Dealing with imports after Brexit

March 2019 is when the UK is due to leave the European Union and there is still much to be decided.

Nowadays it is very straightforward to buy goods from a business in the EU. An order is placed and the goods shipped to the UK. It is more difficult when buying from a business outside the EU because of the need to submit Customs declarations.

A hard Brexit will make it more difficult to trade with other EU businesses. This is because goods bought from businesses in the EU will then be ‘imports’ in the same way as a purchase from say China is an import.

If goods bought from other EU countries must be dealt with as ‘imports’ the Chartered Institute of Taxation says the likely consequences are as follows:

‘This is a significant shift for business in terms of cash flow, system, processes, supply chain efficiency etc. Cross border movement of goods will require import VAT to be paid and import declarations will need to be made, typically import VAT can then be reclaimed, so businesses will need to obtain the relevant evidence in order to secure a refund – unless simplifications are in place. The reality of this is cost and time – both financially and administratively.’

If this is the outcome, the Chartered Institute of Taxation estimates that the number of customs’ declarations will rise ‘from 50 million to 300 million’. This creates a major processing and logistical problem for HMRC and many doubt that HMRC are capable of getting all the necessary systems and people operational by March 2019.

This is one of the reasons why there is much talk of the need for a transitional period.

The EU is proposing a transitional period of 21 months during which not much would change for businesses. During the transitional period trade with other EU countries would continue as before and in particular without the need for customs’ declarations. However this comes at a price.

The price proposed by the EU is that the UK will continue to pay its contributions to the EU budget, accept the EU laws but have no input into the making of these laws, continue to accept free movement of people etc.

The EU has published it views of what happens in the event of the EU and UK not reaching a negotiated settlement before 29th March 2019. The views are in a press statement available at

In the brief the EU says that ‘Unless a ratified withdrawal agreement establishes another date, the United Kingdom will become a ‘third country’ as of 30 March 2019…’.

The EU go on to say what this means in practice. For example they say without a withdrawal agreement ‘Goods…brought into the customs territory of the EU from the United Kingdom or are to be taken out …to the United Kingdom are subject to customs supervision …This implies that customs formalities apply…’

Whilst all this is going on the EU continues to plan VAT changes for 2019 and 2021.

Tagged with: , ,

The Bluefrog Blog

You may have seen this recent blog article or other posts related to it:

Why I had to close Bluefrog down (and why I set up Bluefrog Fundraising)

We thought it would be helpful to pass on our observations as we know there has been some confusion about the content of the blog.

We have no reason to doubt it has not been written in good faith and is a fair representation of the customers’ experience with HMRC. It does however contain statements which are inaccurate or open to misinterpretation.

With reference to the following paragraphs:

“The whole idea of a package test was completely changed. Under the new interpretation, as an agency, if you provide a service to a charity that is subject to VAT, it is subject to VAT – no arguments. This means things like creating an ad or a mailing pack need VAT charged on them at the standard rate.”

The “package test” is a method for determining the VAT status of packages of printed matter. Most direct mail packs fall within the scope of the package test. Nothing at all has changed regarding the rules or application of the package test therefore this statement is incorrect. Furthermore, charity advertising and mail packs which meet appropriate criteria may be zero rated. The blog author makes a generalised statement that such supplies are always subject to VAT which is not the case.

“The good news for charities is that the onus to pay any wrongly assessed VAT falls to the supplier.”

This statement could be construed as meaning charities are immune to any retrospective VAT charges. Whilst it is true that the repayment of VAT arrears rests with the supplier, that does not mean the supplier will not attempt to recoup the VAT from their clients. They may indeed have a contract clause that allows them to do just that.

‘”We simply could not afford to pay the sums owing…The company never received the VAT payments that HMRC wanted to reclaim.”

Unable to pay the sums owing, Bluefrog Ltd ceased trading and now there is Bluefrog Fundraising. Changes like this are commonly called ‘phoenixing’. Use this link for more information.

We trust this clarifies matters should any of your customers raise questions arising from this article. Please feel free to contact us for further information.

Tagged with: ,

Agency Agreements – suppliers beware!

In 2015 HMRC provided guidance for businesses who had incorrectly accounted for VAT on supplies of printed matter and postage. These terms were published by HMRC in Revenue and Customs Brief 10 2015. VAT Notice 700/24: postage, delivery charges and direct marketing, was also updated to reflect HMRC’s policy on supplies of printed matter and marketing services.

Recently it has come to our attention that some suppliers may still be incorrectly accounting for VAT on supplies of printed matter and postage.

According to their circumstances and the arrangements which they make, organisations are able to purchase VAT exempt postal services. The two ways in which this can be done are as follows:

1) Direct Access
Customers who meet the minimum requirements in terms of volume of mail and operating standards may contract directly with Royal Mail Wholesale and buy postage which is exempt from VAT.

2) Agency Agreements
An alternative method is for a customer to enter into a contractual arrangement with a licenced postal operator or intermediary (the agent), who themselves have a Direct Access Contract with Royal Mail Wholesale. In effect this is a tri-partite arrangement between Royal Mail wholesale, the agent and the customer.

  • The agent invoices the customer for the upstream postal costs. “Upstream” refers to the cost of picking up the bulk mail from the mailing house and delivering it in to the Royal Mail’s inward mail centres. This is a VAT standard rated supply.
  • Royal Mail invoices the customer for downstream postal costs. “Downstream” refers to processing mail in the inward mail centres, onward distribution to local postal sorting offices, and end delivery to individual households. This is a VAT exempt supply.

In summary, the agency agreement allows the customer to not pay VAT on the downstream costs. If the customer was to deal directly with Royal Mail for the services as a retail customer, they would be charged VAT. Organisations who are unable to reclaim part or all of their VAT costs, such as charities and financial institutions, find these the agency agreements an effective method to mitigate VAT on postal costs.

Suppliers with an agency agreement who are not the end customer

We are aware of a variation on the agency agreement arrangements where suppliers for example a printer, mailing house or agency, are the holders of the agency agreement.

The basis of these arrangements is as follows:

  • The licensed postal operator will act as agent for the supplier
  • The supplier signs an Agency Customer Contract
  • Royal Mail invoice the supplier for downstream postal services, which are VAT exempt. The supplier pay these invoices.
  • The licensed postal operator invoices the supplier for upstream postal services, which are VAT standard rated. The supplier pays these invoices.
  • The supplier treats the downstream costs as a disbursement and passes them on to their own customer (e.g. a charity or financial institution) without charging VAT.

We are concerned that when doing this suppliers cannot comply with HMRC’s strict rules for disbursements.

The disbursement rules

The requirements to meet the VAT disbursement criteria are substantial and specific. It is incorrect to think that as long as the exact costs are passed on this will suffice. Instead several conditions must be complied with before HMRC will accept there is a disbursement.

The conditions that must be met for HMRC to accept that the charge from the agent to the principal can be treated as a disbursement (or pass-through cost) are;

  • you paid the supplier on your customer’s behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer’s responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are in addition to the cost of your own services

HMRC has advised us that suppliers considering an agency agreement would not meet all the disbursement conditions. In particular HMRC noted who, according to an agency agreement, is liable to pay Royal Mail. This is the supplier rather than the ultimate client. In addition, the supplier would be acting as a principal and not an agent of its client.

Infringing HMRC’s strict disbursement rules

When HMRC do not accept that the downstream costs are a disbursement the financial consequences are potentially serious for any Member who uses an agency agreement for this purpose. HMRC will then regard this as not disbursement but as a supply of postage to the client. This is a standard rated supply of services to the client which when print is also supplied HMRC will categorise as a standard rated direct marketing service.

In an attempt to save a customer VAT on postage the member is exposed to VAT liabilities on both the postage and the print. Therefore we would strongly recommend you obtain professional advice before using agency agreements to treat postage costs as a disbursement. If you should require any further information please contact us.

Tagged with: ,

Update to Notice 701/10

HMRC have published a new version of VAT Notice 701/10: zero-rating of books and other printed matter.

If you are unsure about the significance of the changes in the new version then please contact us for further advice.

Tagged with: ,

Charity Update

HMRC have published a new version of VAT Notice 701/58: charity advertising and goods connected with collecting donations.

If you are unsure about the significance of the changes in the new version then please contact us for further advice.

Tagged with: ,

What does Brexit mean for VAT?

Every member of the European Union (‘EU’) has VAT. It is a condition of membership.

After leaving the EU the UK is not bound to have VAT. It could abolish it. If this were to happen the UK would be going against a worldwide trend as VAT has spread to countries outside the EU. This is because VAT raises a lot of money.

In the UK, VAT raises about 17% (£120bn) of government revenue. As it is collects so much tax for the Exchequer it is difficult to believe any government will get rid of it. It seems more likely that VAT will continue in the UK even after we leave the EU.

Like all EU members the UK must have VAT rules which are consistent with the over-arching EU laws. The EU laws set parameters within in which the UK is free to change the rates of VAT and to alter to some extent how it applies. The parameters were agreed by the EU VAT committee in which the UK played a very active role.

After leaving, the UK should be able to amend in any way it likes the VAT laws applying here. For example after leaving the EU the UK will unilaterally be able to apply a different rate of VAT to existing goods or services. However life may not be so simple.

Trading with businesses in other EU countries has never been simpler. This is due to the single market. What happens about this will be major part of the leaving settlement agreed with the EU.

Some third party countries have access to the single market (eg Norway and Switzerland) however this comes with conditions. Some examples which we have read and heard about include monetary fees, free movement of people etc. Further, the EU normally insists that the third party country has VAT conditions. Without this there will not an agreement and the third party country will not get access to the single market.

The time allocated for reaching an exit settlement with the EU is two years. The two years start from when the UK formally applies to leave. Whilst the UK is negotiating an exit agreement VAT is unlikely to change significantly. There are some good reasons for thinking this.

The exit negotiations will be very involved and most probably fraught whilst both sides struggle to get the best deal. Making changes during this period to UK VAT laws which infringe EU legislation would likely antagonise the other countries making some very difficult negotiations even more difficult.

In summary, we do not expect there to be any material changes to VAT while the UK continues to be part of the EU.

Tagged with: ,

VAT Single Sourcing…(again)

It was hoped that the updates to VAT Notices 700/24 and 701/10 would bring some much needed clarity to the direct marketing industry and allow everyone to move forward on an even footing.

The revised version of VAT Notice 700/24 advises that:

‘Where..(marketing related services) are supplied with printed matter as a single supply, then that is taxable at the standard rate, as it is a supply of direct marketing services. Where the printed matter and any services are supplied separately then that may comprise multiple supplies and each component is taxed according to its VAT liability.’

This guidance infers that print supplied with marketing services can be EITHER a single or multiple supply depending on the individual facts in each case. Since 1 August 2015 many firms have relied on this guidance to continue to supply print and other services, treating them as multiple supplies for VAT purposes. In practice, it would appear that HMRC’s Compliance Team is taking the default position to categorise these as a ‘single supply’ and that contrary to the guidance quoted above, HMRC will not readily accept the supply of print and other services can be a multiple supply.

This matter is of concern to us all because it is likely that industry suppliers are succumbing to HMRC pressure and, for supplies made since 1 August 2015, charging VAT on both the print and other services.

HMRC should use the facts in each case to decide whether a single or multiple supply exists. The start point for such matters should be to identify the customer’s expectation. In the customer’s mind were they receiving a single over-arching supply of marketing services or separate component parts. Often the contract or brief will be a pointer to the customer’s expectation.

HMRC advise that the following list of indicators suggest that a transaction is a multiple supply (though do not provide conclusive proof)
• Separate pricing or invoicing
• Components are available separately
• There is a time differential between parts of the supply
• Components are not interdependent/connected

We, industry bodies, and other taxation professionals continue to lobby HMRC about these matters. If you are in any doubt if your supplies are affected you should seek professional advice.

Tagged with: , ,

Budget 2016 – Isle of Man charities

The government will legislate to ensure charities subject to the jurisdiction of the High Court of the Isle of Man are capable of qualifying for UK VAT charity reliefs. (Finance Bill 2016).

Tagged with:

Vaguely Ambiguous Tax

Whilst the industry is in the process of aligning itself with HMRC’s published policy in Revenue & Customs Brief 10 2015, (note today’s deadline!), there is another bump in the road.

HMRC updated VAT Notice 700/24: postage, delivery charges and direct marketing in June 2015 to address concerns that suppliers were misinterpreting the guidance in the previous version, such that certain supplies were being incorrectly zero rated. It is unfortunate that the updated version has introduced its own (in our opinion) glaring error.

The Notice contains some potentially misleading wording. It is the third paragraph in section 3.3. The third paragraph is an example and reads as follows:

‘An example of a single supply occurs where a supplier prints leaflets for a charity and, as part of the contract, amends the charity’s customer data so that address and postcode details are correct. This is a single supply of zero-rated goods.’

The item of printed matter used in this example is a leaflet. In the example the supplier also requires customer data in order to print the leaflet. The usual reason for providing customer data to the printer is so that the item of printed matter may be addressed. It can then be posted to the selected recipient. To develop the above example, there will be problem if the customer data is used to address the leaflets. This is because leaflets which carry a name and address cannot be zero rated.

HMRC’s example above states there is a ‘single supply of zero rated goods’ when a supplier prints a leaflet using customer data. Our concern is that many suppliers may misinterpret this as authority to supply and zero rate leaflets which carry a name and/or address.

Any supplier who incorrectly zero rates a supply of personalised leaflets might feel aggrieved to be on the end of a subsequent bill for undercharged VAT but unfortunately the system is weighted in HMRC’s favour. To quote from their own guidance manuals – ‘Every case of misleading advice that results in actual or potential incorrect declarations of tax must be considered on its own merits…’. and ‘The starting point for all cases is that HMRC is not bound by any advice it gives which is incorrect in law’.

We expressed our concerns about the misleading information in Notice 700/24 and HMRC have confirmed that personalised leaflets do not qualify or zero rating. Also and due to us bringing this matter to their attention they are considering changing section 3.3 when the Notice is next reviewed, but it is unlikely that this will be any time soon!

Tagged with: , , ,

Time is running out

You only have until 30th November 2015 to inform HMRC in writing if you wish to take advantage of the transitional or settlement arrangements as detailed in Revenue & Customs Brief 10 2015. If you are not sure whether these arrangements affect you or what to do about them then please contact us for further advice.

Tagged with: , ,