Public Accounts CommitteeWritten evidence from HM Revenue and Customs
1. Q263 Stephen Barclay: A few quick questions, if I may. When a major company operating in the UK has entered into a Dutch ruling, would you see the details of that Dutch ruling?
Jim Harra: I don’t know whether we can automatically see them all. Most of the large businesses that we deal with are very transparent, and they will show us the rulings.
Q264 Stephen Barclay: Can you send us a note on that? Amazon is the most obvious example of when there was a Dutch ruling. There is some confusion over that, but it is difficult to talk about European co-operation if you do not have the details. I would be quite interested to have clarification, if I may.
Jim Harra: I will indeed.
HMRC’s work to establish the basis on which the UK members of multinational groups transact with affiliated companies in other countries includes understanding the terms of any rulings from, or agreements with, other tax administrations that may affect the amount of profits returned in the UK.
HMRC is aware that the Dutch tax authority frequently gives tax rulings to Dutch-resident members of multinational groups. The Department is not automatically notified of such rulings; however, we expect companies to provide details of them on request and we can use our formal information powers to seek to obtain them if the company does not provide them to us voluntarily.
We also work successfully with other tax administrations, including our Dutch counterparts, to obtain this type of information under the Exchange of Information provisions of our bilateral tax treaties.
2. Q265 Stephen Barclay: Secondly, we have talked a lot about corporation tax loss. Obviously, the tax loss from VAT is bigger than the tax loss from corporation tax. How does your resource allocation compare between the two?
Jim Harra: The main issue with VAT is evasion rather than avoidance. That is both evasion by small businesses, but also more serious organised fraud—MTIC fraud—which I am sure the Committee has looked at in the past. A much larger proportion of resources are deployed on VAT than there would be, for example, on corporation tax by large businesses.
Q266 Stephen Barclay: Again, perhaps we can have a quick note on that. I am particularly interested in why we have not set up a specialist team focused on things such as carousel VAT losses in the way that some other European jurisdictions have.
Jim Harra: We certainly have a specialist team on what we call MTIC fraud, which is carousel fraud.
HMRC does not generally organise and deploy its compliance resources based on tax regimes. Our approach is to tackle compliance risks based on customer behaviour (avoidance, error, evasion, criminality, etc). Thus, for example, our SME caseworkers, Large Business Customer Co-ordinators and Customer Relationship Managers, Computer Audit Specialists, Criminal Investigators, etc. will frequently tackle risks on a “whole case”, cross-tax basis, advised as necessary by tax regime specialists.
The Department has a strategy for tackling Missing Trader Intra-Community (MTIC) VAT fraud (which includes VAT carousel fraud) and we have a dedicated MTIC National Co-ordination Unit, which supports the Director of Criminal Investigation in co-ordinating the work of the various operational units in HMRC, other UK government departments and authorities and other EU member states in preventing, detecting and tackling MTIC VAT fraud.
We estimate that the frontline caseworker resource allocated to managing risks of VAT non-compliance and Corporation Tax non-compliance in five of the most relevant operational units was 4,120 and 3,835 respectively in 2012–13, giving a ratio of 52:48 between VAT and CT compliance. Just over half of those working on VAT compliance were focused on managing the risks of VAT fraud.
3. Q274 Ian Swales: A very simple one from me. I know we have mentioned this before. With the way that VAT works we have a lot of offshore businesses selling into the UK. There must be many days in your office when you have the happy surprise of opening an envelope with a massive amount of money in it. How much is that? How much VAT do we collect in this country from offshore businesses?
Jim Harra: I don’t have that information to hand. Where it is business-to-business transactions, as was explained earlier, it is the UK business that accounts for that VAT under the reverse charge. Where it is a business-to-customer transaction, then for electronic sales new rules come in in January 2015 which will give more tax to the UK.
In response to this question about VAT collected from overseas businesses selling to UK consumers, a note is attached at Annex A setting out the VAT treatments in some detail, which it is hoped the Committee will find helpful.
1. VAT Treatment of Cross-Border Supplies of Goods and Services
As well as providing the required information on the VAT yield from overseas businesses it might be worthwhile to also set out the rules that apply to cross-border supplies of goods and services to describe the context in which VAT is paid (or in some cases not paid).
The VAT system sets out rules to establish the “place of supply” of cross-border supplies of goods and services. The place of supply rules therefore determine in which country VAT has to be paid and are intended to prevent double or non-taxation.
There are different rules for goods and services. There are also different rules that apply to supplies made by businesses based outside the EU compared to those based in the EU and also differences between the treatment of supplies made to business customers and those made to private consumers.
2.1 Supplies of Goods from outside the EU
2.1.2 Business to Business (B2B)
For goods exported by a business outside the EU to a business in the UK it will be the UK importer who is liable to account for duty and UK VAT. The importer will also be subject to VAT audits by HMRC staff. Total import VAT on goods from third countries amounted to £22.9 billion in 2012–13.
2.1.2 Business to Consumer (B2C)
Where a business outside the EU exports goods direct to a consumer in the UK it will be the UK consumer, as importer, who is required to account for duty and UK VAT.
The goods may be sent as individual packages by post from the supplier to the customer. In such cases UKBF officers establish what VAT and duty charges are due, which Royal Mail then recovers from the consumer before delivering the parcel.
Alternatively, imports may be sent in bulk and broken down into individual packages when they arrive in the UK.
The total VAT from both sources was £77 million in 2012–13 (this compares to £40 million in 2011–12 and £36 million in 2010–11—the uplift is due to the removal of Low Value Consignment Relief on mail order from the Channel Islands—see below).
188.8.131.52 Low Value Consignment Relief (LVCR)
LVCR is an EU-wide scheme that applies to small consignments of goods which may be imported into member states VAT free—the underlying EU legislation prescribes a maximum value of €22. It is intended to relieve the administrative burden and cost of collecting small amounts of VAT on small value packages.
Evidence that this relief was being unfairly exploited led to a reduction in the monetary limit in the UK from £18 to £15 on 1 November 2011. In addition the scheme was withdrawn in its entirety for imports from the Channel Islands with effect from 1 April 2012.
2.2 Supplies of goods from other EU Member states
2.2.1 Business to Business
A business based in another EU country that sells goods to a UK business will zero rate the supply in its own country. The UK business then accounts for any VAT due in the UK, at the UK rate.
2.2.2 Business to Consumer
A business based in another EU country that sells and delivers goods to private consumers in the UK (eg through the Internet or through a mail order catalogue) is distance selling. The business will account for VAT in its own Member State. However, if the value of the supplier’s distance sales to the UK exceeds £70,000 in a year it is required to register in the UK and pay UK VAT.
For supplies of certain excise goods such as alcohol and tobacco, the supplier must register and account for UK VAT irrespective of the value of sales.
3. Non-Established Taxable Persons
Businesses that have no establishment in the UK may have an obligation to register and account for UK VAT. This may be because they are, for example, EU businesses that have exceeded the distance selling threshold or perhaps an overseas business that has bought and sold goods that were already located in the UK. Such businesses may be registered as non-established taxable persons (NETP)—currently HMRC has 7,768 NETPs registered. In 2012–13 they declared a net total of £2 billion VAT. Of these 612 were making retail sales via mail order or the Internet and were responsible for net VAT receipts of £44.8 million.
As an alternative a NETP may appoint a Tax Representative or an agent to account for VAT on its behalf, this tends to be the approach adopted by large businesses, and the above figures do not include VAT declared in that way.
There are special rules for certain services eg those connected with land (which are taxed where the land is situated) and for passenger transport (which is taxed where it takes place) but the general rules are described below.
4.1 Supplier based outside the EU
4.1.1 Business to Business
A UK business that purchases services from a company located outside the EU is required to account for VAT in the UK under the reverse charge. It may be able to recover this VAT subject to the normal rules—see section 8 below. Section 8 below explains the reverse charge procedure in more detail as PAC members raised a number of questions about this in questions 156 to 172 of the PAC hearing on 16 May.
4.1.2 Business to Consumer
For supplies of “electronically supplied services” (eg computer downloads) a non-EU business is required to register and account for VAT on all its supplies to EU private consumers.
Rather than having to register for VAT in each member state where it has customers, an overseas business can register for VAT in one member state and account for all of its EU obligations under a special regime referred to as VOES (VAT on Electronic Services).
The UK has 251 businesses registered for VOES in the UK (compared to 301 registered elsewhere in the EU) and in 2012–13 the total UK VAT declared was £39.7 million.
In considering this figure it has to be borne in mind that many of the major non-EU suppliers of electronic services have chosen to locate in Luxembourg and are registered for VAT there—see section 7 below.
For other types of services purchased by a UK private consumer from a company located outside the EU (in practice the range of cross-border services, other than electronically supplied services, consumed by private individuals is limited), there is no liability to UK VAT.
4.2 Supplier based in the EU
4.2.1 Business to Business
A UK business that purchases services from a company located in another Member State is required to account for VAT in the UK under the reverse charge. It may recover this VAT subject to the normal rules.
4.2.2 Business to Consumer
A business in another Member State that supplies services to a UK private consumer will account for VAT in its home Member State—so no UK VAT is due.
5. Changes to the Place of Supply of Services—1 January 2015
With effect from 1 January 2015, EU businesses making supplies of electronically supplied services, telecommunications and TV and radio broadcasting to private consumers in other Member States will have to account for VAT in the countries where its customers are located.
This means that the UK will receive VAT from suppliers in other member states with UK customers, but UK suppliers with customers in other member states will no longer declare UK VAT on their sales.
We estimate that the changes will increase the overall UK VAT yield by an additional £300 million per year and protect up to £5 billion per year.
6. HMRC Activity
The growth of the internet has led to a change in shopping habits which make it easier for businesses to supply goods and, in particular services, cross-border. It is no longer necessary for a business to have any major infrastructure in those countries in which it wishes to trade. HMRC acknowledge this is an area of risk and it is one that we are focussed on.
6.1 Relocation of service providers within the EU
Under the current rules, services supplied by EU businesses to private consumers are taxed in the Member State where the supplier is located. This gave rise to the risk of businesses moving to a low-VAT jurisdiction, such as Luxembourg, to supply electronic services to UK consumers. From 1 January 2015 this risk will be removed when the new EU VAT place of supply rules are implemented
In the meantime, HMRC has had success in challenging the intended/purported migration of some telecoms and broadcasting businesses to Luxembourg ahead of the 2015 changes intended to enable them to benefit from the lower VAT rates, when in reality these supplies were still made from the UK.
Businesses have the freedom to establish themselves in whichever Member State they wish so it is not possible to challenge the arrangements put in place by online businesses which have genuinely established themselves in low rate jurisdictions from which they are making supplies of e-services to UK customers.
6.2 Non-EU electronic service providers
HMRC is closely monitoring whether non-EU e-service suppliers are failing to register for VAT and to pay tax on their supplies. We have little evidence that this is the case. Recently HMRC investigated a number of non-EU businesses that appeared to be making e-service supplies to UK customers without properly registering and accounting for VAT. The findings were that all the businesses tested were either registered for VAT somewhere within the EU, registered for VOES under a different name, had ceased trading, or were not liable to register for the scheme. To supplement this, we are commissioning some more systematic analysis to test out these initial findings.
6.3 Supplies of goods into the UK
HMRC is currently undertaking a good deal of activity to identify businesses that are supplying goods in the UK without meeting their obligations to register and account for VAT. Information may be received from UK competitors who feel that they are at a competitive disadvantage but we are also using techniques such as the use of “web robots” to trawl the internet and identify sales that should be subject to UK VAT.
6.4 International Cooperation
It is now standard UK (HMRC) policy to negotiate and agree bi-lateral arrangements for the exchange of VAT/sales tax information alongside direct tax information with other jurisdictions. The UK is also a signatory to the multi-lateral OECD Convention of Mutual Administrative Assistance and the EU/Swiss Anti-Fraud Agreement, both of which allow for the exchange of VAT information. The UK is therefore increasingly well-placed to exchange VAT information with non-EU jurisdictions to strengthen taxpayer compliance and to help fight VAT fraud and to identify avoidance.
HMRC has a dedicated team responsible for EU VAT administrative co-operation and information exchange arrangements which aim to improve taxpayer compliance and support the fight against VAT fraud (including VAT MTIC fraud). In relation to VAT information exchange within the EU, the latest Commission figures show that HMRC fully answered 86% of information requests within the EU deadlines. When the PAC looked at this area in 2007, HMRC’s performance was 55%. HMRC has outperformed every large Member State (those handling more than 1,000 requests per year) in this area for the last three consecutive years.
7. Reverse Charge on Cross-Border Supplies of Services to Business Customers
1. VAT is a tax on expenditure by final consumers. It is collected at each stage in the supply chain—each supplier charges VAT on the supplies it makes (output tax) and can recover any VAT it has paid on goods and services that it uses to make taxable supplies (input tax).
2. Where a UK business supplies services to another UK business, the supplier therefore adds UK VAT to the invoice and accounts for this VAT (output tax) to HMRC. The business customer, provided they are using these services to make taxable supplies, can recover the VAT charged (input tax). They do this through their normal VAT return—this shows the output tax due to HMRC and the input tax being recovered with the net amount then being paid to HMRC (or repaid to the business if input tax exceeds output tax).
3. For cross-border supplies to a business customer, VAT is accounted for under what is known as the reverse charge mechanism. For these supplies:
The supplier does not add VAT to the invoice and does not account for VAT.
Instead, the business customer is required to account for VAT as output tax on the supply that they have received.
The business customer will also be able to recover this VAT as input tax, to the extent that they use the supply to make taxable supplies. This mirrors the position for supplies received from UK businesses.
4. This mechanism can be illustrated in the following example of a company that is based in Germany which is supplying services to a UK VAT registered business which then uses those services to make a taxable supply to a final consumer in the UK. If the VAT exclusive price of the services received by the UK business customer is £1,000 then:
The German supplier does not charge German VAT.
The UK business customer accounts for VAT in the UK—it therefore accounts for £200 of UK VAT.
The UK business can recover the £200 as input tax.
If the UK business uses these services to make a supply with a VAT exclusive price of £2,000 to a UK consumer, it will charge £400 VAT and account for this as output tax.
The UK business in its UK VAT return will then include:
5. The reverse charge mechanism applies across all EU member states. It provides a more streamlined way of collecting the correct amount of VAT on intra-EU supplies to business customers than the supplier charging VAT in the country in which they are established and the business customer having to recover that VAT from the country in which the supplier is registered for VAT. This reduces compliance costs for both businesses and fiscal authorities. It also reduces the risk that VAT will hinder cross border trading in the EU.
24 May 2013