The Chartered Tax Adviser Examination

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1 The Chartered Tax Adviser Examination November 2014 VAT on Cross-Border Transactions & Customs Duties Advisory Paper Suggested solutions

2 Q1 Client s Address Date Adviser s Address Dear Bob PREFERENCE AND AUTHORISED ECONOMIC OPERATOR Thank you for your letter. GSP / Preference The Generalised System of Preferences makes lower rates of duty available to goods manufactured in less developed countries. The EU does this to encourage economic development in certain countries. The liability to Import VAT is unaffected. There are three rules to be met, briefly these are: the goods must originate (meet specific rules about being made in the preference receiving country); they must not be altered before import; and you must have the correct paperwork. If you do not claim preference at import you will pay the ordinary higher rate of Customs Duty. To claim preference you must present the GSP Form A (GSP) by entering a code on your import entry. You do not need to physically give the GSP to HM Revenue & Customs, they will ask for it if they wish to inspect it. You do not have to claim preference. If you have any doubt over whether the goods qualify it is prudent not to claim it. If you do and the goods are found not to have met the rules, you could be liable to pay the normal (higher) rate of Customs Duty and possibly penalties, on imports in the last 3 years. It is sensible to take all reasonable steps to ensure that you understand the origin rules and to ask your suppliers to confirm that they understand them and the goods do in fact meet the rules. If you can afford to, it is wise to visit the factories to satisfy yourself that they are where they say they are and the processes described do in fact take place. This can protect you from demands for duty where you claimed preference and goods are later found not to qualify. This is known as good faith relief. I suggest you do as much of this as is possible for imports where you will make a belated claim, see below. You may wish to consider insuring yourself against future demands for Duty. I recommend that you claim preference in the future where you have taken these precautions. Belated Claim Where you did not claim preference at import, you may make a belated claim using a C285 Application for Repayment / Remission form. You must provide HM Revenue & Customs with entry numbers, amounts of duty paid, amounts now due and the original GSPs: photocopies would not be accepted. It is important to note that GSPs would have to be within their 10 month period of validity on the day the claim was received for a belated claim to be accepted. You could either: a. submit a claim covering a short period for your oldest extant certificates and then another for more recent ones later. or b. submit a protective claim to stop the GSPs going out of time. The minimum information required is a list of affected import entries and reason for the claim. You submit a full claim with the supporting paperwork within an agreed timescale. GSPs would be treated as if they were submitted on the date the protective claim was received. Which approach is best depends upon how quickly you can collate the information. 1

3 If you can convince HM Revenue & Customs that there were exceptional reasons why the GSPs were not submitted within the period of their validity they may accept late submission However, simply misclassifying the goods, would not be viewed as exceptional circumstances, so I would not recommend that you pursue this unless there are exceptional circumstances which you did not mention. Overall claims cannot go back more than 3 years. Binding Origin Information (BOI) BOI is where the Customs Authorities give a binding ruling on the origin of products to give the importer certainty over where products originate from. That is to say it prevents HM Revenue & Customs from querying which country goods were manufactured in. These would not help in your current situation because BOIs will not be issued after the goods have been imported and because it is not origin but classification which has been questioned. BOIs are legally binding across the EU for a 3 year period. Authorised Economic Operator (AEO) AEO status will not help you in defending the claim to duty. AEOs may be the subject of less audit work than non-aeos but the status should not affect the outcome of audit work. I am however, concerned about the effect this error might have on your AEO status. AEOs must have a good record of compliance, appropriate systems and cover for key personnel. HM Revenue & Customs recognise that AEOs will make errors, they look critically at what has led to any error and how the AEO intends to prevent a reoccurrence. I would expect HM Revenue & Customs to look critically at the impact the departure of your Customs Manager had on the business such as whether processes were updated and also whether this classification error is related to a failure to operate internal systems or failings of those systems. This could result in suspension of your AEO status, whilst you rectify any shortcomings, or in withdrawal if shortcomings are not satisfactorily addressed. I do not wish to underplay the importance of the financial loss caused by the unexpected demand for duty but I cannot over emphasise the need to address the root causes of the error and demonstrate this action to HM Revenue & Customs. I suggest we meet to discuss appropriate action. Yours sincerely Adviser 2

4 MARKING GUIDE TOPIC MARKS GSP / Preference Preference reduces Customs Duty but not VAT 1 Description of three basic rules 1 Preference does not have to be claimed 1 GSP must be presented & what that means 1 Good faith relief precautions 1 Belated Claim Belated claim can be made in Period of Validity 1 Information including Original Certificates required 1 Consider protective claim and minimum information 1 Don t have exceptional circumstances 1 Binding Origin Information BOIs What they are, but won t help. 1 Authorised Economic Operator AEO won t help fight C18, C18 could affect AEO status 1 Record of compliance and importance of processes 1 HM Revenue & Customs will look at reasons for errors 1 Could lead to suspension / revocation 1 Presentation 1 TOTAL 15 Bonus Mark DSG or Lane Fouracres case, if mentioned and relevance explained 1 3

5 Q2 Client s Address Date Adviser s Address Dear Nathan VALUATION OF DESIGNS, MOULDS AND CASES Thank you for your letter. There are special rules for determining where, for VAT, supplies of goods and services are deemed to take place. Design Design services fall under the business to business (B2B) general rule, which states that the supply is treated as taking place where the customer belongs. If you provide suppliers based in other EU member states with your VAT registration number they will not charge you VAT. You account for both the input and output tax on your VAT return, using the reverse charge. If the supplier is based outside the EU you would not need to give them your VAT registration number. You would need to account for VAT under the reverse charge. Manufacture and supply of moulds The supply of moulds to Chinese manufacturers free of charge, which are shipped from another Chinese manufacturer, is outside the scope of UK VAT. You may want to take specialist advice on the position in China. Leather cases produced in Italy Where you supply hard cases to third party manufacturers based in Italy, for them to use in the manufacture of a finished product, the supply by you of hard cases to them does not attract VAT. The work on the hard cases is treated as a service. The place of supply of this service, referred to as work on goods falls under the general rule for B2B transactions. It is deemed to take place where you, as the customer, belong. You should account for VAT on the Italian manufacturers work on your goods under the reverse charge. Value of goods at import - principles The hard cases subsequently supplied to the Italian manufacturers and the finished cases imported from China can be valued under Method 1, that is the transaction value, or the price paid or payable for the goods. The parties are unrelated and there appear to be no other restrictions that would preclude this method. Along with the usual adjustments for freight and insurance (up to the point of introduction into the EU), the value must be adjusted to reflect the cost of the assists that you provide. Assist means anything used to manufacture the product or which is added to or affixed to the product and which has been supplied by the buyer of the goods (JCL) to the supplier at a reduced cost or free of charge and the value of which has not been taken in to account when the supplier sells the product to the buyer (JCL). Common examples include designs for goods; tools or moulds used to make goods, and labels. There are three ways in which the value of the assist (for example a mould) may be added to the value of the goods at import. Add the entire assist s value to the first import of the goods. This is simple but the drawback is that you will pay the Customs Duty and Import VAT due on the value of the assist all at once. 4

6 Apportion the assist s value across all units which have been manufactured at the time the first shipment is exported. This may end up with a similar outcome to the first option, for example if the entire stock produced so far is exported in the first shipment. Apportion the assist s value against the number of units that you expect the mould will be used to produce over its lifetime (maximum period of three years). This spreads the payment of Customs Duty and Import VAT over the longest period but has additional administration burdens. You can choose any of these methods and may use different methods for different assists. I recommend calculating the amount of Customs Duty and Import VAT due on each mould before you make a decision. If the mould values or Customs Duty on the imported product are low it is often worth paying the Customs Duty and Import VAT on the first import to save future administrative costs. Value of Design and Moulds The design supplied free of charge to the Chinese mould and case manufacturers would have to be added to the Customs value of the imported goods if it had not already been included in the invoice value charged by the Chinese manufacturers, which is highly unlikely. There is one exception. Design undertaken within the EU and supplied by the buyer to the seller free of charge does not need to be added to the value of the imported goods. This value of the specialist moulds, the amount JCL paid for the tooling, must be added to the invoiced value of the imported goods. It is important to note that the value of the moulds would have to include, where appropriate, the value of the design supplied free of charge to the manufacturer of the mould. Value For VAT of Imported goods The value of the goods for Customs purposes will therefore be the invoice value of the goods, plus any elements for the assists and the usual adjustments for transport costs and insurance if this is not already included in the invoice value. The value for import VAT would be based on the Customs value including incidental costs (e.g. commission, packaging and insurance) plus Customs Duty and would have to include any additional transport to the point of delivery in the EU. I trust that this is helpful, but please do not hesitate to contact me, if I can be of any further assistance. Yours sincerely Adviser 5

7 MARKING GUIDE TOPIC MARKS Design Design business to business general rule 1 Supplier is EU VAT registered JCL must supply its VAT registration number 1 Supplier is in third country reverse charge 1 Manufacture and supply of moulds Moulds supplied to Chinese manufacturers are outside the scope of UK VAT 1 Leather cases produced in Italy Supplying hard cases to Italian co does not attract VAT 1 Work done on hard cases is work on goods reverse charge 1 Value of goods at import principles Imported goods valued under Method 1 plus assist 1 Definition of assist 1 Three ways of apportioning value of assist 2 Recommendation of considering methods as appropriate 1 Value of Design and Moulds Design is an assist: not dutiable if undertaken in EU and supplied FOC 1 Moulds are an assist & value of moulds includes their design 1 Value for VAT of imported goods Value for VAT based on Customs Value 1 Presentation 1 TOTAL 15 6

8 Q3 Client s Address Date Adviser s Address Dear Mr Cohen VAT REGISTRATION AND LIABILITY OF SUPPLIES The supply of goods for VAT purposes is determined by where goods are supplied or made available; services depend on where the supplier or customer belongs, see below. Liability of Supplies Buying and selling aggregates This is a supply of goods. Since the aggregate was outside of the UK both when you bought and sold it both transactions are outside the scope of UK VAT. Marble bought in Italy, delivered direct to France This would be another supply of goods. If you were registered for VAT in the UK at the time the Italian company sells you the marble, the basic provisions for these transactions are that the Italian Company should zero-rate its supply to you. You could be liable to register for VAT, account for acquisition VAT and supply VAT in France, depending on the level of your supplies. However in a triangular situation like this, provided certain rules are met, a simplified triangulation procedure that prevents suppliers having to register in many countries may be used. Under this the Italian supplier zero-rates its supply to you and you in turn zerorate your supply to your customer. Your invoices must contain all the details for a normal Intra-EC supply and must be reported on your EC sales list. However, if you are not registered for VAT in the UK at the time the Italian company sells you the marble, they will have to charge you Italian VAT. You could be liable to register for VAT and to account for VAT on the supply in France, depending on the level of your supplies. There would appear to be a clear benefit to you being VAT registered in the UK. Marble sold to Germany commission Charging commission on the sale of goods is classed as the services of an intermediary. As you are operating in a business capacity your intermediary services would fall under the business to business (B2B) general rule and are treated as taking place where your customer belongs. There is no requirement for your customer to be registered for VAT for the transaction to fall under the B2B rules. The transaction is outside the scope of UK VAT. Your customer will account for the VAT using the reverse charge procedure. Commission on sale of land. The place of supply of a service which relates to land is deemed to take place where the land is located. This includes the services of estate agents which is how your supplies in relation to the villa would be classified. The location of supplier and customer are irrelevant. You need to check, in Spain, whether you need to register for VAT there. 7

9 Where you belong for VAT purposes When deciding on the liability of these transactions it is important to consider where, legally, you belong. This is an important concept in VAT law and getting that correct is essential for determining where some transactions are deemed to have taken place for the purpose of VAT and where someone needs to or may register for VAT. I believe you would be regarded as belonging in the UK for the reasons set out below. EU law talks about establishment and UK law belonging but these have the same meaning. Business establishment is defined as the principal place of business and is often the head office or the place from which the business is run. Each business may have only one business establishment. Fixed establishment refers to any other establishment other than the business establishment from which the business operates. It means any permanent place that the business has which has the human resources capable of providing or receiving services. A business may have any number of fixed establishments. Temporary establishments cannot count as fixed establishments. The usual place of residence for a private individual is normally where they have set up home with their family and where they are in full-time employment. An individual may have only one usual place of residence at any one time. A person belongs in the UK for the purpose of making or receiving supplies of services, if any of the following apply: They have a business establishment or other fixed establishment in the UK and none elsewhere; They have a business establishment in the UK and fixed establishments in other countries and it is the UK establishment which is most directly connected with making or receiving the supplies in question; They have a fixed establishment in the UK and a business establishment and or fixed establishments in other countries but it is the UK establishment which is most directly connected with the making or receiving of the supplies in question; or They have no fixed establishment anywhere but their usual place of residence is in the UK. It is likely that your home in the UK is your business establishment, given that any records are kept there. I do not think it would be possible to view either of your other homes as a business establishment or a fixed establishment. However, for the purposes of where you belong, whether your UK home is a business establishment is a moot point as if it is treated as a business establishment, you are treated as belonging in the UK and if it is not treated as a business establishment; you are treated as belonging in the UK as the UK is your usual place of residence. When to register If most of your clients are VAT registered, then it is likely to be beneficial for you to register sooner rather than later as you will be able to reclaim VAT on business expenses including those supplies which are outside the scope of VAT but which would be taxable supplies, if they took place in the UK such as the commission you receive on the sale of marble. You would also be able to recover VAT on expenses related to goods purchased up to four years before you are registered for VAT, if you still have them, and on services bought in the six months before registration, if they are used for business purposes. There is also clearly a benefit to you being registered for VAT in relation to the marble transactions, where you will buy and sell the marble but not take delivery of it. It would enable 8

10 the Italian company to zero-rate the sale to you and would remove the need to consider whether you need to register for VAT in France. I hope that this is helpful, but please do not hesitate to contact me, if I can be of any further assistance. Yours sincerely Adviser MARKING GUIDE TOPIC MARKS Different rules for goods and services belonging matters for services 1 Recent Transaction - Aggregates High Seas Buy & sell outside the scope 1 Proposed Transactions Bought Marble in Italy, delivered directly to France Buying Marble Not registered Italian VAT charged 1 Buying Marble Not registered Might be liable to register in France 1 Buying Marble VAT registered Zero rate from Italy 1 Buying Marble VAT registered Basic provision still might need to register in 1 France Buying Marble VAT registered Triangulation No need to register in 1 France Marble sold to Germany - commission Commission on marble sale 1 Commission on sale of land Commission on land where land is 1 Commission on land location of buyer and seller is irrelevant 1 Place of Belonging Place of belonging is important 1 Business establishment definition 1 Fixed establishment definition 1 Usual place of residence definition 1 How the three interact to determine belonging 1 Belongs in UK 1 When to register Voluntary registration likely to be beneficial 1 Voluntary registration particularly beneficial for triangulation 1 Might have to register in Spain 1 Presentation 1 TOTAL 20 Bonus Mark Schmelz what it means, explained to lay-man. 1 9

11 Q4 Mr T Snook Medismall Training Services Inc Moose House Oakville Small Time Tax Advisers 1 High Street Cardigan 1 November 2014 Dear Mr Snook I am responding to your enquiry on whether Medismall's services may be subject to VAT in the EU and, if so, how it may minimise the administrative costs which flow from compliance with the regulations. VAT is a tax on the consumption of goods and services and, in the case of the EU, there is a common system which applies across all of the member states. Place of supply of services in the EU Within the EU, special rules govern where services delivered electronically are chargeable to VAT and who accounts for the tax. Where the supplier does not have a business establishment in the EU and is required to account for VAT chargeable in a member state, the rules set down a mechanism for doing so. An "electronically supplied service" is one that is: delivered over the internet or a similar network; and heavily dependent on information technology for its delivery - in other words, the service is essentially automated, involving minimal human intervention and in the absence of information technology, is not viable. In my opinion, the supply of distance learning services by Medismall come within the scope of electronically supplied services. Although the monthly tutorials and the provision of the printed training manuals by themselves would not constitute electronically supplied services, on the basis of the information that you have supplied, it seems to me that they are ancillary, and integral to the supply of the distance learning service; accordingly, it would be artificial to treat them as separate supplies and furthermore, they cannot be considered to be aims in themselves. In the EU, the provision of educational services is exempt from VAT where supplied by universities, colleges, schools and other public bodies. Given that Medismall is a trading company, to the extent that its distance learning services take place in the UK, they will be chargeable to VAT at the standard rate of 20%. The scope of the exemption varies slightly across each member state, and while I expect Medismall's services to be similarly taxable in both Ireland and the Netherlands, you should seek local advice on this. Given that Medismall does not have a business or a fixed establishment in the EU (for example, a branch or agency), its distance learning services will be chargeable to VAT in the member state: 1) in which the recipient of the service is established or resident where it carries on some form of business or economic activity. Thus the sale of Medismall's content and learning materials to an UK educational body for an annual royalty fee of 100,000 is chargeable to VAT in the UK, but the obligation to account for VAT due rests with Medismall's customer under what is known as the reverse charge, or the tax shift mechanism; 10

12 2) in which the recipient of the service resides or belongs where that person does not carry on an economic activity or receives the service in a private capacity. Here Medismall either has to register for VAT under the normal rules applicable in each member state in which its services are chargeable to VAT (this will result in multiple registrations across the EU, with perhaps significant compliance costs) or it may take advantage of the simplified registration scheme open to non EU businesses supplying electronic services - the VAT on e-services ("VoeS") scheme. VoeS VoeS offers eligible non-eu businesses the option of registering electronically in a single EU state (for example, the UK) and accounting for VAT at the appropriate rate for each member state on electronically supplied services supplied to all EC consumers through a single quarterly electronic declaration which discloses details of VAT due in each EU state. The declaration, which must be submitted 20 days after the end of each calendar quarter, should be accompanied with payment to the tax administration of the country of registration (where registration is effected in the UK, payment must be made in sterling) which then distributes the VAT paid to the EU states (Ireland and the Netherlands) where the services are consumed. Details to be shown on a declaration include: the total value of all supplies made in the period, excluding VAT; the VAT rate that applies; and the total amount of VAT payable. A non-eu business is eligible to use the scheme if it: provides electronically supplied services to consumers (private individuals and businesses which do not carry on an economic activity) who belong or are established (broadly resident) - in the EU; has no establishment itself in the EU; and is not registered (to required to be registered) for VAT under the normal rules in any EU state. In January 2015 VoeS will be replaced by the non-union VAT Mini One Stop Shop (MOSS) online service which will be in essentially the same terms. Administrative arrangements will be made to transfer businesses registered under VoeS to the non- Union MOSS online service. The fact that Medismall will be supplying services to business customers which are required to account for the VAT due under the reverse charge mechanism, such as the UK educational body will not preclude it from registering under VoeS. It is permissible for Medismall to appoint an agent to prepare and submit declarations (and my firm shall be pleased to act as such), but an agent cannot register for VoeS. There is no need for Medismall to issue tax invoices given that its customers are not in business, but nevertheless it may issue electronic invoices for services covered by VoeS. Finally, registration under VoeS (and by extension under the non-union MOSS online service) will not provide a mechanism for Medismall to reclaim VAT incurred on 11

13 expenses incurred in the EU if it wishes to do so, it will have to use the reclaim procedure covered by the EC 13th Directive. Refund of VAT incurred in the EU by non-ec businesses Under the terms of the EC 13th Directive, Medismall may reclaim VAT on expenses incurred within an EU country, subject to the following conditions: 1) it has not made supplies in the country of refund, save for those where the customer is required to account for the tax or electronically supplied services covered by VoeS; 2) it does not have an establishment in the EU; 3) the expense item is not one which, under the rules pertaining to the country of refund, recovery of VAT is precluded - the rules vary between member states; 4) the VAT claimed does not relate to any of Medismall's activities which are exempt from VAT; 5) the US does not bar EU traders from claiming refunds of sales tax. Claims cover prescribed periods of the 12 months to 30 June, and they must be lodged no later than the following 31 December. A claim must be accompanied by VAT invoices issued by suppliers, as well as a certificate from the IRS confirming that Medismall is a taxpayer. Given that Medismall is resident in the United States, VAT should not have been charged on advertising and promotion services supplied by suppliers established in the EU. Where VAT has been incorrectly charged, you should request that suppliers credit it for VAT incorrectly charged. I hope that I have covered all the matters raised in your letter. Please do not hesitate to contact me should you require clarification on any issues covered here. Yours sincerely A Taxadviser 12

14 MARKING GUIDE TOPIC MARKS Layout of answer 1 Electronically supplied services: (a) Place of supply; 1 (b) scope of electronically supplied services and conclusion; 2 (c) consideration whether tutorials and manuals are separate supplies; 1 (d) VAT status of Medicare's services; 1 (e) Place of supply and obligation to account for VAT on supplies dependent 2 upon status of recipient of supply. (One discretionary mark may be awarded for full answers on this aspect of the question)) Registration scheme for non EU suppliers (VoeS): (a) Outline of scheme (b) Eligibility to operate scheme (c) Practical aspects of scheme, for example, use of an agent, issue of tax invoices, etc; (d) Recovery of VAT incurred in EU (Bonus mark to be awarded where candidates identify VAT should not have been charged on advertising and promotion services, and advising recourse to suppliers) Recovery of VAT incurred in the EU 3 TOTAL 15 Equal credit to be given for students explaining Non-union Moss rather than VoeS the client is intending to trade so just as relevant

15 Q5 To: Jan Behrens From: David Smith Subject: VAT enquiry Dear Jan Thank you for your . Place of supply/acquisition The UK has adopted a liberal interpretation of articles 14 and 20 of the Principal VAT Directive relating to the supply and intra-community acquisition of goods, with the authorities distinguishing between "call-off" and "consignment" stock. Call-off stock covers goods which a customer may appropriate as it wishes (albeit ownership has not passed) i.e. the customer has the right to dispose of the goods as if owner. It will cover goods destined for an identified customer either: for incorporation with other goods, for example, as part of a manufacturing process; to make onward supplies to its customers. Although generally call-off stock will be delivered to a customer's premises, this treatment extends to stock held at UK storage facilities hired by the supplier so long as the customer is identified and has immediate access to the goods. There is no time limit within which call-off stock must be appropriated by the customer, nor does the supplier have to advise the UK authorities that it has adopted this treatment or refer to it on its invoices. Call-off stock despatched from another EU state to the UK is regarded as a zero rated supply of goods by the supplier and an intra-community acquisition by the UK customer - it cannot delay accounting for VAT on the acquisition until the goods are drawn down, used or paid for. Stock destined to supply more than one customer - or where the customer has not been identified on its despatch - is not call-off stock, but consignment stock which falls to be treated as a transfer of own goods to another EU state i.e. a supply and intra-community acquisition by the owner of the goods, in practice necessitating VAT registration in the UK given that the acquisition and subsequent supply take place there. Your client's transactions. On my analysis, the VAT treatment of the transactions set out in your is: 1) Scenario (1). Since the supply represents call off stock, your client will make a VAT exempt supply in Germany (subject to it meeting the terms of the provisions governing zero rated despatches), with its UK customer accounting for VAT on the intra-community acquisition. Customers should obtain the UK tax authorities' approval to raise self-billing invoices. Stock sold as scrap by your client - either directly or through an undisclosed agent - will give rise to a supply in the UK, with perhaps a consequential obligation to register for VAT. Following the ruling of the European Court of Justice's ruling in Ingrid Schmelz Case 97/09 14

16 there is an immediate obligation to register for VAT in the UK where supplies are made here by a non-resident business, irrespective of the value of the supplies made. Later in this note I cover registration in the UK. Since the customer will have accounted for VAT on its acquisition, it should adjust its VAT returns to reflect the fact that an acquisition did not take place. 2) Scenario 2 (a). On the facts provided by you, these goods will be considered to be call-off stock, and thus zero rated supplies effected in Germany, with UK customers required to account for VAT on intra-community acquisitions. Where a sale does not proceed on account of non payment, a supply effected thereafter by your client takes place in the UK and accordingly your client may, on this account, have to register for VAT. 3) Scenario 2(b). Stock transferred in these circumstances will be regarded as consignment stock, giving a rise to a deemed supply of goods by your client in Germany and an intra-community acquisition by it in the UK. In the absence of VAT registration in the UK, such supplies will be chargeable to VAT in Germany. Your client will be required to register for VAT from the end of the month in the calendar year in which the value of its acquisitions exceeds 81,000. Given your client's plan to hold consignment stock in the UK, from an administrative perspective it will be advisable to seek voluntary registration now. VAT registration in the UK In the absence of a business establishment in the UK, your client's options to effect UK VAT registration, to file returns, etc. are briefly: 1) appoint a representative. It must ensure that your client meets all its legal obligations and - significantly - it will be jointly and severally liable for all VAT debts occasioned by your client. For this reason, UK professional firms are unlikely to take on this role without a guarantee to cover potential liabilities; 2) under a letter of authority, appoint a UK resident to act as its agent. Joint and several liability does not extend to an agent, and it may complete your client's VAT returns, maintain its accounting records in respect of its activities in the UK, etc; 3) register directly with the Non Established Tax Payer unit at Aberdeen. Under this option, your client could maintain the necessary accounting records in Germany, complete and file returns, and settle the tax due. Returns consequential upon VAT registration Briefly, consequential upon VAT registration in the UK, the following returns must be made: 1) Quarterly VAT returns to account for VAT on supplies and acquisitions made in the UK, with credit due for VAT chargeable on its acquisitions and UK VAT incurred on supplies of goods and services received by it. Goods despatched to Irish customers will be zero rated from UK VAT provided that they are VAT registered and your client holds commercial evidence of the movement of the goods from the UK to Ireland; 2) EU sales lists (recapitulative statements); and finally, 15

17 3) Arrivals Intrastat returns - given that current annual threshold is 1.2m before such returns are required, it is unlikely that your client will have to complete them for the foreseeable future. I hope that this covers the matters raised by you. Kind regards David Smith MARKING GUIDE TOPIC MARKS Commentary on the place of supply/acquisition, distinction adopted by the UK tax authorities in respect of call-off and consignment stock: (a) call-off stock - legal basis and place of supply/acquisition; (b) call-off stock - parameters; (c) consignment stock - place of supply/acquisition Analysis and conclusion on scenario 1 2 Analysis and conclusion on scenario 2(a) 1 Analysis and conclusion on scenario 2(b) 2 Effecting VAT registration in the UK (whether under VATA 1994, Schedules 1A or 2 3), appointing a representative, agent, etc Returns required 2 TOTAL 15 16

18 Q6 To: Dave Jones From: Roger Freeman Subject: VAT and customs duty - processed castor oil Dear Dave Thank you for your . I propose to deal with the issue of Customs Duty first. Relief from Customs duty. Although Community Transit provides for the suspension of both Customs Duty and VAT on movements of non-community goods (goods which are not in free circulation within the EU) between two points in the EU (an External or T1 movement), this procedure will not be available given that the goods are to be processed prior to their delivery in Spain. The T1 procedure envisages that the goods will be sealed on entry to the UK until delivery in Spain - clearly that is impractical here. Customs warehousing may be an option but the processing operation clearly goes beyond usual forms of handling, given that a different product results. However, Processing under Customs Control ("PCC") should be considered as it allows for the suspension of both Customs Duty and VAT where the rate of duty payable on processed goods is less than that on the imported product, perhaps in conjunction with customs warehousing. Briefly, the requirements of PCC are: HMRC authorisation is required. Since the processing operation will be carried out in both the UK and France, you should seek a single authorisation. As the authorised person, the company will be liable for any failure to comply with the procedure; only duty suspended goods are eligible for the procedure; the imported product must be readily identified in the processed goods and it is not economically viable to restore the processed product to its original condition; the processing operation will not harm the interests of EU producers of similar goods (if the duty advantage from the use of the procedure is less than 50,000 per calendar year, this economic condition is deemed to have been met); an application to use the procedure must be supported by the economic reasons for using imported goods and be accompanied by firstly, an estimate of the throughput period required for completion of the processing operation and secondly, the yield of processed product derived from a fixed quantity of the raw oil, taking account of wastage; detailed records covering the operation of the procedure must be maintained. Generally security is not required to operate the procedure. Customs Duty on the processed product may be computed by reference to any of the following methods: 1) the value of the imported product (as determined under the general rules), plus all costs incurred in making the processed product, including attributable overhead expenses; 2) the value of identical goods; 3) the value of similar goods; 4) the selling price of the goods in the EU. 17

19 Should you proceed with PCC, I doubt that you can compute the duty payable under methods (2) and (3). Clearly method (4) will not be beneficial. Under method (1), I compute the duty payable to be 77,280, a reduction of 7,720 to that payable on the raw oil: Cost of raw material (excluding buying commission) 2,500,000 Processing costs: NFB Chemicals 500,000 LM Chemicals 150,000 Attributable overhead costs 40,000 Transport of part processed product to Paris 30,000 Total processing costs 3,220,000 Duty payable on processed goods 2.4% 77,280 Duty payable on raw stock on importation 3.4% 85,000 Reduction in duty 7,720 The reduced duty will be payable when the processed product is released into free circulation. Normally the VAT chargeable on the processed goods will be payable at this point, but here it will be exempted from the charge if onward supply relief is claimed. VAT - Onward Supply Relief Imported goods are exempted from the VAT charge on importation (but not Customs Duty) where they are supplied by the importer (i.e. the person designated as the importer on the import documents) to a VAT registered person established elsewhere in the EU - onward supply relief ("OSR"). When the goods are entered for free circulation, OSR must be claimed by making the appropriate entries in the import SAD - I expect your agent will be familiar with the procedure: if not, please revert to me. Generally HMRC will not require a taxpayer to provide security before the relief is granted. The goods must be removed from the UK within a month of their importation, but this time limit may - on application - be extended. If the requirements of OSR are not adhered to, HMRC may issue a demand for the VAT payable (and perhaps penalties and interest), but the VAT charged would be deductible. While the transfer of business assets (including trading stock) from the UK to another member state is deemed to be a supply of goods, giving rise to an acquisition and supply chargeable to VAT in the country of destination, here the movement of the raw oil from the company's premises to NFB's premises for further processing will be undertaken under suspension, and accordingly the deeming provision does not apply. VAT - place of onward supply to Spanish customer Turning to the onward supply to the Spanish customer, under EU law (it should be applied consistently across the EU) a supply of goods takes place (and hence that is where the transaction is chargeable to VAT) in the country in which they are situated when despatched or their movement to the customer begins. Under the proposed arrangements, the processed stock will be situated in France when despatched, and accordingly is chargeable to VAT there. However, under EU law (which should be reflected in French VAT law) the supply will be exempt from VAT provided that there is irrefutable evidence (in the form of commercial documents, consignment and delivery notes, etc) that the stock has been removed from France and your customer is VAT registered in Spain. The obligation to account for VAT is effectively transferred to your Spanish customer and it is required to account for VAT on the processed goods as an acquisition. Since the onward supply to the Spanish customer takes place in France, it should not be included on the company's UK VAT return, on its EU sales list nor its UK dispatch Intrastat returns (if you are required to file them). 18

20 The trade facilitation measure which applies to a chain of intra-eu supplies involving 3 parties (triangulation) does not apply here since the company will not be making an intra-community acquisition in France. VAT chargeable in UK on imported services NFB's services and those of the Australian intermediary (assuming that it does not have an establishment in the UK) are chargeable to VAT in the UK under the place of supplies rules. Since the services are consumed in the UK and the suppliers do not reside in the UK, under what is known as the reverse charge mechanism, the company must account for VAT on these services by entering VAT on their cost in boxes 1 & 3 of the company's VAT return, and claim an equivalent credit in box 4, i.e. the tax effect is neutral. Broadly the entries must be made on the earlier of completion of the service and payment, and where payment is made in a currency other than Sterling, it should be converted to Sterling. I trust that this note meets your immediate needs. Best wishes Roger MARKING GUIDE TOPIC MARKS Layout of answer 1 Customs duty: Community Transit (a discretionary mark may be awarded for candidates' 1 consideration and conclusions of other customs duty relieving measures, if relevant, for example Customs Warehousing). Identifying PCC option. 1 PCC requirements (1/2 mark for each of the following points, subject to a 3 maximum of 3 marks): form of authorisation; only duty suspended goods eligible; imported product readily identifiable in processed goods; not economically possible to revert to imported product; no material effect on the interests of EU producers; economic case; record keeping; security. Computation of customs duty computed under PCC and due date:: basis of valuation; 1 computation of duty under PCC and chargeable event. 2 VAT: Identifying OSR 2 Scope of OSR: 3 onward supply to a taxable person in another EU state; requirement for security; time limit for removal. Place of supply of processed goods and the implications which flow (N.B. the 4 examiner will be flexible in allocating marks in this area where candidates have reached a different, but reasoned conclusion, on the place of supply): place of supply of processed goods; conclusion on place of supply and the resultant implications; reporting transaction; observations on easement in respect of triangular transactions. VAT due on imported services 2 TOTAL 20 19