VAT is definitely not my strong point

Will I ever understand it?

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Dear Aweb community,

My question is about a potential new client - we haven't gone a far as committing to working together yet. The hive mind here will let me know I'm sure if I should walk away.

This person has registered her company for VAT two quarters ago. I wanted to make sure this is set up correctly so I asked her a few questions.

She sells vatable supplies both worlwide and to one European country. But the place of supply is the UK because she uses a scheme called Ex Works. This means that the clients organise the shipping from the UK to their respective countries themselves.

My understanding is that therefore she needs to charge VAT on the goods she is selling (standard rate for food supplements and cosmetics) to the EU company.

Why I am confused is that apparently HMRC investigated her first VAT return (because she was due a VAT refund). They looked at the invoices she issued with 0% VAT, asked her about the place of supply, and said that everything was fine. Which means that my understanding could be wrong. If so, can anyone clarify where I've gone wrong please?

Replies (16)

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By paul.benny
29th Feb 2024 17:14

I hesitate to respond before the proper VAT experts but justify on the grounds that I have plenty of practical experience of exports.

Zero-rating of exports requires evidence that the export actually took place. If you send by your carrier you and/or they will have evidence of the goods leaving the UK. If Customer makes the arrangements for export, Supplier is reliant on Customer providing the evidence.

I generally resist ex-works supplies but if I have to, I apply VAT and credit once customer provides evidence of export.

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Replying to paul.benny:
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By Cylhia66
29th Feb 2024 17:26

So I was half way there with my understanding. Missing what was happening once the export took place. Why does VAT have to be such a minefield? I keep reading the Brace for Brexit pages and the more I do so the more it's a blur :-(

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Replying to Cylhia66:
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By paul.benny
29th Feb 2024 17:37

I think you're being hard on yourself. I've worked in business since I qualified and most of my VAT knowledge comes from having deal with it for myself and research things I didn't know. Ditto with employment taxes.

FWIW, I think VAT is relatively straightforward and the complications mostly come from cross-border transactions and property. Stay away from those and it's not too bad.

But as for other taxes... too complicated for me.

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By QLis
29th Feb 2024 17:53

Have you checked the details regarding indirect exports in section 3.4 of https://www.gov.uk/guidance/vat-on-goods-exported-from-the-uk-notice-703...?

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Replying to QLis:
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By Cylhia66
01st Mar 2024 06:31

Thank you very much for this QLis.

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By Jason Croke
01st Mar 2024 08:31

A VAT inspection, certainly the first return check, is in no way a validation of a taxpayers compliance with the rules, all it means is that HMRC asked to see copies of some sales invoices, saw that those sales invoices were zero rated and that they were addressed to somewhere overseas and that's that.

Doesn't sound like HMRC did enough checking, as others have stated, the zero rating for exports is only valid when you have proof of export, where the end customer arranges shipping (as in an ExWorks scenario) then the seller will have no proof of export and HMRC have missed a trick here.

Ex-Works does indeed suggest VAT should have been charged, but it could quickly flip to being a zero rated sale if your client holds proof of export.

I think your client got lucky, fair enough, but they should look to changing their processes such that the end customer can still arrange shipping but to ensure the end customer supplies proof of export.

The end customer might well just pick up goods from your clients warehouse and then deliver them around the corner to their own warehouse and sell them on eBay, all acquired VAT free courtesy of your client who facilitated the so called "export".

The issue for you now is convincing the client that HMRC was wrong and that your client needs to change the way they do things. The link that QLis posted covers how to deal with "indirect exports".

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Replying to Jason Croke:
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By Cylhia66
01st Mar 2024 08:56

Thank you Jason,

You confirmed what I had gathered from the previous replies. That the client needs to charge VAT initially and then obtain evidence that the goods were exported before finally removing the VAT. And that HMRC misled this (not yet a client) into thinking their procedure is compliant, which is, it has to be said, very unhelpful.

I have now read the link QLis shared where it deals with indirect exports. Thank you again.

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By JCresswellTax
01st Mar 2024 10:17

I am a tax bird and I will never understand VAT.

I know the basics (and maybe a bit more), what I do know is when I am out of my depth and recommend a specialist.

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By FactChecker
01st Mar 2024 17:00

It's Friday afternoon, so picking up on the less specific part of OP's post:
"VAT is definitely not my strong point - Will I ever understand it?"

It's not the central concepts that are complex (although they keep trying to make it more so), it's the wonderful balancing act that they (fail to) perform between being very specific about certain products/services and deliberately vague the rest of the time.

Anyway, this isn't another snarky reference to jaffa cakes, nor the recent attempt to make loo rolls a central talking point ... but a link that I've just received from HMRC:
https://www.gov.uk/government/publications/revenue-and-customs-brief-1-2...

Yup ... although Items 1 and 2 to Group 8, Schedule 9 of the VAT Act 1994 provide exemption from VAT for the following burial and cremation services:
- the disposal of the remains of the dead,
- the making of arrangements for, or in connection with, the disposal of the remains of the dead;

... they've now formally decided that the provision of live web streaming of funeral, burial, or cremation services (which allows mourners who are unable to attend a funeral, burial, or cremation service in person to view the proceedings) to remain a separate taxable supply at the standard rate of VAT - UNLESS the streaming is provided directly by undertakers, cemetery or crematorium operators (but then any tax incurred by them on the cost and overheads of providing such a supply will not be recoverable).

There must be such jolly japes in that office whilst they decide what to tackle next!

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Replying to FactChecker:
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By Cylhia66
02nd Mar 2024 05:08

oh dear god. I often wonder how much time they have on their hands to debate over whether the chocolate in inside or outside the cake...... and now that!

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Replying to Cylhia66:
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By Tax Dragon
02nd Mar 2024 06:20

It's called moving with the times.

But... HMRC can never win can they? If they don't provide guidance, you can be sure someone in here will moan about it [I can provide corroborating evidence if you don't believe me]; if they do, they get called time wasters.

What would be funny (given the current scoffing) is if this very question had been asked in here, someone moaned about the lack of HMRC clarity, someone at HMRC saw the moan, raised it, and this guidance is the result.

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Replying to Tax Dragon:
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By FactChecker
02nd Mar 2024 11:44

Fair point(s) ... and my fault for using the sloppy "they" without drawing distinction between those that create the legislation and those that attempt to create guidance - which as you say is a thankless task.

The heart of what I was trying to get at (apart from an easy laugh) was where I said: "it's the wonderful balancing act that they (fail to) perform between being very specific about certain products/services and deliberately vague the rest of the time."

It's always been a conundrum for legislators (and ever more so with the rapid changes in technology, societal behaviour, etc) ... neatly encapsulated when the Misuse of Drugs Act received a major change regarding the class of psychoactive drugs. The problem was that each specific compound had until then been listed on an increasingly length of prohibited drugs, which had to be updated extremely frequently due to the ability of the 'manufacturers' to just tweak the formula and escape prosecution. So the Act was amended to 'ban' that whole class of drugs, and introduced the inverse list of exceptions (for instance caffeine is one of many 'safe' compounds that is a psychoactive drug).
Net result? Rather obviously I'd have thought, first the arguments started as to whether specific compounds did or didn't belong to one of the criteria on the exemption list (shades of the jaffa cakes issue) and then the illegal manufacturers synthesised new compounds that weren't technically psychoactive but had similar 'side effects'.
The person I knew who was working on this in the HO at the time has since moved on, but I don't believe the conundrum has been solved.

So my shorter, if no more helpful, post could have been:
1. Why doesn't VAT legislation make greater use of the 'default' approach when determining the VAT status of a product/service? [It does so quite a lot but then decides to have 'special case' legislation for different materials in different scenarios - which is where the massive pile of source rules comes in.]
2. And does HMRC need to be issuing guidance on every possible permutation (as in my example where VAT was standard, as you might expect, UNLESS ...)? [The volume of these makes it hard to know when to to look up something - unknown unknowns etc.]

Anyway, in the unlikely event that anyone from HMRC is indeed reading this, you can now see there was (intended to be) a vaguely serious point behind my frippery.

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By kim.shaw-and-co.com
03rd Mar 2024 02:49

Jason Croke wrote:

A VAT inspection, certainly the first return check, is in no way a validation of a taxpayers compliance with the rules, all it means is that HMRC asked to see copies of some sales invoices, saw that those sales invoices were zero rated and that they were addressed to somewhere overseas and that's that.

Doesn't sound like HMRC did enough checking

..... and this is the all-too-frequent issue really. I have seen 'schoolboy errors' overlooked by HMRC, often systemic, through multiple inspection visits which it is very difficult to explain to clients require correction and/or adjustment of their system(s) .

More than one business relationship has been terminated because of HMRC failure to highlight systemic failures the advisor is blamed by clients for pointing out. You become the nuisance who rocked the boat and outside of quality corporate clients there is only rarely any weighting attached to compliance or social responsibility.

You can go ahead and file a SAR if they won't commit to a compliant approach or correct any tax shortfalls, but that still leaves you with the ethical situation to handle in relation to an engagement. Everyone has their own boundaries for that I guess.

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By paul.benny
03rd Mar 2024 11:28

This thread has developed into several streams - I'm enjoying the discussion about the complexity.

I think the fundamental practical difficulty is that legislation must deals in the hard and fast but reality is much messier. We all know that sausage rolls are often sold while still warm from the oven but escape being classed as hot takeaway food because the very same sausage rolls will also be sold later in the day when no longer hot.

And all the other ways where business and HMRC are forever trying to nudge a good or service to their preferred side of the line. A lot of food-related ones seem genuinely difficult to codify.

FWIW, I think the ruling on live streaming of funerals that FactChecker mentions is a sensible place to draw that line because it both hinders abuse and does not increase the number of businesses making Exempt supplies.

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Replying to paul.benny:
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By FactChecker
03rd Mar 2024 11:55

Like you, I'm conscious I may have inadvertently hijacked the thread by focussing on just one aspect of the original question - so apologies to Cylhia66 ...

But it seems to me that you make a good point (your final sentence) with regard to the practical considerations; although in this particular case I find it hard to conceive of much likely abuse against which to guard.
Are there really going to be lots of people providing live streaming of funeral services on a commercial basis, but who are doing this as none of the exempted categories of provider?

The 'interesting' angle from my perspective is whether any attempt by the rule makers (to simplify things whilst protecting revenues) is geared at the suppliers or the purchasers.
I guess it's obviously the suppliers (who HMRC might consider the 'customers' of the VAT 'service') - in which case focussing the rules around the nature of the supplier (as here) makes sense.
But it further complicates the perception of the purchasers (and arguably distorts the market) ... the most immediate example that springs into my mind is where materials deemed to be 'energy-efficient' are treated differently solely depending on who buys them (even if to be used on the same job).

I have no answers ... just ruminating over a weekend!

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Replying to FactChecker:
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By Cylhia66
03rd Mar 2024 12:11

No problem at all. I am enjoying this thread. It's perfectly relevant and appropriate if you consider that I was moaning about the impossible complexity of VAT.

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