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On 1 January 2019 Bahrain became the third of the six GCC countries to introduce VAT, following Saudi Arabia and the United Arab Emirates one year earlier.  As per the terms of the Unified VAT Agreement signed by all the GCC States in 2016 the rate of VAT is 5%.

In a departure from the way in which KSA and UAE introduced VAT however, Bahrain limited the January 2019 implementation of 5% VAT to large tax payers, meaning that ahead of 1 January 2019 only businesses with an annual turnover of approximately 5 million Bahraini Dinars (BD) were required to register, by 20 Dec 2018.

Rolling forwards, from 1 July 2019 businesses with an annual turnover between BD 500k and BD 5million will be required to register and from 1 January 2020 businesses with an annual turnover between BD 37.5k and BD 500k will be required to register.

As with KSA and UAE, non-resident businesses have no threshold and must register immediately and voluntary registrations are permitted.

Zero-rating is available for, amongst others, the construction of new buildings, education and healthcare services, transport services, as well as oil and gas and derivatives, pearls and precious stones and, in a further departure from KSA and UAE, for basic food items.   The sale and lease of real estate as well as certain financial services and life insurance/reinsurance are exempt from VAT.

Businesses need to be ready for the Making Tax Digital initiative and many need to handle their records digitally from the 1st April. Over 2000 businesses are signing up for MTD each day, but at the beginning of March almost 1.2 million businesses only had one month to go to get signed up and using the software.

Most UK VAT registered businesses with more than £85k p.a. turnover must subscribe to the new “Making Tax Digital” (“MTD”) regime for VAT return submissions falling due from 1 April 2019. This means they must have a computer system allowing them to:

·        Keep records in a digital form;

·        Create a VAT return from the digital records, and

·        Submit this information digitally (no more manually typed submissions will be possible

The new service gives businesses a more integrated approach to tax. For businesses over the VAT threshold, they will need to be to digitally submit their records and submit VAT returns using MTD-compatible software.  The scheme is designed to give businesses more control over their finances, so that they can spend more time on their growth and job creation. It also reduces the time they spend on admin and makes it easier to get tax right. It’s part of the government’s #Smartergov campaign, which was launched to drive innovation through the public sector.

Companies Delaying Signing Up

There have been some concerns that companies were putting it off due to the high cost of software, a belief that the deadline would be moved again or a difficulty in understanding the new system. Theresa Middleton, Director of the Making Tax Digital for Business Programme, commented that there are many options for companies.

“There are over 160 software products for businesses to choose from with a range of prices, including some that are free, offering different levels of functionality to suit every business. It’s time to get on board and join the thousands of businesses already experiencing the benefits of MTD.”

Most accountants will have been aware of Making Tax digital for a while and can advise businesses of how and when they need to make changes. Any software that companies already use will need to be MTD-compatible and authorised when they sign up.  If you don’t currently have software or an accountant to advise, businesses are able to access information and guides online.

Snagging Period and Deferment

HMRC has also made companies aware that they are aware of the snagging period usually needed for implementing new systems. For this reason, during the first year it will not be too harsh when it comes to digital record keeping and forcing penalties if companies are doing their best to comply with the law.  This doesn’t mean, however, that there will be no penalties at all.

There is also deferment until 1 October for some VAT taxpayers, such as trusts, ‘not for profit’ organisations that are not set up as a company, VAT divisions, VAT groups, local authorities, public corporations, traders based overseas, those required to make payments on account and annual accounting scheme users.

Any business that does not have an accounting system configured to make the automated submissions to HMRC, or that manually manipulates data outside its system (for instance in Excel) before submission will need to obtain “bridging software” in order to make submissions in form required by HMRC.

Provisions to force foreign suppliers of B2C digital downloads to register for and pay local  VAT/GST continue to spread to new countries across the world. The latest jurisdiction to introduce this is the Canadian province of Quebec. Foreign suppliers of digital services above a value of CAD 30,000 p.a. will become registrable for Quebec Sales Tax from 1 September 2019. Canadian businesses from  other provinces  have been registrable since 1 January. The rate is 9.975%.

Germany has been referred to the Court of Justice of the EU for rejecting certain applications for VAT refunds coming from businesses in other member states.

The incidents have occurred when they believed the information provided on the VAT refund is insufficient. Instead of asking for additional information on the nature of the goods and services, it has come to a decision anyway.

VAT refunds were denied even though they fulfil the substantive requirements. It violates the right to a VAT refund established under the EU rules* and the Refund directive**.

The decision was made by the European Commission in January following a review as Germany has failed to bring its legislation in line with the EU law.

*VAT Directive, Council Directive 2006/112/EC

**Refund Directive, Council Directive 2008/9/EC).

The Chinese authorities have confirmed they will reduce the rate of VAT on the manufacturing industry from the current 16% down to 13% as of 1 April 2019.

For the transportation and construction industries, VAT will be reduced to 9% from 10% to help reduce tax burdens on the manufacturing sector and small businesses. The 6% value added tax for other industries will remain unchanged.

Two recent ECJ cases that were joined into one hearing continue the trend of the last few years of rolling back the German authorities’ one-time insistence on pedantically precise details on VAT invoices.

The cases concern addresses on VAT invoices, and whether they need to be precisely the address at which the supplier carried out that economic activity, or any reasonable contact address. The finding was the latter, and this hopefully marks the end of the era of VAT recovery in Germany being blocked on pedantic, unsubstantive grounds.

The CJEU (Court of Justice of the European Union) judgement in Volkswagen AG (C-533/16) confirmed that when VAT is charged by a supplier to a customer – several years after the supply took place – Member States cannot deny a VAT refund to that customer solely based on the expiry of a time limit running from the date of the supply.

In this specific case, Slovakian companies that supplied car light moulds to Volkswagen did not charge VAT to the German automotive manufacturer, as they had incorrectly considered their supplies to be VAT exempt. Subsequently, the suppliers invoiced VAT on the supplies for a number of years, collected this VAT from VW, and paid it to the Slovakian tax authorities.

Volkswagen was not established in Slovakia, therefore, submitted an 8th Directive claim for this VAT. This claim is for traders that are not VAT registered, or established in a Member State, and are seeking to recover VAT. The Slovakian tax authorities had a five-year time limit for VAT recovery, from the date of the initial supply. Therefore, Volkswagen’s claims for VAT recovery on invoices relating to supplies, which took place more than 5 years earlier, was disallowed.

Nevertheless, the CJEU found that when a taxpayer has not been invoiced and has not paid VAT arising on a supply, VAT recovery cannot be denied. This is simply due to a time limit from the date of supply, which had expired before the refund claim was submitted.

Do note the judgment, in this case, was based on a specific pattern. Businesses which incur foreign VAT should pay close attention to the relevant time limits for submitting refund claims.

Poland: abolition of VAT Returns

In another “sign of things to come” Poland has become the first European country to announce the abolition of VAT returns. As of 1 July 2019, VAT returns will no longer be required, but will be replaced with a submission of a data file on all transactions in a standard format. The file – called JPK – is an updated version of the JPK file that Polish taxpayers must file already in addition to VAT returns.

Italy: 2019 rules for E-invoicing

The Italian 2017 Budget introduced mandatory electronic real-time invoicing for domestic transactions taking place between private businesses with effect from 1 January 2019. From this date, invoices must be issued using the Agenzia delle Entrate e-invoicing platform, Sistema di Intercambio or SdI. The use of the platform will allow the tax authorities to monitor all domestic VAT transactions in real time; hence, the old “Spesometro” periodic data file submissions become redundant and will be abolished from the same date.

Unlike in Poland, where data submissions are seen as rendering VAT returns obsolete, in Italy, the obligation to submit VAT returns will remain. This is a monthly data file submission declaration required from resident businesses only of all transactions concerning goods and services to be submitted electronically, unless these transactions are recorded via electronic invoicing.

If you would like to read further, here is a link to Agenzia delle Entrate’s guidance (in Italian).

https://www.agenziaentrate.gov.it/wps/wcm/connect/a8316033-6124-4667-99d8-ed143dc72c20/Provvedimento_30042018+.pdf?MOD=AJPERES&CACHEID=a8316033-6124-4667-99d8-ed143dc72c20

Should you require any assistance or further information, please contact teodora.vallone@essentiaglobalservices.com

VAT Introduction In Bahrain

Bahrain will be introducing VAT from 1 January 2019. The VAT law, which was passed by the Bahraini parliament in October, is closely modelled on the systems in the EU and in its Gulf Co-operation Council neighbours of Saudi Arabia and the UAE. The standard rate is 5% with zero rates or exemptions for a range of supplies including medicines, education, oil and oil derivatives, financial services and international transport.

The law is available in Arabic here: http://www.legalaffairs.gov.bh/146342.aspx?cms=q8FmFJgiscJUAh5wTFxPQnjc67hw%2bcd53dCDU8XkwhyDqZn9xoYKj8m0dXr6j6QBp%2bA0lBwNtbkk%2fKrexGjWJQ%3d%3d#.W7yYTHkUm3B

We are preparing an English translation and cross-referenced index of the law. If you would like a copy when it is ready, please contact william.morrison@essentiaglobalservices.com

Essentia and Quipsound will be delivering a webinar on Bahraini VAT introduction in Q1 2019 (date TBC). If you would like to attend, please email r.dunk@quipsound.com

This month, HMRC launched a pilot for its new online VAT service, Making Tax Digital. The Making Tax Digital (MTD) scheme will require digital transactional recording and filing of UK VAT returns from 1st April 2019.

From April, Making Tax Digital will mean that around 1 million businesses who are registered for VAT will need to keep their VAT records digitally and file their domestic returns using software that is compatible with MTD. However, this will only be for businesses that have a taxable turnover of £85,000 or over.

Theresa Middleton, Director for Making Tax Digital for Business, said that MTD will help businesses “manage their business income and expenses and getting their tax right builds on this momentum and will also help them get more control over their finances.” With so many businesses using digital tools, Mel Stride MP, Financial Secretary to the Treasury commented that it was “a major step towards bringing VAT into the 21st century.”

Users of UK versions of reputable accounting software packages will obtain updates from their suppliers to achieve this, but the new requirements may be an issue for businesses which do the final stages of their VAT accounting in Excel rather than within the system. In response to this problem there has been a delay until 1 October 2019 for charities, VAT groups, public sector entities, and foreign companies that are VAT registered in the UK, all of which are among the businesses most likely to either be doing bespoke VAT accounting outside their accounting package, or to be using non-UK software versions.

Essentia has developed a bridging tool that allows people who are doing their VAT accounting Excel (or in another medium that can be imported into Excel) to submit digitally from Excel and become fully MTD compliant.

The UK government guide to Making Tax Digital is here: https://www.gov.uk/government/publications/vat-notice-70022-making-tax-digital-for-vat/vat-notice-70022-making-tax-digital-for-vat

If you would like some more details on Essentia’s bridging tool please contact d.tornarides@essentiaglobalservices.com

Until recently, submission of the Certificate of Status document issued by non EU countries and the supporting cover letter that details any additional company information (such as registered business address) had been accepted by HMRC as sufficient proof of the legitimacy of the company requesting the VAT refund.

Over the course of the last few months, claims filed on the UK Tax Office by businesses registered in non EU member countries have been rejected on the basis that the Certificate of Status no longer meets HMRC requirements for a valid certificate which must include ALL of the following criteria:

  • The name, the address and official stamp of the authorising body
  • The company name and address
  • The nature of the company business
  • The company registration number
  • Original document (not a copy)
  • Valid one year from the date of issue

Quipsound have been lobbying HMRC for a review of the changes and the IVA (International VAT Association) and the CIOT (Chartered Institute of Taxation) have also met with senior HMRC leaders in October 2018 to voice their concerns about the un-notified change in requirements.

As it is no longer possible to use Certificates of Status that do not fully meet the above criteria to substantiate 13th Council Directive 86/560/EEC claims on the UK, Quipsound have been working with all bodies involved to find a workable solution. In the immediate term, the IRS have agreed to validate HMRCs form VAT66A which will now be submitted along with the usual 8802 Certificates for any VAT claims submitted to the UK Tax Authority on behalf of US registered companies.

Quipsound are continuing to work with other 13th Council Directive countries on behalf of our global clients to identify an acceptable solution for all parties.