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.

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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.

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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).

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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!

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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.

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Doctor, I have a VAT problem

HMRC finally published new guidance for the direct marketing industry in the updated versions of Notices 700/24 and 701/10 on 9th June.

Following on from this, industry representatives such as the Direct Marketing Association and Charity Tax Group have provided their own summary guidance to assist with understanding and complying with the new guidance.

Unfortunately, as always happens with these things, a glut of “information” then pops up on various online business forums and social media from people in the industry who are about as qualified in VAT matters as we are in quantum mechanics.

They regurgitate published guidance in to their own words and spout forth their own “recommendations” with less regard for whether they are actually being accurate so long as they garner an audience and some extra traffic to their website.

Even with the new information from HMRC there is still a lot of expertise involved in understanding it all and putting it in to practice. You wouldn’t go to the Doctor for VAT advice so why should you be any more inclined to take it from someone whose written a blog but has as much VAT expertise as a free range chicken?

As always with these matters the devil is in the detail. If in doubt seek professional advice!

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Some light relief

HMRC have recently published new guidance. It covers situations where certain types of charity may reclaim VAT. For most charities nothing has changed. They may not reclaim VAT on costs such as fundraising etc. This new notice provides guidance for the limited number of charities that may now reclaim VAT.

The only charities that may reclaim VAT in this scheme are those offering the following services:

• Palliative care
• Air ambulances
• Search and rescue
• Medical couriers

For further information please contact us.

April Fool?

Picture the scene. Your client has asked you to deliver a project by April 1st 2015. They provide you with written confirmation and advise that a full brief will be available several months in advance of the deadline.

Some months pass and the brief doesn’t arrive but the client is still insistent that you meet the 1st April deadline. Naturally you become a little nervous and chase them up. Some while later they send you a brief.

The brief has several key elements missing and also some elements which don’t make any sense or contradict themselves. You grow a little more nervous and ask for clarification from your client. They still insist on meeting the deadline even though its several months since they promised the full brief.

A few days before the deadline the client sends you an updated brief. It has a few more details in it but still contains information which is missing. You neither have enough information to brief your suppliers or to deliver the project but the client is still insistent that the deadline must be met or you and your suppliers could face financial penalties.

In any ordinary commercial scenario this would sound like an unacceptable way to do business. But this is based on actual events.

The client is HMRC. You are and your suppliers are part of the Direct Marketing industry.

Originally the deadline was an even more unachievable 1st October 2014. HMRC relented on this after it was pointed out that this was one working day after they’d decided to implement the project. Generally not enough time for a major project to be delivered unless you have mastered time travel.

And yet April 1st 2015 has been and gone. The brief has not arrived and HMRC are still expecting the project to be delivered. You are now liable to potential financial penalties.

Despite your frantic attempts to reconcile the situation HMRC cannot commit to discussing it because an election is coming. It would be laughable if it wasn’t real.

All this doesn’t seem fair when compared with what HMRC expect from taxpayers. HMRC Charter states ‘We expect you to…respond in good time if we ask you to do something’.

Sadly it’s not an April Fool.

This article is based on HMRC’s pending updates to Notice 700/24 Postage and Delivery charges which affect the VAT liability of supplies including direct mail, door drops, inserts and associated services. For more information you can contact us directly.

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Sort of…but not quite

So we now have what we’ve all been waiting for. The definitive guide to VAT on direct mail. Or have we…

HMRC’s most recent correspondence (Open PDF) is a useful statement of policy, extracted after over two years of pressing from independent tax professionals like us and trade bodies such as the DMA and CTG.

But predictably it doesn’t (and was never likely to) answer all the questions. It confirms a number of things that we already knew, hints at some other things, and completely omits to mention certain other things!

Whilst there are still negotiations with HMRC about some of these matters, we shouldn’t expect too much more information. What is good about HMRC’s letter is that they have have taken on board the feedback about many of our industry’s concerns.

One of the widely talked about factors is the issue of retrospective action for incorrectly applied VAT. HMRC have confirmed in their letter that they do not intend to take action in cases where suppliers got it wrong prior to 1st April 2015. However, this is not a free for all and there is an important caveat that this will not apply if the “treatment is seen as abusive or the arrangements are artificial”. In their guidance manuals HMRC define artificial as:

‘Whether a situation is artificial is the primary thought to keep in mind when making a decision. There is no single definition of what HMRC considers to be artificial as this conclusion will always depend on the circumstances of each transaction, but in general terms we judge an arrangement to be artificial if the contractual arrangements are inconsistent with the economic reality of the transactions. This is also considered in the test for abuse where the essential aim of the arrangement is to obtain a tax advantage contrary to the purpose of the legislation.’

HMRC admit that some of their published guidance led to misunderstandings. They intend to publish updates as soon as possible.

Very importantly they appear to have stepped back from their aggressive stance that the moment you combine certain services with printed matter, it becomes a single standard rated supply.

There is also information in the letter about what services may be singled sourced with printed matter. Here again there has been some success. HMRC now accept that certain services necessary to produce a mail pack ready to be put into the postal system should be regarded as part of the production of the pack. In affect, that these services may be single sourced with the print and subject to VAT accordingly.

So, whilst the letter from HMRC is a useful step in the right direction it is not the “Definitive Guide to VAT on Direct Mail”, which is lucky for taxation professionals like us who get paid to deal with the tricky stuff!

As ever with these matters, if you are in any doubt you should seek professional advice.

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Can I have that in writing?

In a previous blog we set out the facts surrounding HMRC’s policy statements in ongoing discussions with the Direct Marketing Association (DMA). Since then, representatives from both the DMA and Charity Tax Group have met with HMRC to seek further clarity on the stated policy.

Mike Lordan of the DMA has provided his summary view of the events of the last meeting in his blog.

As ever with these matters, the devil is in the detail. HMRC acknowledged the points discussed and gave verbal assurances but it will only be when things are confirmed in writing that we will know the exact details and implications for the past and going forward.

On the face of it you might think that this latest information provides for all suppliers to single source postage and other services up until April 2015 with impunity, or to refund VAT which may have been charged to date. We need to exercise some caution here. Part of the rationale for extending the deadline to April 2015 was to allow suppliers to extricate themselves from binding contracts. If for example, a business started single sourcing print and postage from today, when no previous contract existed, HMRC might take a dim view of this because it is not part of “existing arrangements”.

In all likelihood, the industry will take this recent information and interpret it every which way leading to yet another period of flux and confusion! If you are in any doubt you should seek professional advice.

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