Breaking VAT news from RSM's experts around the world, including updates from the European Union, United Kingdom, Denmark, Ireland, Netherlands and the United States.
by Andy Ilsley, RSM UK
VAT ‘quick fixes’
The EU’s ‘Economic and Financial Affairs Council’ has agreed a set of adjustments (known as ‘quick-fixes’) to the EU's VAT rules, applicable from 1 January 2020, aimed at fixing specific issues pending the introduction of a new ‘definitive’ VAT system. The Council of the EU is expected to adopt the directive once the European Parliament has given its opinion.
The ‘quick fixes’ relate to:
- call-off stock - the proposals provide for a simplified and uniform treatment for call-off stock arrangements whereby, subject to meeting the substantive conditions, when a vendor transfers stock to a warehouse at the disposal of a known acquirer in another Member State such would give rise to one exempt supply in the Member State of departure and one intra-Community acquisition in the Member State of arrival.
- VAT identification number - to benefit from VAT exemption for the intra-EU supply of goods, the inclusion of VAT identification number of the customer in VIES will become an additional condition.
- chain transactions - in determining the VAT treatment of chain transactions (triangulation), the proposals establish that, subject to meeting the substantive conditions, where the same goods are supplied successively and those goods are dispatched or transported from one Member State to another Member State directly from the first supplier to the last customer in the chain, the dispatch or transport shall be ascribed only to the supply made to the intermediary operator. As a derogation, the intra-community despatch or transport mat be ascribed to the intermediary operator if he has communicated the VAT identification number issued to him by the Member State from which the goods are dispatched (or transported) to his supplier.
- proof of intra-EU supply - a common framework is proposed for the documentary evidence required to claim a VAT exemption for intra-EU supplies, such may include a signed CMR document or note, a bill of lading, an airfreight invoice, an invoice from the carrier of the goods, or other relevant documents (eg insurance policy, notaries, etc.)
What this means
These measures are important, as part of the ‘transitory’ move to a more definitive VAT system (which has been on the agenda since the creation of the Single Market in 1992), in providing consistency and uniformity of treatment in key areas of EU compliance. Businesses with significant cross-border activity across the EU should take note of the procedural issues resulting from this.
by Andy Ilsley, RSM UK
The Withdrawal Agreement (‘WA’) on the terms of the UK’s withdrawal from the European Union has been published and agreed by UK and EU negotiators. At the time of going to press however, it has been resoundly rejected in its current form by the UK Parliament and amendments, or tweaked alternatives are being considered, principally around the mechanism for ensuring that a frictionless border with the Irish Republic can remain post-Brexit.
For customs, VAT and excise purposes, the WA aims at ensuring that movements of goods which commence before the UK's withdrawal from the EU Customs Union should be allowed to complete their movement under the EU rules which were in place at the start of the movement. After the end of the transition period (expected to last until 31 December 2020, but can be extended if agreed before July 2020), the EU rules will continue to apply for cross-border transactions that started before the transaction period in terms of VAT rights and obligations; ie reporting obligations, payment and refund of VAT, access to relevant network and information systems and data bases (eg MOSS, VIES).
Further, it is implicit that UK courts must abide by the principle of consistent interpretation with the case-law of the Court of Justice of the European Union (‘CJEU’) handed down until the end of the transition period, and that UK courts should also pay due regard to CJEU case-law handed down after that date.
In relation to the much discussed ‘backstop’, to ensure that, if no permanent trade agreement is not reached, there would nonetheless be ‘frictionless’ trade at the Irish border, the current proposals would mean:
- Northern Ireland would remain part of the UK's VAT area, with HMRC remaining responsible for the operation and collection of VAT, and the setting of VAT rates across the UK, in line with the VAT directive;
- Northern Ireland would be required to remain aligned to EU VAT rules with respect to goods;
- there will be a single EU-UK customs territory to avoid the need for tariffs, quotas or checks on rules of origin between the EU and the UK;
- the Union's Customs Code (UCC), would continue to apply to Northern Ireland to ensure that Northern Irish businesses would not face restrictions when placing products on the EU's Single Market.
What this means
Given the fluidity and delicacy of the current situation and that the WA in its current form does not have the backing of the UK Parliament, it is some way of becoming law, but it does remind businesses of the importance of reviewing supply chains in view of Brexit, whatever form it eventually takes, to ensure the indirect tax risks and additional costs (principally around VAT and customs duties) are identified and properly mitigated.
Making Tax Digital for VAT – Postponed of implementation for ‘complex’ businesses
HMRC has announced that some businesses will benefit from a six-month deferral of the Making Tax Digital (MTD) VAT reporting requirements coming into effect next year in the UK. The affected businesses are those with what HMRC calls 'complex requirements'. For these businesses the first VAT return which has to be submitted via MTD-compatible software will be the VAT return for the period beginning on or after 1 October 2019. HMRC has deemed that a number of difference categories of business will be considered to have complex requirements, and these include ‘overseas businesses’ i.e. those established outside of the UK but the nature of their activities mean that they are required to be registered for VAT here:
What this means
The UK is, along with a number of other tax authorities, committed to the digitalisation of the tax reporting process, the first stage of this being the requirements to maintain VAT accounting records digitally and submit VAT returns using compatible bridging software. The timing of this, along with the challenges of Brexit, mean that this is resulting in unprecedented change for UK businesses and those with UK interests, and the impact of these changes needs to be properly understood and prepared for.
Reconsideration of certain rejected 13th Directive refund claims
HMRC is to reconsider rejected VAT refund claims for 2016/17 under the overseas refund scheme (known as the 13th Directive), where the claim was processed after 23 May 2018 and the reason given for rejection was an invalid certificate of status (COS). HMRC introduced new verification procedures for overseas refund scheme claims from that date, requiring strict compliance with the legislative requirements for a valid COS, but failed to inform businesses of the change.
What this means
This brief explains the verification changes and actions HMRC will take in respect of 2016/17 claims. For new 2017/18 claims, HMRC will extend the deadline until 31 March 2019 for submission of a valid COS. Impacted businesses should review prior year claims to see if there is an opportunity for these to be revisited.
by Camilla Wimmelmann, RSM Denmark
VAT Recovery on Share sales to settle bank debt not recoverable
In a case referred by the Danish court, the CJEU has ruled in the case of C&D Foods Acquisition that in the specific circumstances of the referral whereby the one, and only, purpose of selling the shares in a subsidiary was to use the proceeds of that sale to settle the debts owed to the bank, the new proprietor of the group of companies, the share sale could not constitute an economic activity falling within the scope of VAT and therefore underlying VAT on costs could not be recoverable.
In its consideration of the specific circumstances of the referral, and the application of the PVD and case-law to those circumstances, the CJEU rehearses the well-established principle that the mere acquisition and ownership of shares do not, in themselves, constitute an economic activity for the purposes and consequently the disposal of such shares does not afford the recovery of input tax on underlying costs.
The CJEU then observes the attributes of previous case-law where it could be considered that the disposal of a shareholding in a subsidiary could would be viewed as economic activity, and consequently where VAT incurred on underlying costs could, at least in part, be recoverable.
Such circumstances as noted by the CJEU included circumstances where a disposal of shares, carried out in order to enable the parent company to restructure a group of companies, could be regarded as a transaction that consisted in obtaining income on a continuing basis and therefore an economic activity. Likewise, transactions relating to shares or holdings in a company are economic activities when carried out as part of a commercial share-dealing activity or in order to secure a direct or indirect involvement in the management of the companies in which the holding has been acquired, where they constitute the direct, permanent and necessary extension of the taxable activity, or where there is the active involvement in the management of a subsidiary.
The CJEU however distinguished the present referral concluding that, as the direct and exclusive reason for the aborted share disposal transaction was to secure funds to pay a debt, and did not relate to the taxable economic activity, or to the direct, permanent and necessary extension of the economic activity of the holding company or group, the sale of shares in this referral did not come within the scope of VAT within Article 2 and Article 9 of the PVD with the consequence that there could be no recovery of VAT on underlying costs within the scope of Article 168 of the PVD.
Although it was noted in the referral that there was a provision of management and IT services to the subsidiary, in its final comments the CJEU notes that the sale of the subsidiary would mean such services would cease and consequently would not have had any bearing in its analysis.
by Paddy Stapleton, RSM Ireland
The CJEU ruled in the case of Ryanair that, where a company intends to acquire all the shares of another company in pursuit of an economic activity consisting of the provision of taxable management services to that other company, input tax incurred on the preparatory acts is, in principle, fully recoverable, even if the proposed takeover is aborted.
The specifics of the case relate to when, in 2006, Ryanair made a bid for a strategic takeover of Aer Lingus. Although the takeover failed for reasons of competition law (Ryanair was only able to acquire around 29 percent of Aer Lingus’ shares), Ryanair had already incurred considerable costs for consultancy and other services related to the planned takeover. Ryanair therefore claimed deduction of the input tax paid, which was refused by the Irish tax authorities.
The CJEU did not however address whether a strategic takeover of a competitor is a direct, permanent and necessary extension of the taxable activity of the acquiring company and therefore, of itself, an economic activity, the CJEU throughout its judgement merely considering the content of the Irish court’s referral, that of Ryanair’s proposed management services to the target.
What this means
These Danish and Irish cases represent the latest of a number of high profile cases considering the VAT recovery on (typically not insubstantial) deal costs associated with a corporate transaction. It is further reminder that the nature of the activity undertaken by the incurring entity and the costs in question should be considered as a key part of any transaction planning. Practically, acquisitive businesses should consider the rulings and how best to properly document their plans such that they are on a best possible footing to recover VAT on deal costs.
VAT rate increase
In a further development from Ireland, the Irish Budget 2019 (announced 9 October) provided that the current 9% VAT rate will increase to 13.5% with effect from 1 January 2019, with certain exceptions. The rate increase mainly impacts hotels, other short-term guest accommodation providers and restaurants. The reduced rate was originally introduced to assist certain sectors in a deep recession. The 9% will be retained for the provision of sporting facilities and the supply of newspapers and other periodicals. The Budget also announced that the 9% rate will be introduced for the supply of electronic publications (currently 23%).
by Liesbeth de Groot, RSM Netherlands
From 1 January 2019 the reduced rate in the Netherlands will be increased from 6% to 9%. This reduced VAT rate applies to, amongst others, pharmaceuticals, groceries and labour-intensive services. No transitional arrangements are in force and the normal tax point rules will apply to determine whether 6% or 9% applies. This also means that the Dutch tax authorities will not impose any additional VAT assessments with respect to supplies that will take place in 2019 but have been paid for in 2018 and therefore accounting for at the lower rate. This is applicable with respect to all supplies of goods and services.
What this means
The moment that VAT becomes due is stated in the Dutch VAT Act. In case of a domestic supply to a business customer, VAT becomes due at the point that the invoice is issued or should have been issued. In case of a supply to a private individual VAT becomes due on the moment the supply is completed or the (pre)payment is received. Events impacted will, for example, be football matches or concerts that have already been paid for in 2018 but are yet to take place in 2019.
VAT taxable persons that supply digital services to private individuals in the EU are due to account for VAT in the EU Member State where the private individuals reside. In order to charge the local VAT rate and to pay the VAT to the competent tax authorities the MOSS system can be used.
What this means
For business it can be difficult to determine where the recipients of the digital services usually reside. For small business this could lead to a substantial administrative burden. Therefore a threshold of €10,000 (total amount of cross border sales) will be introduced per 1 January 2019 to limit this burden. If the services will not exceed the threshold, VAT is due in the country where the VAT taxable person is established. Furthermore the rules for invoices will be simplified. Only the invoicing rules that apply in the country where the VAT taxable person is identified for MOSS will be applicable.
by Andrienne Albritton, RSM US
South Dakota v. Wayfair update
Since the U.S. Supreme Court’s ruling in late June, indicating that physical presence is no longer the constitutional standard for determining whether or not a seller has a sales tax registration and filing obligations, or “nexus,” in a state, numerous US jurisdictions have expanded their efforts to work new economic nexus provisions into current legislation. Approximately 35 states have already introduced or imposed revenue and transaction count thresholds. Some of these new provisions were enacted in recent months with another half dozen scheduled to go live January 1 or February 1, 2019. The remaining states are expected to follow suit in the new year.
What this means
The Supreme Court’s elimination of the physical presence requirement is a monumental change for companies, and the states’ call to action has significant implications for businesses in every industry. Many remote sellers are now facing registration and filing obligations in US jurisdictions where they did not previously have such requirements. While more proposed federal legislation in response to the Wayfair decision is in the works, there are currently not any related levels of uniformity across the states.
We urge businesses to evaluate their current nexus footprint as well as their current business activities and related taxability of the products they sell and services they provide to US customers. Note that the states due not universally impose sales tax on particular goods and services, meaning that in one state a product or service could be exempt, while taxable in another. Thus, nexus should be the first step in determining registration and filing requirements in a US jurisdiction, but understanding the taxability of the products and services sold will become ever-more important as businesses evaluate potential exposure and implement new sales tax processes in a post-Wayfair environment.
For further infomation please email [email protected] to be put in touch with your local tax expert.