As plans and objectives for 2019 are made, we reflect on value-added tax developments in 2018 and areas of expected focus for businesses in 2019.
Many tax professionals will have noted a greater emphasis in recent years on the processes and controls in place to ensure good tax governance. This trend continued in 2018 with the U.K. government’s decision to push ahead with the planned implementation of Making Tax Digital (“MTD”) for value-added tax (“VAT”).
We’ve also seen an increase in the number of penalties imposed by the U.K. tax authority HM Revenue & Customs (“HMRC”) on financial directors and senior finance executives for senior accounting officer breaches, placing greater pressure on those individuals to ensure that their organization’s tax processes and controls are robust.
Making Tax Digital for VAT
From a process perspective, MTD for VAT is expected to introduce a significant change to the way that VAT returns are prepared and submitted in the U.K. There is a phased implementation timeline with the new requirements taking effect from either April 1, 2019 or October 1, 2019.
This means that organizations with a taxable turnover above the VAT registration threshold will have to keep certain VAT records digitally and submit their VAT return data to HMRC through compatible software.
During 2018, HMRC released additional information and guidance on how the new regime will work. However, much of this guidance came in the second half of the year and significant concerns remain as to whether HMRC and businesses will be ready in time. Indeed, in late November 2018 the House of Lords Economic Affairs Committee published a report into the implementation of MTD for VAT which criticized HMRC’s preparations as being too little, too late, and suggested the measures should be postponed or abolished completely.
Ultimately, it is expected that the MTD measures are just the first step in a move to a greater use of technology in VAT compliance. Over time we expect that HMRC will require transactional data (rather than just the basic summary totals required on the VAT return) to be provided so that real time data analytics can be applied to identify potential VAT errors and to then query those transactions. 2019 therefore promises to be a year where there is further emphasis placed on the use of technology and the processes supporting “how” an organization’s VAT figures are determined.
Holding Company VAT
From a tax technical perspective, there was continued focus in 2018 by HMRC on the recovery of VAT by holding companies. This remains an area of HMRC focus which shows no signs of reducing, due to the complex nature, frequency and often significant quantum of VAT incurred.
There has already been a significant amount of VAT litigation on the topic and this year there have been a number of judgments of the Court of Justice of the European Union (“CJEU”) for businesses to consider. Earlier in the year the case of Marle (C-320/17) potentially gave effect to a broader definition of “management” for the purposes of establishing whether a holding company has an economic activity in relation to its activities with its subsidiaries.
More recently, there was the judgment in the case of Ryanair Limited (C-249/17) which considered the recovery of VAT on costs incurred on an aborted takeover of Aer Lingus. The CJEU accepted that where an entity’s only objective is to acquire shares with no direct or indirect involvement in its management, this would not make them a taxable person.
However, in Ryanair’s case, the CJEU considered there was a clear intention to have a taxable activity in the form of management charges. Therefore a “person” or company, such as Ryanair, with the intention of starting an economic activity, and which incurs costs to do so and starts work, was still a taxable “person” and was entitled to reclaim the VAT it incurred in pursuing that activity.
Businesses recovering significant amounts of VAT in their holding companies will need to continue to keep the position under review and the courts have set out principles that can be followed to support the recovery position.
Pension Fund VAT
Many large corporates have funded pension schemes, and during 2017 there was movement on the long-running issue of the recovery of VAT on pension fund VAT costs. This meant businesses began to get clarity over the position. In brief, HMRC set out their views on:
- the situations when VAT would be charged by suppliers of pension fund related services;
- the circumstances when VAT could be reclaimed by the sponsoring employer or the pension scheme.
During 2018 it became apparent that there were still some areas of inconsistency in approach. For example, whether pension fund administration service providers should invoice the trustees of the pension scheme (with whom they were most likely engaged), or the sponsoring employer entity, with the latter being able to reclaim the VAT charged on the invoice as an overhead of its business.
HMRC provided confirmation that, in this situation, the administration services could be invoiced to the sponsoring employer, which was welcome news to many organizations.
The developments in 2018 will not be the end of the focus on pension fund VAT costs. From April 1, 2019 there is due to be a restriction on the availability of the VAT exemption currently applied to certain pension fund investment management services provided to defined benefit pension schemes by regulated insurance companies. This will mean more transactions on which VAT is charged and consequently a greater focus on the recovery position for this VAT.
More generally, there is still uncertainty around the recovery of VAT on pension fund investment management services and the relevance of tripartite contracts. Given that the values involved are often significant and there is potential for irrecoverable VAT to arise, it is likely that pension fund VAT issues will continue to be an area of focus during 2019.
Organizations with international trading arrangements have also had a number of changes to deal with. There have been specific measures introduced in relation to digital taxation and online market places, as global tax systems slowly start to adapt to changes in technology and consumer shopping habits. These measures have changed some of the VAT compliance requirements, for example requiring international sellers’ U.K. VAT numbers to be shown on the digital platforms through which their products are sold.
VAT in the GCC
VAT has been introduced into the GCC region for the first time and many businesses trading in the United Arab Emirates ("UAE") and Saudi Arabia have had to VAT register locally. As with all new VAT implementations there have been practical challenges as businesses and their customers adapt to dealing with a VAT regime in its infancy.
For example, issues have arisen when dealing with local sub-contractors providing services to U.K. businesses when determining whether VAT is due on their charges, and whether the U.K. business is required to VAT register in the UAE. It has already been announced that VAT will be introduced in Bahrain from January 1, 2019, albeit exact details of how the system will operate currently remain in short supply. Both Qatar and Oman are also expected to introduce VAT systems in the next year or so.
U.S. Sales Tax and Wayfair
Moving away from VAT, in the U.S. the Wayfair Supreme Court decision is leading to a significant change in U.S. Sales Tax rules. The decision could result in non-U.S. companies that sell goods or services into the U.S. having to register and pay local sales taxes in each U.S. State where they have customers. The decision creates an obligation for businesses to consider if they have an “economic nexus” with each State, rather than a “physical presence.”
During 2018 the States reviewed and provided updated commentary on their individual positions, meaning potentially impacted businesses will now need to review their position for each State for 2018, and continue to monitor developments in 2019 and beyond.
Finally, there is of course Brexit. The Chief Executive of the Port of Calais has been quoted as saying, “We know there is Brexit … but we don’t know exactly what Brexit means,” and while the political negotiations are edging closer to certainty, the impact on businesses in 2019 and beyond remains unclear.
Organizations are encouraged to review the possible impact on their trading arrangements and move forward with identifying and implementing “no remorse” actions that can help with their contingency planning whatever the outcome of the “deal” negotiations.
In the event of “no deal,” HMRC started issuing guidance in summer 2018 on changes that could occur; for example with the use of deferred import VAT accounting for imported goods. It can be expected that further guidance will be issued in 2019. If it does conclude with a “deal,” there will be a period of transition which will give businesses time to adapt to the new trading and regulatory environment.
As VAT is a transactional tax, it is difficult to highlight all the high-profile VAT developments of 2018, and those expected in 2019, as many are sector specific. In the legal sector, for instance, further developments are expected in relation to the Brabners case regarding the treatment of online property search disbursement charges.
One specific area that does have more generic application is the new VAT voucher rules. Owing to inconsistencies across the EU member states and a perceived loss of tax by the tax authorities, the vouchers legislation had been under review in the U.K. and across the EU for a number of years. HMRC announced rules that take effect from January 1, 2019 which effectively transpose new EU rules into U.K. law.
The rules amend the difference between a single-purpose voucher and a multi-purpose voucher, and result in different times when VAT needs to be accounted for. From a U.K. perspective, the rules narrow the circumstances when a voucher qualifies as multi-purpose.
The voucher rules are a complex area of VAT legislation, and 2019 will bring further developments for organizations to review to ensure they remain compliant with their VAT accounting obligations.
Organizations now operate in a world where tax is front page news and many boardrooms will be focused on ensuring that they do not face negative publicity from their tax affairs.
There are a significant number of fiscal and political disruptors that will have an impact in 2019 and beyond on businesses and how they are organized. Brexit is one such example.
On a more granular level, MTD for VAT represents another step in the direction of focus on processes and controls for “how” VAT due to HMRC is calculated.
That said, for the purists who thrive on tax technical developments, case law in relation to holding company VAT, further developments to VAT for funded pension schemes and new legislation in relation to vouchers will present VAT technical challenges for businesses in the year ahead.
Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe UK.
He may be contacted at: Robert.Marchant@crowe.co.uk