Indirect tax news from the past week
COVID-19 VAT deferral: further details of instalment repayment scheme
HMRC have amended their guidance on how businesses will have to pay any VAT that became due between March and June 2020, but which was deferred in line with HMRC’s response to COVID-19. The deadline for joining the instalment repayment scheme has been extended to 21 June, although businesses which delay joining will have to pay the deferred VAT in fewer instalments (eleven instalments for a business which joins by 19 March, or eight instalments for one joining on 21 June). All businesses will therefore have to finish repaying the deferred VAT by the end of January 2022 (slightly earlier than some had anticipated). Large businesses which make payments on account will be invited to join the scheme in March, and helpline details have been provided for businesses who will not be able to join the scheme online (e.g. those who do not have a UK bank account). (Contact: Chris Chatting).
Rottendorf Pharma: conditions for inward processing duty relief – CJEU
Rottendorf Pharma imported 12.5kg of ertugliflozin from the US for the production of diabetes medicine. When it had to pay the associated customs duty, it realised that it could have claimed inward processing relief (IPR), as the finished product was going to be re-exported. The German customs authorities granted IPR retroactively, provided that the medicine was presented to the Beckum customs office prior to export. Rottendorf Pharma, which was not very familiar with customs processes, failed to modify the data in its systems and did not therefore present the drugs when they were re-exported. Customs duty rules include a general equity provision which allows duty to be remitted in “special situations” if a taxpayer has not been manifestly negligent. There was some question as to whether Rottendorf had been negligent by failing to observe the IPR conditions, but ultimately that was a question for the national court to decide. It may find it unnecessary to do so, however, as the CJEU has ruled that Rottendorf was not in a “special situation”. It had not shown that IPR was particularly complex, nor that IPR caused particular issues for it compared to other pharmaceutical companies. The error may have arisen because (on retroactively being granted IPR) Rottendorf failed to update the status of the drugs in its systems, but that fell short of being a special situation which would justify duty remission. Even though the ertugliflozin was imported, processed, and re-exported, Rottendorf Pharma will have to pay customs duty of €179k. (Contact: Michael Watson).
Domestic reverse charge on construction services – implementation imminent
The domestic reverse charge on the provision of construction services is scheduled to take effect from 1 March 2021. There are no indications that the measure, which is designed to counter VAT fraud in the construction sector, is going to be delayed again (as it was in October 2019 and June 2020). Many more businesses will be affected by this reverse charge than other anti-fraud measures in recent years (such as the reverse charge on renewable energy certificates). For example, any large business which is registered under the Construction Industry Scheme because of construction work it receives may have to apply the reverse charge (and adapt its systems accordingly), unless it makes an end-user declaration to its contractor. HMRC have provided further details on how the reverse charge will operate on their website. (Contact: Gagan Sra).
Wilmslow Financial Services: loan broker’s advertising costs subject to UK VAT – FTT
The judgments in Ocean Finance illustrate how a UK loan broker could, in theory, have set up an “offshore loop” to save VAT on advertising costs: transfer the loan broking business to an offshore company, provide it with administrative support, and have the offshore company procure advertising from UK providers direct. In Wilmslow Financial Services plc, the FTT has ruled that WFS’ attempt to implement this structure was not effective. In WFS’ case, Karakus Ltd was established in Gibraltar to act as the loan broker, but operationally little seems to have changed. Loan applications were vetted by WFS and then sent direct to the UK lenders rather than to Karakus, which did not appear even to have the power to veto applications retrospectively. WFS, rather than Karakus, also continued to manage (and profit from) the relationship with the UK advertisers. The FTT concluded that the advertisers were supplying WFS, which was providing loan broking services to the lenders – in reality, no offshore loop existed. Even if the advertising should be characterised as supplied to Gibraltar, the FTT concluded that the arrangements were uncommercial and were contrived to achieve a VAT advantage. They were therefore an abuse of law which should be redefined as a domestic supply which did not involve Karakus. WFS’ appeal was dismissed. (Contact: Judith Lesar).