The UK VAT regime is characterised by a complex piece of legislation comprising the Act (VAT Act 1994) and myriad other regulations, notices, and extra statutory concessions. To confound the situation, tribunals and courts often contribute their own bit through various interpretations and judgements. If that isn’t enough there are the EU directives and the European Court of Justice that can further up the ante with what should apply to fit in line with the EU VAT. The UK is bound to align its rules in line with the EU ones. Wading successfully through this maze at the moment are fraudsters, with ‘inventions’ like carousal fraud. The taxman is caught right at the centre of all this confusion desperately trying to stop VAT leakage. In the process, more legislative changes are pushed in through the annual Finance Acts, adding to the ever-complex regime!
VAT Registration
The complexity begins at the registration stage itself. To register for UK VAT a business needs to be a ‘taxable person’ (i.e. carrying out an economic activity) and what is being sold should be a ‘taxable supply ’(e.g. local authority services are not taxable supplies). Once these conditions are met a business could get vat-registered voluntarily until the threshold level for registration (2012 -£ 77,000) is hit. Registration becomes compulsory once this level is breached. So far so good, but confusion starts when an overseas business ventures out to do business in the UK or a UK one tries to sell overseas. If you are an EU business selling in to the UK you follow a different set of rules (distance sales) than those from outside the EU would be following. Incidentally, those from the outside the EU watch out (!), the law is changing again from 01 December 2012.
Place of supply
Different rules apply for goods and services. Normally, when you supply goods the law of the country where the seller is based should apply. That has all changed from January 2010, particularly for services. To prevent enterprising businessmen from setting up artificial tax-base in low-VAT jurisdictions like Luxembourg, we now have what is called ‘place of supply for services’ rules. As a result, the general rule now is that for a business selling services to another business, the VAT rules of customer’s country apply. If it is to a consumer the rules of the supplier’s country will apply. What this means generally is that a US-based business selling services to UK consumers could be expected to apply the US rules. But then there are the usual detailed exceptions to the general rules, making the general rule nearly ineffective! The exceptions mean that the US-based business selling services to UK consumers could be expected to register for UK VAT if the place of supply is held to be the UK and the threshold level is breached.
Reverse charge mechanism
Even if the place of supply is held to be the UK, the overseas seller doesn’t necessarily need to charge and account for UK VAT. If the customer is registered for VAT in the UK, he would do it by becoming both the seller and the buyer of the services in his books! This is reverse charge mechanism, or technically the tax shift. There is no financial impact because the customer just passes accounting entries for both the input and output VAT based on notional sales and purchases. Double-entry system of accounting, literally! The notional input and output VAT cancels out each other.
On a serious note, reverse charge mechanism was introduced to check carousal fraud, where a vat-registered customer collects VAT and disappears without paying the government (missing trader intra-community or MTIC for short). Originally introduced for five goods including computer chips and mobile phones, this was later extended to all services acquired from outside the UK. Whether this mechanism has indeed checked carousal fraud is anybody’s guess because in a recent case decided by the Upper Tax Tribunal, reversing the First-Tier Tribunal decision, (HMRV v Greener Solutions Ltd – 2012/UKUT 18(TCC) a mobile phone recycling company that did not in fact disappear, got caught in a carousal fraud and was ordered to pay £176,000.
To tax or not to tax is not the question
To tax or not to tax is no more a question because everything is taxable unless specifically exempt (s. 4(2) – VATA 1994)! Schedule 9 to the Act has some 15 groups of items specifically exempt from VAT. Yet there is no cast-iron guarantee that everything specifically exempt is indeed exempt from VAT. Take for example postal services, which are specifically exempt from VAT. But an ECJ ruling a couple of years ago (only universal postal services are exempt from VAT) means that some of the Royal Mail services are now subject to VAT.
Even where taxable, Schedule 8 lists items that are subject to zero-rate of VAT (i.e. effectively no VAT). In a case decided by the First Tier-Tribunal last year (Thorncroft Ltd v HMRC – UTFTT/TC/2011/01536) HMRC sought to charge VAT on a tea drink bottled and sold ice-cold, despite tea being one of the items subject to zero-rate of tax under Schedule 8 to the Act. HMRC unsuccessfully argued it was a soft drink subject to the standard VAT of 20%.
Heat and VAT
The heat coming from Brussels can now be felt at Pasty stores. The Finance Bill 2012 added what is now widely known as pasty VAT where food items served above the ambient air temperature will attract standard vat at 20%. So to avoid a 20% levy all you need to do is wait for the food item to cool down to the ambient temperature level or raise the ambient temperature to the food’s level or may be a bit of both!
The latest is that bowing to the ‘heat’ felt in the business and consumer circles the government may now go back on ‘pasty tax’!!
The complexity of the UK VAT system has reached absurd levels and just toeing the EU line has significantly contributed to it. But then that’s politics.
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