10 VAT and Indirect tax issues for retailers
In the current environment of falling Corporation Tax rates and with a continued reluctance for Income Tax rates to be raised, Indirect Taxes are increasingly viewed by Governments across the Globe as a legitimate way of balancing the books. Here we outline 10 different areas of potential risk and opportunity within VAT and indirect taxes for the retail sector.
1. VAT liability of product sales
Although the majority of goods sold within the UK are liable to the 20% standard rate of VAT, there are a range of often complex reliefs available where products may in fact be liable to the zero (0%) or reduced (5%) rates of VAT. People will probably be aware of the infamous “Jaffa Cakes case” (is it a cake or a biscuit?) but what exactly are the rules when it comes to sales of food? And although sales of “children’s clothing” may be zero-rated, when is a “child” no longer deemed to be a child for these purposes? Also, sales to overseas customers many not be subject to VAT at all in some cases, but not all cases. It is important to review and monitor the allocation of product codes against the various VAT rates, in particular when new lines are produced or stocked.
2. Overseas sales
Online or postal sales to overseas customers may not be subject to UK VAT if certain conditions are met. Where VAT is not charged the onus is on the retailer to maintain the right evidence to prove this is correct, such as export and transport documents. However, depending on the volume of sales to individual countries retailers may have an obligation to also register for VAT locally within different territories under the “Distance Sales” rules. It is therefore important to identify the location of your customers and monitor the volume of sales to each country in order to determine if and when a local VAT liability may be triggered.
3. Retail export scheme
The Retail Export Scheme is a great way of promoting and boosting sales to overseas visitors by offering “tax free” prices, particularly for those with outlets located near major tourist and travel areas, such as airports and stations. There are also a number of companies that offer their services to administer and oversee this scheme. However, whether they operate the scheme themselves or outsource this, it is important for retailers to understand their obligations and the potential risks and problem areas. For example, in the event of a fraudulent claim who is responsible for repaying any VAT claimed to HMRC, you or the claim company? The relevant terms and conditions are ultimately crucial in determining risk.
4. Imports - VAT
It’s a fact of life that VAT will be payable on most goods imported into the UK. Generally this VAT will be recoverable, but there is often a timing and cash flow issue between when VAT is paid and when it is recovered. However, regular importers may take advantage of HMRC’s deferment scheme which allows goods to be automatically cleared at the point of entry, with payments to HMRC then being made on a set monthly basis. There are conditions to joining the scheme, but ultimately this is likely to be of benefit to any business that has regular or high value importations of goods from outside the EU.
5. Imports – Customs Duty
Unlike VAT, Customs duties are not always payable on the importation of goods and this will ultimately depend on the type of goods imported and their country of origin. However, when duty is payable this is the responsibility of the importer and this cost is not recoverable from HMRC. It is therefore important to consider supply chains and who will actually be responsible for importation in order to fully determine costs. It is the commodity code applicable to a product that determines the rate of duty payable and it is often the case that very slight difference in products can result in big differences in the rate of duty payable – so it is often worth spending time to ensure that the right code is identified from the outset. Also, regular importers of goods will almost certainly benefit from applying for Authorised Economic Operator (AEO) status as this aids the import process.
6. Sales promotions, etc
Generally retailers will account for VAT based on the value of sales recorded via their tills on a particular day. But often this only tells part of the story as there may be a whole range of other sales or price adjustments which aren’t necessarily picked up on the till readings alone. These could include sale or discounted items (including staff discounts), two for one offers, gifts and samples. There are also different VAT accounting rules applicable to the sale of Multi Purpose Vouchers, which can be used for a range of products, and Single Purposes Vouchers where use is limited to specific items, as well as credit card chargebacks. In short, if you’re simply accounting for VAT based on the ticket price or cash in the till alone then you may well be paying too much.
7. Real estate issues
The VAT rules in relation to land and property issues can be particularly complex, none more so then if your business is not normally involved in property issues. There can be very specific VAT issues concerning cash inducements, rent free periods, landlord contributions, sub-lettings, refurbishments, reverse premiums, empty units, anchor tenants, dilapidations and disposals – in fact most land and property transactions. We would always recommend that specific VAT advice is sought prior to committing to any major transactions or expenditure.
8. Recovery of VAT incurred on deal fees
Retailers are generally able to recover the VAT incurred on their costs and overheads, with a few notable exceptions on things like business entertainment. However, the past few years has seen a concentrated and prolonged attack by HMRC on the recovery of VAT incurred on fees relating to various “deals”, such as sales/acquisitions, equity investments, flotations, MBO’s, finance restructuring, etc. The rules here are complex and are very much fact specific, but in general to recover input VAT you must have received the services in question (not, for example, the bank or individual shareholders) and there must be a direct link between these costs and your taxable business activities, which isn’t always met if the costs are incurred by a passive Hold Co. It is possible to improve the VAT recovery position with careful planning, but in order to be successful in minimising VAT leakage this should ideally be done before professional costs are incurred or recovered.
9. When the VAT man calls
It’s well known that HMRC now have fewer resources than in the past and so operate a more “target focussed” approach to VAT audits and inspections. However, because of the range of VAT issues relevant to the retail sector this means that retailers are often (and probably disproportionately) the subject of this more focussed attention. It is therefore vitality important to ensure that systems and procedures are monitored and reviewed periodically so that it can be demonstrated that “reasonable care” has been taken with VAT compliance, even if some mistakes may inevitably occur from time to time. This could be the difference between a large penalty, on top of any tax due, or no penalty at all. It’s also important to remember that HMRC aren’t always right. In fact, as is proven in the Courts, they are frequently wrong or have misunderstood the relevant facts. Therefore if HMRC do visit and raise a possible issue we would recommend that specialists VAT advice is sought.
10. The “B” word
Yes, Brexit! We read a lot about Brexit and the possible implications but there is still very little detail about what this is actually going to mean in practice. Businesses therefore face uncertain times, although this could represent positive opportunities as well as potential pitfalls. From a retail perspective it is important to consider possible supply chain issues and plan accordingly. For example, if you currently, or plan to, import goods from overseas into a central European “hub”, where is the best place for this hub to be located? The answer will depend on a myriad of issues, from the origin of the goods and the VAT/duty rates applicable in various territories, through to the demographics of your target market and where they are physically located. Businesses will clearly want to avoid any potential “double duty”, ie duty payable on entry into the UK and then again if goods enter the EU – or vice versa, so one solution could be to potentially operate two hubs, although this would come with increased running costs. At the moment there are no clear answers, but it is important to consider and plan for very possible outcome in order to allow your business to address and adapt to any issues that may arise as Brexit gets nearer.