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Preparation For No Deal Brexit

As of the time of writing (5 November) the UK and EU have still not agreed the terms of Britain’s departure from the EU, scheduled for 29 March 2019. The UK has published a paper to assist businesses with the VAT aspects of a “No Deal” Brexit, should no agreement be reached. This can be accessed here:

https://www.gov.uk/government/publications/vat-for-businesses-if-theres-no-brexit-deal/vat-for-businesses-if-theres-no-brexit-deal

The EU has also prepared a briefing paper on the VAT impact of Brexit for its businesses. This can be accessed here:

https://ec.europa.eu/info/publications/preparing-withdrawal-united-kingdom-european-union-30-march-2019_en

Essentia and Quipsound will be delivering a webinar on Brexit once the shape of the deal becomes clear. If you would like to attend, please email r.dunk@quipsound.com

 

EU VIES System Update

After Brexit, the EU’s VIES system will still be available for UK users to check EU VAT registration numbers, but UK data will no longer be available although access to historical UK VAT registration status on VIES will remain available until December 2024. The UK tax authority, HMRC, has advised that it intends to develop a system that will enable UK VAT registration details to be checked and has written to software developers to seek their views on how this might best be achieved. Developers are invited to contact HMRC to arrange a discussion.

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.

An agreement boosting VAT cooperation and providing a legal framework for the prevention of VAT fraud between the EU and Norway was signed in Sofia, Bulgaria on 6 February 2018. Following the same structure that is currently used between the 28 member states, with the same instruments, this agreement marks the first of its kind with a non-member state that forms part of the European Economic Area.

Norway has a similar VAT system to the EU and this agreement seeks to eliminate weaknesses in the way VAT transaction chains are controlled that can be exploited by fraud schemes.

This spring sees more movement in the ongoing international progression toward automated VAT compliance. Three trends are currently of note:

1. SAF-T: Standardised Digital Record Keeping and Audit.

SAF-T stands for “Standard Audit File – Tax”. It is a standard set of data file requirements published by the OECD, allowing tax authorities to access data in a standard format for the purpose of digital auditing. Several countries already require that VAT taxpayers submit SAF-T files in addition to VAT returns. These are:

  • Austria
  • France
  • Lithuania
  • Luxembourg
  • Poland

They will be joined by Norway on 1 January 2018. We can expect the list to lengthen further. The requirement to submit standardised files has systems and process implications for taxpayers as audits will increasingly focus on this data so it must be right. You can read more about the SAF-T concept here:

http://www.oecd.org/tax/administration/45045602.pdf

And about the technicalities of SAF-T files here:

https://www.oecd.org/tax/administration/45167181.pdf

2. Real-Time Reporting

Since 2017, Spain has required “real-time reporting” of sales and purchase invoices and intra-community transactions from businesses with turnover above EUR 6 million. The system is called SII (“Suministro Inmediato de Información”) and requires reporting data to be submitted within 4 days of transactions that are made. More details about SII can be found here:

https://www.agenciatributaria.es/AEAT.internet/en_gb/Inicio/La_Agencia_Tributaria/Campanas/Suministro_Inmediato_de_Informacion_en_el_IVA__SII_/Suministro_Inmediato_de_Informacion_en_el_IVA__SII_.shtml

From 1 July, Hungary will also implement a new real-time reporting regime for invoices above HUF 100k (about EUR 320/USD 395/GBP 280).

Standard data sets are required for each reporting regime and we expect that more countries will follow suit.

3. Digital Interaction with Tax Authorities

The UK has published guidance on how its initiative for 2019, “Making Tax Digital” will work. VAT registered businesses will be obliged to keep digital records and will need to submit their VAT returns via software compatible with HMRC requirements. This means that businesses will have to review their processes and if necessary update their software in advance of the go-live date of 1 April next year. For more detail on Making Tax Digital see here:

https://www.gov.uk/government/publications/making-tax-digital-changing-the-scope-and-pace-technical-note/making-tax-digital-for-business

Taken together, one can see that these trends will eventually converge at some point in the future in a world where indirect tax is reported real time rather than via periodic returns, is reported in an automated manner, is recorded in standard data formats, and is audited digitally rather than manually. That road will take some years to travel, and in the meantime businesses can expect a string of incremental changes as each trend advances.

A notice to all stakeholders entitled “Withdrawal of the United Kingdom and EU Rules in the Field of Customs and Indirect Taxation” has been published by the European Commission. The notice seeks to examine the implications for Customs and Indirect Taxation when the UK withdraws from the EU and becomes a ‘third country’ on March 30th, 2019.

As expected the notice confirms that goods imported from the UK into the EU and vice-versa, as well as goods in transit, will be treated as importation or exportation of excise goods. Subject to customs formalities and controls, unless there is a transition period stating otherwise, from March 30th, 2019 onwards.

Companies established in the United Kingdom that are carrying out taxable transactions in a Member State of the EU may be required by that Member State to designate a tax representative as the person liable for payment of the VAT in accordance with the VAT Directive.

Taxable persons established in the United Kingdom purchasing goods and services or importing goods subject to VAT in a Member State of the EU who wish to claim a refund of that VAT will no longer be able to file electronically but will instead have to claim in accordance with the previous Council Directive which allows Member States to issue VAT refunds only where there is reciprocity.

A review of VAT refund procedures for businesses located in the European Union has been launched to assess if they are compliant with EU law and Court of Justice of the European Union case law. The review, which began on the 8th March, will run for 8 months and will scrutinise the ease with which businesses are able to recover VAT credits both in their own country and in other EU countries.

The European Commission has identified that a lack of access to a simple and fast VAT refund procedure has a major impact on cash flows (especially for small businesses) and on the competitiveness of those businesses.The tax provisions in each member state will be assessed and non-compliance with the rules could well launch infringement procedures against member states for breaking the rules.

Of particular interest to the study will be the length of time necessary to finalise refund procedures in each country as well as any unwarranted burdens in the system that may create financial risks for business. Currently, there are no uniform arrangements within the EU, with some states refunding on a month by month basis and other states forcing businesses to wait for 21 months before being able to actually submit a claim – and waiting 12 months or longer for the money to be refunded.

The review forms part of the EU Commission’s plan for a single VAT area which aims to provide a consistent approach to VAT refunds throughout the 28 member states in order to reduce administrative burdens for micro-businesses and SMEs.

 

Following the implementation of the Value Added Tax (VAT) starting from January 1 st 2018 VAT came into effect for the first time in the United Arab Emirates and Saudi Arabia at a rate of 5%.
There was a lot of nervousness about the introduction but overall things have gone well. Due to the stresses of the introductory period, the Federal Tax Authority in the UAE has been flexible in its penalty impositions, most notably waiving Late Registration Penalties until April 30, 2018.

The systems in each country are broadly EU-style, so should be recognisable to most foreign businesses. So far, however, the following areas have been ones in which businesses can suffer surprises:

  • VAT registration for a foreign business in Saudi Arabia carries with it the need to register for Zakat (an Islamic levy on Saudi entities that can lead to costs of up to 45% of profits). This is not the case in the UAE, where VAT-only registration is possible
  • The UAE has a number of very active “Free Zones” into which VAT-free importation exists in theory. However, businesses have struggled with obtaining this right in practice due to bureaucratic requirements
  • There has been inclarity over whether a foreign entity with several branches in the UAE (a multi-branch structure is common due to the attractions of establishing separately in different Emirates or Free Zones) is a single taxpayer or several. This controversy is ongoing.

Based on an analysis conducted by Essentia Middle East, there have been implications for systems, infrastructure, skills and training among many other industries and some slowing of economic growth has been reported.