe’s main economies have lower VAT rates than Croatia, UK and France both at 20% and Germany at 19%.