Weekly VAT News

NAO report – Tackling tax evasion in high street and online retail

The National Audit Office (NAO) has published a report on Tackling tax evasion in high street and online retail. HMRC estimate that the annual cost of tax evasion is around £5 billion, and is most prevalent among small businesses. The report considers whether HMRC “is well-placed to tackle tax evasion in high street and online retail”. The report assesses HMRC’s overall approach to tax evasion in retail and to specific risk areas, namely, contrived business insolvency and ‘phoenixism’ (companies artificially declaring themselves insolvent and running the same business in a new company), VAT evasion by overseas retailers selling through online marketplaces, and sales suppression. With respect to VAT, the report finds that HMRC have identified overseas retailers evading VAT online as a significant tax evasion risk, including both direct sales and those made through online marketplaces. The report notes that there remain significant gaps in checks of online retailers, and that overseas companies can misrepresent themselves as UK-based to evade VAT. The VAT-specific recommendations focus on developing effective controls to prevent evasion, including HMRC and Companies House working more closely; HMRC working with online marketplaces on establishing whether sellers are UK-based; and tightening controls to prevent tax evasion. (Contact: Harry McDowell)

Novo Nordisk AS: VAT on statutory payments to state health insurer – CJEU

Prescription drugs in Hungary are partly paid for by patients and partly subsidised by NEAK (the state health insurance body). NEAK may recover part of its subsidies from manufacturers through agreed volume rebates, and the CJEU has previously ruled that manufacturers could reduce their output tax accordingly. Manufacturers must also pay to NEAK up to a further 20% of the amount of the subsidies under Hungary’s law on the supply and marketing of medicinal products. The CJEU has considered whether these statutory payments should be treated in the same way for VAT purposes as volume rebates, or whether no output tax reduction could be made due to their statutory nature. The CJEU has concluded that the statutory payments should be treated in the same way as volume rebates. The purpose of both types of payments was the same, namely to subsidise the purchase price of medicines. Although the statutory payments were collected by the tax authorities, they were transferred immediately to NEAK. In making the payments, Novo Nordisk was waiving a proportion of the consideration received, and it would be inconsistent with the principle of fiscal neutrality for the taxable amount on which VAT was calculated to be higher than the amount which was ultimately received. The payment was therefore a reduction in the consideration, and output tax could be adjusted accordingly. This is the latest in a sequence of CJEU judgments on the topic of healthcare sector rebates paid by pharmaceutical manufacturers, and it is this sequence of cases which the First-tier Tribunal is considering in the Boehringer Ingelheim Ltd appeal, the judgment for which is awaited. (Contact: Chris Cherrill)

VAT zero rating for residential caravans – SI

VAT zero rating applies to the supply of residential caravans that are manufactured to standard 3632 issued by the British Standards Institution (BSI). The Value Added Tax (Caravans) Order 2024, with an accompanying tax information and impact note, updates the zero-rating provisions in the VATA 1994 to remove references to specific versions of that standard, so that the zero rate applies to caravans meeting all versions of the standard taking effect on or after 17 June 2005, including the new standard published in 2023 and versions of the standard issued in future by the BSI. The order came into force on 30 September 2024. (Contact: Gareth Pritchard)