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Current UK VAT Issues
Brian Keenan, Senior Manager, Indirect Tax Services,
Dublin
8th and 13th Directive VAT
reclaims: Important change from 1 January 2006
Her Majesty's Revenue and Customs (HMRC) has confirmed that
from 1 January 2006 mutual recovery claims, if not completed
fully in accordance with the detailed requirements, will
be immediately returned to the claimant, who will then have
to resubmit the claim, correctly completed, still within
the time limit deadline. HMRC claims that it is cutting
down on follow-up inquiries to incorrectly completed claims
in order to give its staff more time to ensure that correctly
completed claims are met within the repayment deadline.
In addition, from 1 January 2006 in all cases (with the
exception of some low value less detailed tax invoices),
a valid invoice must contain the name of the recipient;
in circumstances where the recipient is a taxable person,
an invoice must bear their name if it is to be used to evidence
a deduction of input tax.
Therefore, for all claims received on or after 1 January
2006, HMRC will only refund VAT on invoices that have been
issued to and bear the name of the claimant and relate to
supplies of services properly made to them.
Comment
This change could impact on a number of expenditure categories.
The main category of expenditure is likely to be hotel bills,
where potential claimants will need to educate their staff
on the detail required on the VAT invoice (although it has
to be said that a number of other Member States already
insist on such detail).
Businesses that submit claims for recovery of VAT incurred
in the UK may need to amend their procedures on obtaining
invoices to ensure that the new requirements are met.
VAT Tribunal
decision in relation to the place of supply of services
The background to this appeal is the worldwide implementation
of new SAP financial accounting software across the Zurich
corporate group.
The head office of the Zurich corporate group is in Switzerland.
Zurich has a UK branch (referred to here as Zurich UK).
In the SAP project, the UK branch handled all the day-to-day
administration of the project for the UKISA Region (within
Zurich's regional structure), which covers the UK, Ireland
and South Africa. Zurich appointed PwC Switzerland as worldwide
consultants on the project.
A framework contract was signed between PwC Switzerland
and Zurich Head Office, which set out the arrangements for
the negotiation of the local contracts or 'works orders'
for specific project assignments at regional level and the
global volume discounts on the totality of those assignments.
It had initially been the intention that Zurich Head Office
would fund the entire global cost of the SAP project, except
that local branches would bear the cost of their staff working
on the project and any hardware purchased locally. A change
was decided upon whereby Zurich Head Office would recharge
the regions their appropriate portions of the cost of PwC's
services. This was stated in Board papers to be a more tax-efficient
arrangement.
Therefore, PwC UK supplied services to PwC Switzerland (no
UK VAT); PwC Switzerland supplied services to Zurich Head
Office with Swiss VAT at 7% (the decision records that Swiss
VAT rules allow Zurich to take full deduction of this VAT
as input tax on the grounds that it relates to the recharge
to Zurich UK); Zurich Head Office makes a recharge for the
services to Zurich UK (no UK reverse charge VAT due on an
intra-entity recharge, except on 21% of the charges which
were the subject of a further recharge to the life companies
within the UK). The decision records that Zurich UK obtained
capital allowances for corporation tax in the UK on the
recharges of PwC's services totalling £16.7 million,
represented in correspondence with the Inland Revenue as
'costs incurred for the purposes of the branch'.
Counsel for Zurich argued, in support of the above treatment,
that it did not give an irrational result and that using
the UK fixed establishment as the place of supply of the
services from PwC Switzerland would result in the application
of Swiss and UK VAT (albeit that Swiss rules allowed deduction
of the former) and that it was consistent with the economic
reality of a global project.
Counsel for Her Majesty's Revenue and Customs (HMRC), in
support of an assessment made for £2,085,153 on the
basis that the place of supply of the services is the UK
fixed establishment of Zurich, argued that the services
were carried out in the UK and their cost borne in the UK,
that the services were for the benefit of the UK, that there
was significance in the changes made from the beginning
of 1999 and that an analysis of complete non-taxation in
the Community where the consumption has clearly occurred
is irrational.
The Tribunal Chairman commented on three aspects —
the place of contracting, what was done and for the benefit
of which establishment was the work done. He concluded that
these rank in that order of significance when assessing
the economic reality. Having noted that there was a genuine
economic reality in the contracting for the services by
Zurich Head Office, in terms of the Head Office having a
genuine need to control the entire global project, the Chairman
concluded that the place of supply was indeed Zurich Head
Office.
In response to the HMRC argument, that non-taxation of consumption
within the Community is irrational and distortive, the Chairman
disagreed, noting that the non-taxation of the services
arose here because (unlike goods) there is no tax on the
transfer of services between a head office and a branch.
The Chairman also disagreed with the other HMRC arguments.
Comment
As outlined in the opinion of the Advocate General in the
case of FCE Bank (see article 'Transactions between two
establishments of a single legal entity' for details), the
VAT treatment of charges between establishments within the
same legal entity is currently subject to debate. There
is obviously a need, and indeed a desire, to simplify matters
— as seen in the Commission proposal with regard to
simplifying the VAT treatment in circumstances where a single
legal entity has more than one fixed establishment and services
are rendered between the establishments.
Important
information for those registered in the UK as non-established
persons
Important information for those registered in the UK as
non-established personsThe Non-Established Taxable Persons
Unit (NETPU) of HMRC (based in Aberdeen) currently has a
large backlog of applications for VAT registration, which
may cause a delay in registering overseas entities for UK
VAT.
In addition to this backlog, NETPU is currently carrying
out a deregistration exercise, which entails reviewing all
registrations that have not submitted returns or have submitted
'nil' for the last few years. Those overseas entities that
are identified using these criteria are being issued with
deregistration forms, encouraging them to deregister.
If you receive a request from NETPU to deregister for VAT
in the UK, please do not hesitate to contact any member
of the Ernst & Young Indirect Tax Services team if you
require assistance.
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