Buying print after a “no deal” Brexit

Contingency plans

Recently they government released information about the repercussions of a “no deal” Brexit. This information covered the changes affecting goods bought from other EU countries. If there isn’t a deal with the EU, buying print  (and other goods) from an EU country gets more difficult.

At present this is straightforward because of the EU single market. For example a customer in the UK places an order for printed matter with a firm in Spain. This involves the following:

  • arranging the transport to the UK
  • receiving a Spanish invoice without VAT
  • applying the ‘reverse charge’ procedure to the invoice. This has a neutral effect on cashflow.

This changes if there isn’t a deal with the EU.  The simplicity outlined above is replaced with a more complicated system because after 29th March 2019 import procedures will apply to goods bought from EU countries.

How procedures will change

By way of example, in April 2019 the customer makes another order for printed matter from its Spanish supplier.  The steps for VAT purposes will then be as follows;

  • arranging transport to the UK
  • the Spanish will still invoice without VAT but now because they are exporting goods to outside the EU
  • A customs entry must be filed when the goods are imported into the UK. In practice UK firms normally engage an import/export agent to do this
  • Any import duty must be paid or arrangements to pay must be made before the goods can leave the port
  • VAT will be accounted for under postponed accounting very much like the current ‘reverse charge’ procedure.

There is extra bureaucracy and cost for the UK customer because of having to comply with customs procedures. There is also concern that by March 2019 the Border Agency cannot be ready with the extra resource and technology needed to deal with a very large increase in imports.

Buying services

The repercussions for services bought from or sold to EU businesses are not as significant. Claiming back VAT incurred in another EU country will change as it necessary to apply as a non-EU business.

Another niggle concerns checking UK VAT numbers. Currently this can be done using the EU VAT Registration Number Validation but if there isn’t a deal UK numbers will be deleted from this resource. As a replacement HMRC is developing its own on-line portal for verifying UK VAT numbers.

If you have any questions feel free to contact us.

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Treasury Committee Inquiry into VAT

head against wallThe Treasury Committee is currently holding an inquiry into VAT. The remit of this inquiry is focusing on three key issues:

  • The tax gap (VAT which is due but not collected)
  • Brexit (Opportunities, concerns and impact)
  • Business (Improving the VAT regime for businesses)

Stephen Taylor, business partner at Zero VAT, made representations to the Committee at the Palace of Westminster last week. In his capacity as Chair of the VAT Sub-group for the Association of Accounting Technicians, Stephen addressed MPs on the difficulty businesses face in obtaining written advice (clearances) from HMRC.

The following ATT press release highlights the call for greater certainty for businesses in administering VAT.

The Association of Taxation Technicians (ATT) has highlighted the difficulties businesses face in getting certainty regarding their VAT obligations. Businesses want to know they are treating things correctly so as to avoid a potentially painful and costly HMRC challenge several years later, says the ATT.

The concerns were outlined in the ATT’s submission to the Treasury Committee’s Inquiry into VAT.

Stephen Taylor, Chair of ATT’s VAT Sub-group, said:

“Businesses simply want to ‘get it right’ but are left frustrated by HMRC. The opportunities for businesses to obtain binding rulings on VAT from HMRC are very limited, especially considering HMRC’s refusal to simply say ‘yes, you’re right’ when they receive an enquiry from a business which sets out the full facts and reaches the correct VAT outcome. This results in unnecessary uncertainty for businesses.”

VAT, unlike other self-assessed taxes, does not have a dedicated helpline for tax agents and this often means that it is difficult to resolve technical queries on behalf of clients, said the ATT.

The Treasury Committee’s Inquiry focuses on many areas of VAT, such as the tax gap, Brexit, experiences of business, and how VAT compares with the Committee’s principles of good tax policy. The ATT will be giving oral evidence to the Treasury Committee VAT inquiry on 3 July 2018.

ATT laments in its submission that disagreements between HMRC and a business about VAT are often not resolved quickly enough and fairly.

Stephen Taylor said:

“With some disagreements, there is no possibility of compromise and the outcome must be a straight binary choice between HMRC’s view and the taxpayer’s opinion. For example, it was not possible to compromise when deciding if a Jaffa Cake was a cake or chocolate biscuit, and due to the nature of VAT, disagreements about the categorisation of products are common. Disputes like this often take a long time to resolve because both parties want a binding legal judgement.

“Where there is room for compromise or it is permissible to make changes to how the business calculates its VAT liability, matters can be resolved more speedily.”

In some areas it is arguable that discussing technical issues with HMRC through letters and emails alone has slowed the process, and outcomes would be speedier if HMRC were more ready to undertake negotiations face to face with businesses or their tax agents, said the ATT. The ATT notes that small businesses are now less likely to appeal to the tax tribunal, which may be due to changes that have made the system more formal and appeals potentially more costly for small businesses.

Stephen Taylor said:

“Due to the costs of formal appeals, HMRC’s Alternative Dispute Resolution (ADR) process is more important for and useful to small businesses. It should be used more to resolve VAT disputes. Although it will not be appropriate for categorisation disputes like deciding the status of Jaffa cakes, it can be extremely useful when there is room to compromise or it is necessary to agree the practicalities of quantifying how much VAT is due.”

In its submission, the ATT cast doubt upon the benefits which HMRC’s Making Tax Digital project is expected to deliver in terms of reducing the tax gap attributable to VAT. HMRC estimate the tax gap for 2016-17 at nine per cent of the estimated net VAT total theoretical liability in 2016- 17. This equates to £12 billion.

Stephen Taylor added:

“It is not possible to conclude that Making Tax Digital, due to start in April 2019, will reduce VAT errors without better information about the common errors found by HMRC. Our recent member survey found that a total of 74 per cent of respondents to the survey thought that Making Tax Digital for VAT was a further reason for small businesses to want to remain below the VAT threshold because most respondents thought it would increase the administrative burdens on business.”

Release: Thursday 28 June 2018

During the inquiry the Treasury Committee were particularly interested in how businesses are planning for Brexit. Stephen and the others giving evidence pointed out it is difficult to plan when nothing has been agreed.

Further information about the remit of the inquiry can be found here:

https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2017/vat-17-19/

If you have any questions then please do not hesitate to contact us.

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VAT, why printers are missing a trick

What does VAT mean to you?  Very Awkward Tax? Vaguely Ambiguous Tax?

There is a tendency for print suppliers to follow the path of least resistance when dealing with how to charge VAT to customers. 20% on everything. This is not only incorrect, but an opportunity lost.

Many of the large users of print and direct mail are unable to reclaim VAT. This includes banks, building societies, insurers, health providers, betting and gaming companies and charities, amongst others.

Would you throw away a 20% off voucher?

So, put yourself in your customer’s shoes. They get one quote from Supplier A which simply says “Subject to 20% VAT“. They get another from Supplier B which says “Subject to 0% VAT“. Which quote is the most attractive?

In an economic climate where print margins are tight, supplier A could be unwittingly pricing themselves out of the running.  So how does all this work then?

Certain items of printed matter are zero-rated by law. This means that although they are “taxable supplies“, the rate of VAT is 0%. Example items include leaflets, booklets, brochures and pamphlets. This may seem like a narrow list but it actually covers a wide range of printed products, and by a concession available to the printing trade, extends to correctly formatted direct mail packs.

Suddenly we are talking about seriously large marketing budgets, and who doesn’t want to be able to save 20% of that? If you are not pro-actively tackling VAT mitigation for your customers, there is a competitor who will be.

Can I just look it up on Google?

Perhaps the issue for many printers is that VAT is a sideshow, an unwelcome distraction. Something that has to be dealt with if a customer complains. Then some lucky individual is tasked with trawling Google to look for an answer. “Is there VAT on 8pp leaflets?“. “What if there is a response device?“. “What if it is green with purple spots?“.

HMRC’s guidance can be fairly daunting and seeking professional advice might be a long way down the list of priorities. After all, it costs money right? Well yes it does, but it can also MAKE YOU AND YOUR CUSTOMERS money. What’s that now? MAKE MONEY? Well, if making money is measured by increased sales/profit for you and increased return on investment for your customer, then YES!

Here is the less than magic formula

It’s all a question of knowledge and as is often the case with such matters, a little knowledge is a dangerous thing. With the right approach, and a modest short term investment, printers can put themselves in a position to really step up their market reach. Here’s how:

Existing customers:

Any pound not spent on VAT is a pound saved. That equates to either a better return on investment or frees up additional marketing budget that your customer can reinvest – with YOU.

Potential customers:

Increase your conversion rate on new business tenders and pitches by building a strong VAT mitigation strategy in to your proposal. There’s no point going head to head on quality, credentials and technology if you aren’t in the ballpark on price for a VAT sensitive customer.

Why isn’t everyone doing it?

In our experience it matters not how big the customer or the supplier is, the expertise when it comes to VAT mitigation is often sorely lacking. The phrase “well that’s how we did it at my old place” springs to mind.

The fact is a lot of printers are actively involved in VAT mitigation and doing it well. But there are many many more who aren’t, or are doing it badly. At best, it’s lost business, at worst it’s a compliance issue and a potential VAT bill with penalties to boot.

If this article is news to you then perhaps you need to explore further.

Fact or fiction?

It’s a fact that there are huge differences in (unqualified) opinion about what is right or wrong when it comes to VAT mitigation.

It’s a fact that HMRC have taken different approaches at different times when applying policy in the industry.

It’s fiction that charities don’t pay VAT. Apart from a narrow range of concessions for certain items of printed matter used for appeals, charities should be charged VAT in the same way as any other business.

It’s fiction that zero-rating or the “Package Test” no longer exists. This is the sort of stuff peddled by printers who’ve got burned in the past because they were getting things wrong in the first place.

It’s a fact that the rules are not straightforward. There are many subtle variations in print formats,  contractual arrangements and procurement methods which affect VAT liability.

If all your customers can reclaim VAT then understandably you won’t be going out of your way to avoid charging it. That said, a zero-rated leaflet should be zero-rated no matter who you supply it to. After all, it’s the law.

Where to get help?

An internet search will probably land you with more questions than answers however help is at hand. HMRC provide various online publications though they are not light reading.

If you are a member of either the DMA or IPIA you can take advantage of their free VAT support services by sending an email as shown in the links.

If you are in any doubt you should seek professional advice.

 

 

 

 

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Does the Paragon VAT tribunal change the rules for direct mail?

A recent First Tier Tribunal case which HMRC lost has created a lot of chatter in the industry. The tendency in these situations is for commentators to cherry-pick the snippets that make for a great headline.

As is always the case with these matters, the devil is in the detail.

The detail is a thirty-seven page legal document. Fear not. Here is a handy little summary for you.

The case involved Paragon Customers Communications Ltd (‘Paragon’) and supplies made to their customer Direct Line Insurance Services (‘DLIS’). The supplies were limited to two matters:

  • The supply of printed mail packs and postage
  • The supply of “personalised booklets”

The dispute

Paragon treated the above supplies as a single supply of zero rated goods. HMRC contended that they were a single supply of standard rated services. Further, HMRC contended that the packs were not zero-rated because Paragon had incorrectly determined the VAT liability of the printed matter.

HMRC’s stance in this case is consistent with the revised guidance they published in 2015. VAT Notice 700/24: postage, delivery services and direct marketing.

They were following the policy outlined in Paragraph 3.3 Direct Marketing. This essentially says that when printed matter and certain services (e.g. postage) are provided as a single supply, it is no longer a supply of goods, but of services.

This revised guidance has been the subject of much industry commentary both prior to and after publication. It is this policy which has driven much change in the industry regarding how postage and other services are procured. For example, the increased use of Royal Mail agency agreements.

The tribunal findings

In considering the nature of the supply, the Tax Tribunal decided that this contract was a single supply of goods. They decided that ‘receiving and confirming data, printing, stapling and enveloping’ were ancillary elements necessary to produce the finished printed matter.

In other words they disagreed with elements of HMRC’s current policy regarding the supply of printed matter and certain services, notably postage.

The Tax Tribunal said this was an ‘incidental expense’ and formed a single supply with the print. However the Tax Tribunal went on to say there was a ‘fine line’ between this and postage being a separate supply.

It is important to recognise that the supply of print and postage was specific to a contract which Paragon had with DLIS for “on demand” fulfilment. The mailpacks were produced in relatively small quantities on a daily basis in response to the receipt of customer data.

This is distinct from bulk marketing mailings where the apportionment of cost between print and postage may be materially different. When postage is a significant proportion of the overall cost is it truly an ‘incidental’ charge for packing or transport? It is for the courts not us or HMRC to decide this.

What happens next?

First Tier Tax Tribunal decisions do not form precedents. The First Tier Tax Tribunal makes decisions on individual cases and endeavours to be consistent. There are numerous examples of it reaching different conclusions in cases which to us may look very similar.

Importantly, HMRC are free to regard this decision as an exception which does not apply to other suppliers. Alternatively they can try to overturn the ruling by appealing to the Upper Tribunal.

Paragon was represented by one of the UK’s leading VAT barristers. For HMRC, the decision about single sourcing print and postage flies in the face of current HMRC policy for direct marketing.

If neither side is willing to concede defeat until all court opportunities have been exhausted, there are likely to be several court cases to go before this matter is finally decided.

This case is not a green light to bundle postage and other services with print in order to zero rate the whole supply.

Feel free to contact us at any time. We’ll be glad to help.

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Register to avoid penalties

Fulfilment House Due Diligence Scheme

The term “fulfilment house” may receive some publicity over the coming year. This is because certain fulfilment houses must start registering with HMRC. These are not fulfilment houses which are normally part of the direct marketing supply chain however because of the potential for confusion we thought it necessary to make you aware of the scheme.

The fulfilment houses which must register with HMRC are those meeting the following criteria:

a) They provide storage for goods imported from outside the EU;
b) These goods are owned by (or on behalf of) a person established outside the EU;
c) These goods are offered for sale in the UK; and
d) Due to these arrangements buyers do not pay VAT.

The new mandatory registration scheme is to thwart tax avoidance arrangements described by HMRC as follows:

‘Non-EU traders who sell goods…to UK consumers, mainly via online marketplaces, are not always paying the correct VAT and duty to HMRC. These goods are normally shipped to the UK prior to sale and stored in fulfilment houses close to their final delivery point’.

Further information is available at https://www.gov.uk/guidance/fulfilment-house-due-diligence-scheme

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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 https://ec.europa.eu/taxation_customs/uk_withdrawal_en

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.

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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. https://www.gov.uk/government/publications/phoenix-companies-and-the-role-of-the-insolvency-service/phoenix-companies-and-the-role-of-the-insolvency-service

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.

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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.

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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.

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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.

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