The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination May 205 VAT on Cross-Border Transactions & Customs Duties Advisory Paper Suggested solutions

2 ANSWER [Presentation & higher skills mark] Widbit Ltd Exchequer House Southampton O3 4NF Dear Mr Powis HM Revenue & Customs Gadget Lane Southampton SO VQ May 205 Widbit Ltd VAT Audit Thank you for your letter setting out your thinking on transactions you identified during your audit visit. For the reasons set out below, however, I believe that my client has correctly dealt with each transaction. ) LatheQuick SA I accept that a movement of one s own goods to another Member State is usually treated as a supply. As my client is not VAT-registered in Germany this would ordinarily mean the need to account for UK VAT on the movement. However, there is an exception to this rule here as the tools were moved temporarily to fulfil an existing contractual obligation (the repair) and there was always an intention to return the goods to the UK (evidenced by our pre-payment of the freight company) [cf. Article 4(f) SI 992/3]. In these circumstances there should also be no deemed acquisition when the tools come back into the UK. [ mark] For services it is correct that an invoice issued in advance of the basic tax point usually creates an earlier actual tax point. However, the rules are different when taking into account business to business supplies cross-border subject to reverse charge. The time of supply of such services cannot be affected by invoicing [compare Arts. 63 and /2/EC] but takes place when the service is completed or payment is made (whichever is earlier). As neither of these happened by 3 March 205, my client was correct not to include this on the first quarter VAT return and EC Sales List. [ mark] The basic tax point for goods is indeed when they are removed or made available to the customer [s 6(2) VATA 994]. However, special rules apply to the dispatch of goods to VATregistered customers in the EU. In this instance the time of supply is properly the earlier of the 5 th day of the month following removal of the goods or the issue of a VAT invoice [s6(7) and s6(8) VATA 994]. My client s treatment was again correct as the proper tax point was in April. 2)(a) On-going advice from Widbit SA I agree there can be a deemed tax point at the end of the full calendar year on continuous supplies of services cross-border, provided no invoice or other accounting document has been issued nor payment made. However, this is only applicable if the services have been rendered for more than 2 months without any other tax point arising [SI 995/258 reg 82]. In this case, as you note, the services began in February 204 so 2 months had not elapsed by 3 December 204. Widbit were therefore correct to apply reverse charge VAT in the March quarter rather than in December.

3 2)(b)Time limits input evidence As regards your assertion that my client claimed input tax late, HM Revenue & Customs own guidance states that the entitlement to make a claim to deduct input tax only arises when the taxable person has both incurred the input tax and received the VAT invoice to support its deduction. Therefore the VAT on the machine parts was eligible to be reclaimed in the return when my client received the invoices, despite this being considerably later than the basic tax point, namely when the goods were delivered. 3)(a) Evidence of taxable person status missing If a customer claims to be in business but is not VAT registered then HM Revenue and Customs guidance states that alternative evidence should be obtained. This can be in the form of other reasonable commercial evidence or records including contracts, business letterheads, a commercial website address, publicity material and certificates from fiscal authorities. For this reason I believe the evidence was admissible and a VAT number was not necessary for my client to treat the customers as in business from a VAT perspective. In the first case the nature of the work itself (linked to manufacturing souvenirs) underlines the argument that the client undertakes economic activity and is therefore a taxable person. As for the Pension Fund, this is a separate entity from the local authority which enters into transactions buying and selling shares and other assets. Such entities are routinely VATregistered on a voluntary basis in the UK by HM Revenue & Customs on the basis that their activity constitutes a VAT-exempt business dealing in securities. The Portuguese Pension Fund should be treated as a taxable person on the same basis. I trust this explains my client s approach and removes the need for you to raise an assessment. Yours sincerely For & On Behalf of Widbit Ltd T.Adviser 2

4 MARKING GUIDE FOR QUESTION TOPIC MARKS Tools for repair work own goods movement exception 2 Return of tools also ignored for VAT Business to business cross-border tax point Tax point intra-community dispatch 2 Reverse charge tax point continuous services 2 Input deduction time limit re: delay in obtaining evidence 2 Alternative evidence of business status 2 Manufacturer and pension fund arguments for taxable person status 2 Presentation & higher skills TOTAL 5 3

5 ANSWER 2 MEMO TO: AUDIT TEAM FROM: VAT TEAM DATE: MAY 205 SUBJECT: FURBLAST LTD VAT ISSUES [Presentation/Higher Skills mark] Overview In general when selling goods the place of supply and therefore taxation is determined by reference to: - where the goods are located when supplied to the customer, - where they end up, and - the VAT registrations of supplier and customer. The goods which start in Furblast Ltd s London warehouse and are delivered to customers in the UK are correctly treated as VATable. Where goods are supplied from the UK which are delivered to a retail client in Belgium who is not VAT registered in Belgium, then UK VAT should be applied unless the supply falls under the distance selling rules. Distance Selling (retail clients) Under distance selling rules, Furblast Ltd has the option to register and charge local VAT in Belgium or France from the outset. Such registration is compulsory, however, where sales to retail customers resident in an EU country exceed the local distance selling threshold (typically set at either 35,000 or 00,000 or the local equivalent). Based on the above projected sales, Furblast Ltd will breach the compulsory threshold for Belgium in October as their Belgian retail sales figure then exceeds 35,000 for the year to date. They would then be required to register with the Belgian authority and account for Belgian VAT on these sales. Furblast Ltd should also monitor the level of sales to French retail clients to ensure they do not overlook a similar obligation there. Wholesale clients and Triangulation The supplies to French or Belgian wholesale customers are irrelevant for the distance selling registration threshold. Provided Furblast Ltd obtains a valid EU VAT number from clients and the goods are removed from the UK, the supply would be zero-rated for UK purposes. Otherwise UK VAT would need to be applied. [ mark] Where the goods are sourced from the French supplier and shipped directly to the Brussels comic store, there is a risk that Furblast Ltd would be required to register for Belgian VAT as it is making an acquisition of the goods in Belgium. The onward supply to the comic store would then be liable to Belgian VAT. The EU rules offer a simplification method for such three party transactions (known as triangulation ) which the client should consider using. This would involve quoting the end customer s VAT number on the VAT invoice and reporting the sale as a triangular transaction on the EC Sales List (see below). However, triangulation would NOT be available if Furblast Ltd ends up registered for Belgian VAT under the distance selling rules. In that case it would account for VAT through its Belgian registration on the acquisition of the goods from France and would then be required to charge Belgian VAT on the supply to the Brussels comic store. Specialist local advice should be 4

6 sought on the Belgian aspects as administrative rules are not identical in different Member States. [3 marks] Evidence of removal from the UK It is vital that Furblast Ltd addresses its documentation issues. HM Revenue & Customs require proof of the sale and the removal of the goods from the UK, otherwise they can refuse zero-rating and impose UK VAT. Generally I would recommend Furblast Ltd keeps a copy of the sales invoice, showing: - Customer details including VAT number where applicable - Description of the goods and their value, - Destination and mode of transport etc. as well as some commercial proof of the shipping for example: - Details of insurance and freight charges - Certificate of posting - Commercial transport documents from the delivery firm Photocopies are normally not acceptable unless authenticated. [3 marks] Record-keeping More generally a business should retain VAT records for a minimum of six years unless otherwise agreed with HM Revenue & Customs. As well as the copies of their sales invoices, this includes the original VAT invoices on which they are claiming input VAT. Furblast Ltd must also ensure that it keeps a VAT account clearly showing the source and calculation of all the figures on their VAT return, including any adjustments for errors. [ marks] EU Sales Lists As Furblast Ltd is supplying goods to other VAT-registered traders in Europe and (potentially) will be making triangular sales, it will be required to submit recapitulative statements (known in the UK as EU Sales Lists) periodically. If Furblast Ltd has correctly filled in its VAT returns, it should receive the forms automatically. Furblast Ltd will need to provide the client s VAT number, the value of the relevant supplies in the period and an identifier to show whether the transaction was a straight dispatch to the client of goods or a triangular transaction. The deadline is 4 days after the period end (if submitted on paper) or 2 days if submitted online. Submission is calendar quarterly unless Furblast Ltd opts for monthly returns or exceeds the 35,000 threshold for supplies of goods to EU business customers in a calendar quarter. As Furblast Limited expects to exceed 35,000 (namely through wholesale French and Belgian projected sales) it would be expected to submit its EU Sales Lists monthly. [ mark] Intrastat In addition to EC Sales lists, once the value of dispatches of goods to other EU countries in a calendar year exceeds 250,000, Furblast Ltd must inform HM Revenue and Customs of the month in which it has breached the threshold and will need to submit Supplementary Declarations with statistical data (known more commonly as Intrastat). Assuming an exchange rate of :.25, this converts to 32,500, which is projected to be reached in November 205. The returns are due by the 2 st of the end of the reference period (usually calendar months). 5

7 MARKING GUIDE FOR QUESTION 2 TOPIC MARKS Place of supply goods never leave UK Place of supply Belgian retail B2C Distance selling, threshold, implications 3 Distance selling option to register voluntarily from outset Calculate when threshold breached Wholesale clients liability Triangulation local registration 2 Evidence for dispatch and zero-rating 3 Accounting and record-keeping requirements ECSL frequency and content, submission deadline 2 Calculate monthly ECSL required Intrastat incl. calculate dispatch threshold 2 Presentation/Higher Skills TOTAL 20 6

8 ANSWER 3 From: Kevin Advisor To: Charles Trate Date: May 205 Subject: VAT issues in relation to Nollaw Ltd Dear Charles Thanks for your note my comments follow: ) Platform Development costs Providing an exempt payment service to customers outside the EU is a specified supply and associated VAT on costs is fully recoverable. [ mark] The 200,000 consultancy fee from the US parent is subject to the reverse charge but, as noted above, this is reclaimable. VAT incurred on the executives costs is not input VAT of Nollaw Ltd and cannot be deducted. It does, however, form part of the consideration for the imported service and must be treated in the same way as the fee (i.e. subject to the reverse charge: see above). HM Revenue & Customs policy on VAT reclaim in relation to foreign services is to ask would the service have been taxed if supplied in the UK [cf. s26(2)(b) VATA 994]? In their view options to tax can only cover UK buildings, so a Dutch office rental would not qualify as standard-rated. As a result the related UK VAT on legal advice is fully irrecoverable. Although we could seek to argue that this is an incorrect approach following basic VAT principles of fiscal neutrality and non-discrimination it would likely require litigation. [ mark] The surveyor s services are services relating to land. UK VAT should not have been charged, as these are treated as supplied in the Netherlands (where the building is situated). This cannot be reclaimed and they should ask the surveyor to refund it.. [ mark] In principle, a claim may be made through the portal, for VAT incurred in another member state, such as Poland or Italy. Claims must be based on the calendar year in which the cost was incurred and must be submitted within nine months of the end of that calendar year. The claim must cover a period of at least three months and be for at least 400. (If the claim covers a period of less than three months falling at the end of the calendar year it may still be submitted and must be for at least 50). Copies of invoices may be required. VAT is not refundable unless it would be deductible under the law of the member state where the cost was incurred. For example, some member states do not refund VAT on meals. The amount of EU VAT refundable will be determined under the deduction rules of the Member State where the VAT was incurred and that Member State will repay directly. Nollaw Ltd s UK VAT recovery rate will also need to be considered. [ mark] 2) Non-EU Client Firstly one looks at the business establishment of the client to determine the place of supply. This is "where the functions of the business's central administration are carried out". Account must be taken of the place where: - essential decisions are taken on the general management of the business 7

9 - the registered office of the business is located, and management meets. Where there is uncertainty, the place where essential decisions concerning the general management of the business are taken shall take precedence. [cf. Article 0 Council Implementing Regulation 282/20] If Yaffel Ltd is genuinely managed and controlled from Jersey, this is outside the EU for VAT purposes and so the consultancy service would be correctly treated unless it would be more rational in the circumstances to treat the UK registered office as a fixed establishment receiving the supply. [ mark] A fixed establishment should have a sufficiently permanent presence of the human and technical resources necessary to receive the relevant supply. [cf. Article 0 Council Implementing Regulation 282/20]. Registered offices even without permanent staff have been seen by the UK Tribunal as sufficient to constitute a fixed establishment for the purposes of receiving e.g. audit or consultancy services (cf. Binder Hamlyn EDN/82/55, [983] VATTR 7, (VTD 439) and Vincent Consultants LON/88/254, [988] VATTR 5, (VTD 309)). It is thus a question of fact as to where this consultancy was really received. Although the place where the contract was signed is relevant, per the Zurich Insurance Company case [(C3/2006/02/CHRVF)] it is not determinative. As far as possible the VAT treatment should reflect the actual economic situation (cf. DFDS A/S [ECJ C-260/95] and Gunter Berkholz [ECJ 68/84]) [3 marks] If Nollaw Ltd can demonstrate they had no contact with the UK registered office or any staff there and that the advice more properly relates to the Jersey team, then their treatment is likely correct. The VAT recovery of the related costs will be the same. Given it would be VATable where provided in the UK, they have a right to reclaim attributable VAT on costs in full. [ mark] Regards Kevin 8

10 MARKING GUIDE FOR QUESTION 3 TOPIC MARKS Specified supplies recovery in principle US parent fees/expenses - reverse charge recovery 2 Land-related supplies input VAT Surveyor cost not UK VAT - place of supply EU VAT portal deadlines and claim minima 2 EU VAT deduction principles Place of supply business establishment 2 Place of Supply- rationality test Fixed establishment definition - registered offices 3 Associated input VAT foreign supplies TOTAL 5 WORDS could claim a UK VAT refund via the 3 th Directive scheme. [ mark] 9

11 ANSWER 4 To: Tax Partner From: Indirect Tax Manager Client: First Zero Pvt 8 May 205 Briefing notes for meeting FZ to provide electronically supplied services; such services are defined as the supply of software, images, text and information involving minimal human intervention and delivered using the internet or an electronic network. FZ s services fall within the definition. Business to Consumer ( B2C ) supplies are treated for VAT purposes as made where the customer is established, belongs or lives. FZ will have to account for VAT on the supplies in each Member State where each individual customer belongs. It will need to prove the place of supply by keeping records about its customers such as exactly where a customer is located and establishing the customers VAT status. FZ will need to collect information about the customer to justify its decision about how to tax the customer. Such information could be the billing address of the customer and the Internet Protocol (IP) address of the device used by the customer to access the services. Additionally, FZ will need to keep information about the VAT rates in the Member State of its customers. Rather than registering for VAT in each Member State where a customer lives, FZ can make use of the VAT Mini One Stop Shop ( MOSS ) arrangements. FZ can register for the MOSS arrangements in a single Member State of its choice. If FZ registers with HM Revenue & Customs then at the end of each calendar quarter, FZ will make a single return to HM Revenue & Customs for the output tax using the VAT MOSS portal. FZ will make a single payment covering the total of all the individual VAT liabilities across all the relevant Member States. HM Revenue & Customs will then split the return information and the VAT payment and send it to the Member States where the customers live. With regard to the provision of physical copies of training material, if these were despatched to the EU, these would be subjected to import clearance, but if treated as books would be zero rated for import VAT purposes. This would apply regardless of whether FZ or its customer was shown as the importer on the customs entry declaration. The materials would need to be allocated a proportion of the training course module costs for import value purposes. The consultancy services are to be provided by FZ to private customers in the EU using a webcam and . These are not electronically supplied services since they do not constitute the supply of text, images, software or information over the internet involving minimal human intervention and are not therefore covered by MOSS. As FZ will be supplying consultancy services to non-business customers in the UK, and because FZ s place of belonging is outside the EU, there will be no requirement to charge or account for UK VAT on the charges to customers. As FZ is not established or VAT registered in an EU Member State it can only recover VAT incurred in an EU Member State according to the procedure in the 3 th VAT Directive. The MOSS arrangements provide only for the payment of VAT and cannot be used to reclaim any VAT. 3 th Directive claims made in the UK under the Directive have to be made by 3 December after the 2 month period ending on the previous 30 June. The minimum limits for 0

12 making claims are: not less than 30 VAT for a 3 to 2 month period - or 6 VAT for a whole year. Registration under MOSS relates only to accounting for output tax in respect of electronically supplied services; it cannot be used to reclaim UK input VAT. FZ will be able to use the 3 th VAT Directive to recover UK VAT provided: (a) it is not registered, liable or eligible to be registered in the UK other than as required under MOSS; (b) it does not have place of business in the EU; and (c) it does not make any supplies in the UK, other than those accounted for separately under MOSS. As FZ meets these conditions, it can use the 3 th Directive to make a reclaim of VAT as shown in the table below. The marketing seminars do not constitute making a supply of goods or services because there is no consideration. Some business expenditure is blocked from the reclaim provisions by HM Revenue & Customs: UK costs incurred by FZ Hotel accommodation Venue hire Spa and gym facilities Farewell dinner Rail fares Car hire VAT reclaim eligibility Eligible Eligible blocked* blocked* no UK VAT 50% eligible *Reclaims relating to VAT on the spa and gym facilities costs and VAT on the farewell dinner cost are blocked because these are considered in the nature of hospitality and business entertaining.

13 MARKING GUIDE FOR QUESTION 6 TOPIC MARKS Presentation Identifying type of services supplied Meaning of electronically supplied services or providing examples of ESS (at least two from software, images, text, information) Proving/establishing place of supply by reference to the customer location, that is to say accounting for VAT where the customer belongs How to register for MOSS Where to register for MOSS Benefit of MOSS - single payment and single return for all output tax across EU Alternative to using MOSS; register in each Member State where a supply is made by them Import clearance treatment of physically shipped training materials (who will act as importer and VAT treatment) Identifying that the consultancy services will not be subject to VAT because the supplier has no place of belonging in the EU and the recipients of the service are non-business customers Identifying 3 th VAT Directive to recover VAT on marketing costs Conditions for using 3 th VAT Directive - business not registered for VAT, no place of business in EU, not making supplies Identifying recoverable VAT items (Any 4 of the 6 possible x ½ for recoverable/partially recoverable items max is 4 x ½ = 2)) 2 Identifying blocked items and explaining why TOTAL 5 2

14 ANSWER 5 To: terrysmith@eazitray.com From: taxspecialist@ctas.co.uk 8 May 205 Subject: Customs valuation Dear Mr Smith Thank you for the information which you provided about Eazitray group. There are a number of matters concerning customs value declarations which I should bring to your attention. Imports by Food Packaging UK Ltd Food Packaging UK Ltd is a related party of Eazitray Inc. for customs valuation purposes because Eazitray Inc. owns more than 5% of the voting stock of Food Packaging UK Ltd. However, HM Revenue & Customs are satisfied that despite the fact that the parties are related, the relationship has not influenced the price. Therefore it is appropriate to use Method. Royalty payments by Food Packaging UK Ltd Royalties are to be included in customs values where they are both (i) a condition of the sale of those goods and (ii) they relate to the imported goods. Although Food Packaging UK Ltd has declared the payments, the agreement covers two matters: the imported goods themselves and general trademark defence. The clauses concerning the 2% payment state that it is a condition of sale and that there is intellectual property embodied in the imported goods. Therefore the conditions for inclusion are met. As regards the 0.5% charge, although the charge is stated as being a condition of sale of the imported goods, the trademark defence and legal services do not relate to the imported goods. Since it is necessary to meet both requirements for inclusion in customs values, the 0.5% payment should be excluded, which will result in savings. The royalty payments made to Mr Quick are made to him personally. The import VAT treatment of the amount of the royalty element to be included in customs values is therefore to account for and pay VAT at 20%. Customs Duty and VAT liability with respect to royalty payment a) Total royalty treated as dutiable by HM Revenue & Customs Turnover 2 months to 30 April 205 7,000,000 Royalty 2.5% 75,000 Customs 4.3% 7,525 Import VAT value 75, ,525 82,525 Import 20% 36,505 3

15 b) Actual royalty payment dutiable (that is, excluding element outside scope of customs rules) Turnover 2 months to 30 April 205 7,000,000 Royalty 2.0% 40,000 Customs 4.3% 6,020 Import VAT value 40, ,020 46,020 Import 20% 29,204 [Credit will be given for shortcutting the treatment of the royalty by saying that 0.5% has been overpaid on 7m at 4.3% which equates to an overpayment of,505 in duty. This is the same as the calculation above of 7,525-6,020. The Import VAT calculation could have been shortcut also and credit given for showing 20% x [(0.5% of 7m) +,505)] = 7,30] A request for reconsideration of the C8 should be made to HM Revenue & Customs on the basis that the calculations they have made are based on an incorrect application of the customs valuation provisions to the royalty agreement. The Customs Duty demanded should be reduced by,505 and the Import VAT demanded reduced by 7,30. Pricing adjustments Since there have been adjustments that have increased the combined freight and insurance charges by 8p per kg and the price of plastic by 35p per kg, there is an impact on the customs values declared by Food Packaging UK Ltd. These changes should be disclosed to HM Revenue & Customs who will issue a C8 demand for the additional Customs Duty and Import VAT. The information provided to HM Revenue & Customs should reflect the upward adjustment to the charges and price as well as the settlement discount. I have set this out below: Effect on Customs Duty and Import VAT of adjustment to freight and insurance charges Amount of plastic shipped Uplift on freight and insurance prices 450,000 kg 8p per kg Increase in charges 36,000 Additional Customs 4.3%,548 Value for Import VAT 36,000 +,548 Import 20% 37,548 7,509 4

16 Effect on Customs Duty and Import VAT of pricing adjustment for plastic Amount of plastic purchased Uplift in price 450,000 kgs 35p per kg Increase in cost 57,500 Additional Customs 4.3% 6, Value for Import VAT 57, , Import 20% on 64, , [Credit given for shortcutting the calculation to show additional duty on the increase of 57,500 in the value of the goods and an increase of 36,000 in freight, both ( 93,500) at 4.3% = 8, extra in Customs Duty ( 6, ,548 shown above) and extra import VAT of (( 57, , ,320.50) x 20%)]. Effect on Customs Duty and Import VAT of discount Increase in cost of plastic (as above) 57,500 Less 5% discount for early settlement (7,875) Adjusted value for Customs Duty 49,625 Additional Customs 4.3% 6,434 Value for Import VAT 49, ,434 Import 20% on 56,059 3,22 Summary of impact of adjustments to price and charges on Customs Duty and Import VAT liabilities Additional Customs Duty Additional Import VAT Adjustment due to uplift of price of plastic (reflecting discount taken) Adjustment due to uplift of freight and insurances charges Total adjustments to Customs Duty and Import VAT liabilities 6,434 3,22,548 7,509 7,982 38,72 5

17 I will be pleased to make the disclosures and submissions to HM Revenue & Customs referred to above on your behalf. Please contact me if you have any questions or need further advice. Kind regards Anna d Viser 6

18 MARKING GUIDE FOR QUESTION 5 TOPIC MARKS Presentation Use of the subsidiary s import values satisfactory subject to satisfying price influence rule Basis of inclusion of the 2% royalty condition of sale and related to imported goods satisfied Basis of excluding the 0.5% royalty failure to meet of one the conditions for inclusion in customs values Identifying that as the royalty is paid to an individual, import VAT is applicable (rather than B2B treatment) Computing the adjustment to the amount of royalty subject to Customs Duty and Import VAT Computing the adjustment to the amount of Customs Duty and Import VAT liabilities in respect of the royalty payment Identifying that the transfer pricing and the freight and insurance adjustments have an impact for customs valuation purposes Explaining that the transfer pricing adjustment and the freight and insurance uplift should be disclosed to HM Revenue & Customs so that the liabilities can be re-assessed Computing the effect of the freight and insurance adjustment on the Customs Duty and Import VAT liabilities Computing the effect of the pricing adjustment on the cost of plastic for the Customs Duty and Import VAT liabilities Computing the effect of the discount on the cost of the plastic on the Customs Duty and Import VAT liabilities Summarising the changes to the total Customs Duty and Import VAT liabilities caused by the change of price on plastic and on freight and insurance charges 2 2 TOTAL 5 7

19 ANSWER 6 Parvian Nathilee Finance Director Ready Components Limited The Industrial Estate Manufacturing Way Portring GA4 5DD Ezi-Numbers Accounting Abacus House Westport GA8 8TT 8 May 205 Dear Parvian Customs Duty & Import VAT Thank you for your recent letter. There are some ways in which you can reduce your Customs Duty and Import VAT liabilities and I outline these below. Imports from Japan Ready Components can save Customs Duty and Import VAT on imports of semi-finished components from Japan using the Inward Processing Relief (IPR) suspension or drawback arrangements. Drawback has fewer advantages than suspension so I recommend that we focus on IPR suspension arrangements. IPR suspension can be used to suspend the Customs Duty and Import VAT when the goods are imported and provided the finished goods are re-exported they never become payable. Ready Components will need to be authorised by HM Revenue & Customs to use IPR. The information to be provided in the application must include details of the goods to be processed and the compensating (or end) products - identified by their commodity codes, the rate of yield (that is to say the ratio of goods put into processing the end goods), and the throughput period, (that is to say the time that the processing operation takes from import to re-export). Sometimes, an importer has to satisfy what is known as the Economic Test, which means that you need to prove why you cannot use EU sourced goods. In the application, an Economic Code will indicate the basis for importing the goods but it will not be necessary for Ready Components to show why it cannot use EU sourced goods, as your goods are not in the agricultural sector. Your authorisation will be the UK authorisation-without economic test and the Economic Test is deemed to be met on your goods. Supplies to EU customers The 5% of goods sold to Heavy Industrie are eventually re-exported outside the EU. If Heavy Industrie are authorised by the Italian customs authorities to receive IPR suspended goods, then Ready Components may deliver the goods duty suspended (having claimed IPR at the time of import) Ready Components must also be authorised to transfer Duty and VAT suspended goods to Heavy Industrie. In respect of EU customers, the 0% of goods sold to Ironcrate remain in the EU and since these goods are not re-exported the corresponding imported goods used to manufacture them are not eligible for IPR. Savings 8

20 My computations below therefore include goods supplied to Heavy Industrie to illustrate the maximum potential savings using IPR. % of goods eligible for IPR: Goods re-exported directly 85% Goods re-exported via Heavy Industrie 5% Total goods eligible to benefit from IPR 90% CIF basis CIF : Year Customs value of goods entered to IPR 5.5 million x 90% = 4,950,000 Customs Duty saving 4,950,000 x 5.3% = 262,350 VAT value of imported goods 4,950, ,350 = 5,22,350 Import VAT saving 5,22,350 x 20%,042,470 CIF : Year 2 Customs value of goods entered to IPR 6. million x 90% = 5,490,000 Customs Duty saving 5,490,000 x 5.3% = 290,970 VAT value of imported goods 5,490, ,970 = 5,780,970 Import VAT saving 5,780,970 x 20% =,56,94 EXW basis EXW : Year Customs value of goods entered to IPR ( 5.0 million + 300,000) x 90% = 4,770,000 Customs Duty saving 4,770,000 x 5.3% = 252,80 VAT value of imported goods 4,770, ,80 = 5,022,80 Import VAT saving 5,022,80 x 20% =,004,562 EXW : Year 2 Customs value of goods entered to IPR ( 5.4 million + 500,000) x 90% = 5,30,000 Customs Duty saving 5,30,000 x 5.3% = 28,430 VAT value of imported goods 5,30, ,430 = 5,59,430 Import VAT saving 5,59,430 x 20% =,8,286 9

21 Summary CIF ( ) EXW ( ) Year Customs Duty 262, ,80 Import VAT,042,470,004,562 Year 2 Customs Duty 290,970 28,430 Import VAT,56,94,8,286 Total benefit Customs Duty 553, ,60 Import VAT 2,98,664 2,22,848 Clearly more Customs Duty and Import VAT is saved under the CIF arrangements. However since IPR operates whichever delivery term is used, the import tax liabilities need not be a factor in deciding which of the two incoterms to use. The exception to this is the 5% of goods which are not re-exported from the EU. In tax terms, the EXW prices lead to lower Customs Duty and Import VAT liabilities than CIF. Returned Goods It is not necessary to increase the Kenya contract price to cover the cost of Customs Duty when the equipment is re-imported. Goods which are community goods can be exported and then re-imported free of Customs Duty and Import VAT using the Returned Goods Relief (RGR) arrangements subject to certain conditions. The conditions for relief from Customs Duty are: the goods must be community goods, which have been exported from the EU, which have not been processed or manufactured while outside the EU (other than for maintenance and repairs) and are returned to the EU within 3 years. The conditions for relief from Import VAT are the same as for Customs Duty, plus the goods must not have changed ownership whilst outside the EU, any VAT must have been previously accounted for and the export is not designed to circumvent VAT rules. As the equipment will qualify for RGR, there will be no need to pay any Customs Duty or Import VAT when the equipment is re-imported into the UK. The potential savings will be as follows: CIF value of equipment 75,000 Customs Duty saving with RGR 75,000 x 6.5% =,375 Import VAT value 75,000 +,375 = 86,375 Import VAT saving with RGR 86,375 x 20% = 37,275 Total potential saving*, ,275 = 48,650 20

22 *The Import VAT would be recoverable on your VAT return, but there is a cash flow benefit in not having to pay it at the time of import. In terms of export evidence, Ready Components must retain documentary evidence of export in its records, for example, an authenticated bill of lading or air waybill, a copy of the export SAD obtained from HM Revenue & Customs when the goods were exported or the appropriate INF form. The RGR CPC must be quoted on the import declaration to show the goods are being imported to RGR. I trust that this advice is of value; please let me know if you wish us to implement either IPR or RGR for you. Yours sincerely Jo Jones 2

23 MARKING GUIDE FOR QUESTION 6 TOPIC MARKS Presentation 2 Identifying methods of IPR (suspension and drawback - ½ each) Explaining benefits of suspension IPR application: identification of goods by commodity code, identifying rate of yield ( ½ each) IPR application identifying throughput period and identifying economic test not needed and UK authorisation-without economic test as the appropriate one (½ each) Identifying any transactions which are eligible for treatment of intra-eu supply of duty and VAT suspended goods between IPR authorised traders Computing goods eligible for entry to IPR Computing Customs Duty saving and Import VAT saving for each of 2 years under 2 different incoterms (/2 x 2 x 2 x 2 = 4) 4 For example: EXW Year : Customs Duty saving ½ Import VAT saving ½ EXW Year 2: Customs Duty saving ½ Import VAT saving ½ CIF Year : Customs Duty saving ½ Import VAT saving ½ CIF Year 2: Customs Duty saving ½ Import VAT saving ½ Total ½ x 2 x 4 = 4 marks OR any other computational method by which these eight figures for savings are calculated by a candidate (8 x ½ = 4 marks) Computing the total benefit of IPR under EXW and CIF & conclusion 2 Identifying Returned Goods Relief for testing goods to and from Kenya RGR use conditions: community goods, exported from the EU, not processed while outside EU, returned within 3 years (/2 mark each, max 2 marks) 2 Additional ownership requirement for Import VAT relief Computing Customs Duty and Import VAT savings using RGR Requirement to retain records to evidence export for VAT purposes Documentary evidence: eg authenticated bill of lading, air waybill, copy of export SAD, INF document TOTAL 20 22