A&M UK and International Indirect Tax Alert – Q3 2023

UK

CHANGED APPROACH TO EU LAW: UNCERTAINTY FOR TAXPAYERS RELYING ON RETAINED EU CASE LAW

Retained EU Law Act 2023, which aims to end the special status of retained EU law and EU case law (which has been in place since the UK left the EU), received royal assent. So, what does this mean for VAT?

• Any and all EU law rights and liabilities which have not been recognised in domestic UK law will no longer apply in the UK as of 1 January 2024.
• Abolition of the supremacy of EU law and the general principles of EU law – this is a less drastic change in practice as most of the general principles of EU law (such as the principles of effectiveness, proportionality and subsidiarity) are more focused on the interaction with domestic law. The principle of fiscal neutrality will not be abolished.
• Any ‘retained’ case law will be referred to as of 1 January 2024 as ‘assimilated’ law.
• The UK Courts, from 1 January 2024, may depart from retained EU case if they considered that the retained EU case law restricts the development of UK domestic law.

WHAT ARE THE RISKS TO AND OPPORTUNITIES FOR UK BUSINESSES?

If your business is relying on retained case law which was decided based on general principles of EU VAT legislation, or directly effective rights arising from the European VAT Directive, could you now be at risk of HMRC challenge? The UK courts finally have the freedom to depart from retained EU case law from 1 January 2024. Is this HMRC’s opportunity to revisit cases it lost due to the application of EU law, rights, and liabilities? It will be interesting to see. For businesses that fall into this bracket – perhaps early contingency planning would be a wise move to mitigate the inevitable?

Equally, there is an opportunity for businesses to lobby HMRC to have a more favourable VAT rate or VAT treatment as there is no longer the requirement to continue applying EU principals and CJEU decisions. HMRC has recently published a consultation on the bill which can be viewed here: HMRC consults on draft legislation on retained EU VAT law | ICAEW. You can respond by emailing retainedeulaw.financebill@hmrc.gov.uk by 17 November 2023.

The Retained EU Law Act 2023 can be viewed here: Retained EU Law (Revocation and Reform) Act 2023 (legislation.gov.uk)

2024 BRINGS A NEW MODEL FOR IMPORTS: THE BORDER TARGET OPERATING MODEL – IMPORTERS SHOULD BE PREPARING NOW

On 29 August HMRC published the Border Target Operating Model, which introduces a new approach to importing goods into Great Britain. The new plan will be implemented in 2024 and covers:

• Safety and security controls (applying to all imports), and
• Sanitary and phytosanitary controls (applying to imports of live animals, animal products, plants, and plant products) at the border.

The model sets out how controls will be simplified, digitised and delivered through the UK’s new Single Trade Window. The model aims to minimise trader burdens by reducing admin needs, making the submission of data easier, and improving the use of data, while remaining aligned with international standards.

There will be a phased approach to implementation, with three main milestones intended throughout 2024. These will include the introduction of certain certifications and declarations on medium-high risk products, alongside the reduction/removal of physical routine checks on medium-low risk products.

Importers and their supply chains should already be preparing to ensure readiness of the changes. Look out for further guidance and support due to published online by HMRC. 

The publication can be viewed here: Final_Border_Target_Operating_Model.pdf (publishing.service.gov.uk)

THE LAST DAY FOR MAKING EXPORT DECLARATIONS ON THE CHIEF SYSTEM PUSHED TO 30 MARCH 2024

The Customs Declaration Service is replacing CHIEF as the UK’s single customs platform. Import declarations on CHIEF have already closed and export declarations were supposed to close on 30 September 2023. However, this has now been extended to 30 March 2024.

NEW HMRC INTEREST RATES FOR LATE PAYMENT AND REPAYMENTS EFFECTIVE 22 AUGUST 2023

On 11 July 2023 in the UK, the default late payment interest rate applicable was 7.5% and the statutory late payment interest rate applicable was 4%.

From 22 August 2023, the rates rose by 0.25% to 7.75% and 4.5% respectively.

All HMRC interest rates can be viewed here: HMRC interest rates for late and early payments – GOV.UK (www.gov.uk)

‘WHEN YOU CAN OBJECT TO LATE PAYMENT INTEREST’ SECTION ADDED TO HMRC GUIDANCE

Whilst you cannot appeal against a late payment interest charge, from 2 August 2023, you can now submit an interest objection to the extent you have fully paid the tax for which the interest charge has been made, and:

• HMRC has caused a mistake or there has been any unreasonable delay,
• you dispute the relevant date or effective date of payment,
• mitigating circumstances apply, and
• you are questioning the legislation.

The updated HMRC guidance can be viewed here: https://www.gov.uk/guidance/late-payment-interest-if-you-do-not-pay-vat-or-penalties-on-time#when-you-can-object-to-late-payment-interest

STILL WAITING FOR A RESPONSE FROM HMRC? HMRC LOOK TO TACKLE BACKLOG OF UNANSWERED POST

In response to long-standing services issues, HMRC has set up a taskforce to deal with unanswered correspondence received from taxpayers and agents. HMRC plans to significantly reduce the backlog over the next few months and is prioritising correspondence received over 12 months ago.

If you have an agent, they can use the online Agent Account Managers Service (AAM) to escalate any post over 12 months old.

AAM service guidance can be viewed here: Agent Account Managers service – GOV.UK (www.gov.uk)

IN THE MEDIA: ABOLISHING THE VAT EXEMPTION FOR SERVICES SUPPLIED BY PRIVATE SCHOOLS

There is a lot of noise in the media surrounding Labour’s plans to impose the standard rate of VAT on private school fees, which are currently VAT exempt, thus could increase fees by 20%. The Institute for Fiscal Studies (“IFS”) estimates that this could raise £1.7 billion. This figure takes in to account the input VAT private schools would therefore be entitled to recover (on the assumption that only 20% of the costs they incur are taxable).

It is currently unclear how this would be enforced, however a change to VAT legislation would be required. In any case, this could have a significant impact for private schools, particularly those with high capital spend; and paying parents, particularly on account of the cost-of-living crisis.

Keep an eye out for the A&M article to be published on this shortly. 

UK CASES

TOUR OPERATORS MARGIN SCHEME (TOMS) AND AGENCY CASES PREVALENT IN THE UK COURTS

SONDER SUCCEEDS AT FTT THAT TOMS DID INFACT APPLY WHILST HMRC PURSUE UBER FOR £386M OF VAT FOR INCORRECT APPLICATION OF TOMS. ALL ANSWERS DEEMED TO BE ACTING AS PRINCIPAL AS CONTRACTS DIDN’T REFLECT THE ECONOMIC REALITY

First-Tier Tribunal allows Sonder’s appeal as a tour operator

Sonder leases self-contained apartments, which are sublet to them by landlords, to travellers for periods ranging from a single night to a month. The business was accounting for VAT under TOMS, which HMRC disagreed with. The First-tier Tribunal (after considering extensive UK and EU case law) disagreed with HMRC’s position and allowing the appeal, held that TOMS did in fact apply.

The judge emphasised that the nature/characteristics of the goods and services supplied by third parties (in this case, landlords) does not determine whether TOMS apply. Rather, the focus is on whether those goods/services are provided for the benefit of travellers and without material alteration or processing. This is an important development in the guidance available in relation to TOMS. 

Link to case: TC08852.pdf (bailii.org)

HMRC pursuing Uber for another £386m of VAT

Uber has been assessed an additional £386 million in backdated VAT by the UK’s tax authority, HMRC. This is on top of the £615 million that Uber already paid in 2022 after a High Court ruling found that its drivers are “workers” and not independent contractors.

In the initial claim paid in 2022, Uber was simply not charging VAT. Uber is now charging VAT but claims that the TOMS scheme is applicable to them, which HMRC is now challenging.

Is the service provided by Uber without material alteration or processing? Watch this space. Uber has said it will appeal but has been required to pay the disputed VAT upfront.

This will be an important case to follow in relation to the application of TOMS and very much linked to the Sonder case above. 

AGENT VERSUS PRINCIPAL – HMRC v All Answers Ltd

All Answers Ltd lost at the Upper Tribunal in July 2020 that it was acting as ‘principal’ in the supply of the provision of essays and other academic work written by third party writers to customers online, and not in an agency capacity. As a result, it updated its contractual agreements to convey an agency relationship existed. However, its appeal against further assessments has lost again as the First Tier Tribunal has agreed with HMRC that the updated contractual terms were not sufficient and did not reflect the true relationship between All Answers Ltd and its customers. The business was assessed for VAT on the full value of the fees paid by the student and not just the net fees it retained after paying the writers.

This case emphasises that the commercial and economic reality is the most prevalent factor when determining the VAT treatment. 

Link to case: TC08920.pdf (bailii.org)

INTERNATIONAL

CHANGES TO INDIRECT TAX RATES

In addition to the VAT rate changes published in the Q2 2023 Indirect Tax Alert, two more Tax Authorities have announced updates to VAT rates this quarter:

Changes in VAT rates announced in Q3 2023

Estonia – The standard VAT rate will increase from 20% to 22% from 1 January 2024; and the reduced VAT rates of accommodation services and press publications will increase from 9% to 13% from 1 January 2025.

The Netherlands – There is no longer a reduced VAT rate on management fees for holiday homeowners.

E-INVOICING AND DIGITAL REPORTING: DEVELOPMENTS AND DELAYS

CBAM – EU’S NEW GREEN IMPORT TAX WILL APPLY FROM 1 OCTOBER 2023

The Carbon Border Adjustment Mechanism (CBAM) is a policy tool from the European Union that aims to reduce carbon emissions globally by imposing a fee on carbon-intensive imports from countries that do not have equivalent climate policies.

CBAM is designed to prevent the phenomenon of “carbon leakage,” which occurs when companies relocate their operations to countries with weaker climate regulations to avoid carbon taxes or emission reduction requirements. In its first phase, the CBAM will apply to the most carbon intensive sectors: iron and steel, cement, aluminium, fertilizers, electricity, and hydrogen.

It came into effect on 1st October 2023, with a transition period where the obligation of the importer is limited to reporting. CBAM full measures will be implemented on 1 January 2026.

Keep an eye out for the A&M article to be published on this shortly. 

HOW A&M CAN HELP

If you would like to exchange views or discuss the potential impact of the above announcements for your organisation, please feel free to get in touch with your usual A&M adviser, Mairéad Warren de Búrca or Mark McKay.