If you’re finding it hard to factor VAT charges into your finances, then this article can help you to understand exactly when you need to start paying VAT, how much VAT you might have to pay, and why VAT return software is an essential part of the process.

What Is VAT?

VAT, or Value Added Tax, is a type of tax that’s charged on many goods and services. You’re probably already used to seeing VAT charges on invoices when you place orders online, usually as part of the breakdown of your order total alongside shipping costs. Most businesses include VAT in the price displayed on their website, but an invoice gives you extra insight into how much of that cost is actually VAT.

VAT Rates Explained

VAT rates can vary depending on the product or service you’re selling, as well as how it’s being sold, so it’s important to calculate VAT on a case-by-case basis if you’re selling lots of different products. Here is a brief overview of VAT rates and the categories they apply to:

•       Standard 20% Rate: The majority of goods and services will be taxed at the standard 20% rate, so there’s a good chance at least some of your business’s wares will fall into this category. Even if you think some of your goods are zero-rated after reading this list, such as food and drink, pay close attention to the conditions surrounding the sale of these products. For example, alcoholic drinks and food that’s sold hot are still subject to the standard rate of VAT.
•       Reduced 5% Rate: Some goods will be taxed at a reduced rate, which is usually 5%. VAT is typically reduced on central heating repair services, nicotine patches and energy-efficient materials that can be used to build or improve homes.
•       Zero-Rated: Businesses don’t pay any VAT on zero-rated goods, which include children’s clothes, books, newspapers and food for human consumption (with exceptions).
•       Exempt: Similarly to zero-rated goods, exempt goods don’t incur VAT charges. However, if your business sells exempt goods exclusively, you won’t have to register for VAT. Businesses selling zero-rated goods may still need to register. Common exempt services include online gaming, sports activities and funerals.

Who Pays VAT?

Only businesses with an annual turnover of more than £85,000 have to register for and pay VAT. Businesses below this threshold can register to pay VAT voluntarily, but there’s no obligation to do so, even if they sell goods taxed at a standard or reduced rate.

Registering For VAT Voluntarily

Deciding whether you want to register for VAT early will depend on your business’s needs and whether the additional admin and paperwork are worth the rewards you may reap.

VAT registration can be a bonus for some businesses because while you will have to pay VAT to HMRC, you will also be able to claim it back on any eligible purchases. If you regularly buy a large number of business supplies from VAT-registered businesses, claiming back the VAT could save your business money.

However, claiming back VAT makes your bookkeeping process more complicated and you may need to seek assistance from an accountant. You will also have to consider whether your customer base will be happy to accept higher prices, especially if your goods and services are taxed at 20%.

How To Register For And Pay VAT

Before paying any VAT, you will have to register your business for VAT online. You’ll usually receive your registration number and certificate in around two weeks and won’t be able to charge your customers VAT until then. However, it’s a good idea to increase your prices to account for the extra charges while you wait. This is because you’ll be liable to pay VAT from the day your application is sent off, so make sure you keep careful records of invoices and receipts as soon as you start the registration process.

VAT Software

As of April 2022, all VAT-registered businesses must use accredited accounting software to file their tax returns. This is because of a new policy called Making Tax Digital, or MTD, which aims to make filing your VAT return a much smoother process. Not only will your software automate your VAT calculations, but it will also help you to keep careful records of invoices and expenses while staying up-to-date with any tax law changes and deadlines so you don’t have to.

Keeping Records For VAT

While it’s important for all businesses to record their income and outgoings, VAT-registered companies need to be extra vigilant. It’s important to keep your business transactions separate from your personal spending, which is why many entrepreneurs open separate bank accounts. Some of the records you will need to have for VAT purposes include:

•       A list of every product you’ve bought or sold, regardless of the rate it’s taxed at
•       Copies of every invoice you receive or issue to customers
•       Self-billing agreements and the personal details of the clients these apply to (such as names, addresses and VAT registration numbers)
•       Debit and credit notes
•       Bank statements, paying-in slips and cheque stubs
•       Any products you’ve claimed for personal use, given away, or lost
•       The total amount of VAT you’ve charged (on products you sell) and paid (on products you buy)

It’s important to keep VAT records for six years, as HMRC could request to see them as part of an investigation.

Manage Your VAT More Effectively

Once you’ve decided whether VAT registration is necessary for your business, you can begin implementing processes that make managing your tax return a smoother process. This should include finding an accredited accounting software provider and gathering your financial records but could also involve hiring an accountant or advisor to assist in maintaining your books.

Taxes have always been a bit of a confusing matter for many people – now more than ever, due to the impact of COVID-19 on tax. There are so many things that can be overwhelming when it comes to taxes, such as which bracket you fall into, whether you need a UTR number, and many more.

One of the main things that confuses people is the fact that there are so many different types of tax. It can be hard to know whether you need to pay tax, and even once you know that, you may be unclear on what type of tax you need to pay.

There are various lesser-known types of tax, such as tax when you travel, or tax for gambling winnings, but in this post, we’ll be focusing on three of the most common types of tax: income tax, consumption tax, and property tax.

Income tax

This is the type of tax that tends to cost people the most. As the name suggests, income tax refers to compulsory money you need to pay to the government for any income earned. Keep in mind that this doesn’t just refer to money you earn form your business or job, but other forms of income as well.

There is usually a minimum income required in order for you to have to pay taxes, so if your income falls below this threshold, you might be exempt from paying. There are also various income brackets, which means the more you earn, the more taxes you’ll need to pay.

Consumption tax (VAT)

Consumption tax, also known as VAT, is the tax we pay on most of the products or services we buy. This varies from place to place. In the UK, the standard rate for consumption tax is 20%. This is the type of tax we encounter most often, since most people will pay VAT on nearly a daily basis.

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While the majority of goods and services will require you to pay consumption tax, there are a few that are exempt. These differ depending on where in the world you live. Some places don’t charge VAT on what is viewed as basic necessities, and instead only charge for items viewed as luxuries. In the UK, for instance, insurance is exempt from VAT.

Property tax

Property tax refers to money that is levied on real estate. The way that property tax works is dependent on where you live. In some areas of the world, you only need to pay property tax on a property when you buy it and it is over a certain value. Generally, property tax is taxed annually.

Property tax is the responsibility of the owner of the property, which means that renters are not liable to pay property tax, although a portion of their rent will probably be used towards it. If you don’t pay your property tax, your house could get taken away from you, so it’s important that you pay the amount that you should, and that you pay it on time.

In a presentation following the Chancellors statement yesterday, the IFS have claimed that the job of mitigating the debt caused by the governments current spending plans could be a job “for not just the current Chancellor, but also many of his successors”.

At a presentation of its findings on the Chancellor’s statement, IFS director Paul Johnson said that a “reckoning, in the form of higher taxes” would have to come eventually. It also suggested that the economy will not grow as large as it could have done if the Covid-19 crisis had not hit.

“If that’s the case, and it’s very likely to be the case, revenues will still be depressed, and if we want to try then to bring the deficit back to where it would have been absent the crisis, we will need to do some spending cuts, or given a decade of austerity, perhaps more likely some tax rises,” he said.

“It’s going to take decades before we manage that debt down to the levels we were used to pre this crisis.”

The IFS has also cast some doubt on the potential effectiveness of the Stamp Duty scheme and the 50% off dining initiative warning that the temporary stamp duty holiday, announced by Mr Sunak, may in fact increase house prices while deputy director Helen Miller raised doubts as to whether the meal discount scheme and VAT cut were driven by a problem with demand, or supply – with businesses unable to accommodate customers due to social distancing constraints.

Her concern lay in the fact that many businesses may not pass on the VAT savings to customers, thus negating the purpose suggesting that “the firms that benefit most would be those who have the highest sales, who are operating closest to normal”.

This isn’t the first time Rishi Sunak’s plans have been called into question. HM Revenue and Customs chief executive Jim Harra has also raised concerns about the Job Retention Bonus scheme which gives £1,000 to firms for each furloughed employee they bring back to work and whether it actually offers enough value and benefit.

In a letter to the Chancellor, he requested a ministerial direction which is a formal order to go ahead with a scheme despite the concerns.

Mr Harra said that while there was a “sound policy rationale” for the Job Retention Schems, but that “the advice that we have both received highlights uncertainty around the value for money of this proposal”.

Mr Sunak himself said he expected a “dead weight” cost to the JRS scheme, as many companies who already plan to retain staff will reap the benefit.

Speaking to BBC Radio 4’s Today programme he stated his feelings that “without question” there has been “dead weight in all of the interventions we have put in place”. However, many economists and even the leader of the opposition, Labour leader Sir Keir Starmer voiced concerns that Government could not in fact afford the “dead weight”, stated his belief that the scheme should have been a targeted initiative and not a one size fits all payout.

However, the government have since responded through a Treasury spokesman who stated that the Government is confident the Job Retention Bonus scheme is the “right policy” to help protect jobs.

The tapering down of different initiatives will spark fresh concerns within many organisations, raising questions of whether they will be able to stand on their own two feet again.

The furlough scheme is at the heart of this subject. That is because it has been the most widely-used of all the financial support schemes available – around 8.4 million workers are having 80% of their salaries paid for by the Government at present (up to £2,500 a month). But at the end of May, the Chancellor Rishi Sunak confirmed that the furlough scheme is to end on 31 October 2020, and it will undergo some changes before then.

There are two key questions, then, that business leaders must address. Firstly, what do they need to know about the upcoming reforms to the furlough scheme? Secondly, what can they do if the curtailing of this initiative is likely to cause significant financial distress? Nic Redfern, Finance Director at KnowYourMoney.co.uk, offers his thoughts to Finance Monthly.

What are the changes to the furlough scheme?

Currently, it is estimated that the Government has spent £15 billion so far in covering the salaries of furloughed staff. By the end of the scheme, that figure is likely to reach £80 billion – that is £10 billion for each month the scheme was running.

While the Office for Budget Responsibility is set to publish more detailed costings in the coming days, what these approximated figures show us is that there are billions of pounds that is still yet to be paid for the initial four months of the furlough scheme.

This chimes with the findings of a recent study that KnowYourMoney.co.uk conducted among over 900 UK businesses. We found that as of April almost half (48%) of British companies had furloughed staff – this figure will likely be even higher now – but of those, 71% were still awaiting funds to be transferred to them from the Government.

Currently, it is estimated that the Government has spent £15 billion so far in covering the salaries of furloughed staff.

The Government must prioritise getting up to date with furlough payments to employers; businesses with many members of staff on furlough will not only be feeling the strain if they are not being reimbursed for their salaries, but they will also struggle to understand the real financial health of the business when some supports are yet to be issued.

Employers must do all they can to clearly track how much of their expenditure on salaries is likely to come back into the business. But they can only do so if they understand how the scheme is due to change in the months ahead.

Here are the key changes that were announced by the Chancellor on 29 May: from Wednesday 1 July, businesses using the Government's furlough scheme will be able to bring furloughed employees back part-time; from August, employers will have to pay national insurance and pension contributions; and from September, while employees on furlough will continue to get 80% of their salary, the proportion that the state pays will be reduced each month (government will only pay 70% in September and 60% in October).

The part-time furlough option may interest some employers. Let’s take a simplified example: a member of staff who earns £2,000 per month and works 40 hours a week, but has been furloughed and their employer is not topping up their salary beyond the 80% offered by the Government. If said member of staff returns part-time and work 20 hours per week throughout July, they will now receive 50% of their monthly salary from their employer as normal (£1,000). Meanwhile, the remaining 50% will be paid via the furlough scheme (80% of it – so £800). That means they employee will now earn £1,800 per month, which is higher than the amount they would be paid if they were furloughed full-time (£1,600).

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This solution could suit both employers and employees. Not only can it bolster the workforce and aid the transition back into work for some people who have been furloughed for many weeks, but financially it would ensure the part-time employees are better off. Plus, the business does not need to suddenly jump back to paying all of their salaries.

What are the alternatives?

For some businesses, though, they might not be in a position to bring furloughed staff back, even on a part-time basis. Yet they will need to do so once November arrives. So, what can they do to put themselves in a stronger financial position as they prepare to pay all of the employees’ full salaries again?

The important thing to remember is that there remain many options available for businesses requiring financial support.

For one, the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce-Back Loans initiatives are both still operational. Elsewhere, the Government is providing a Small Business Grant Fund (SBGF) to businesses that already receive Small Business Rates Relief (SBRR) or Rural Rates Relief (RRR).

Furthermore, it is worth remembering that any VAT payments due between 20 March and 30 June 2020 can be deferred to a later date. Also, any Income Tax Self-Assessment payments that are due by 31 July 2020 can be deferred until 31 January 2021.

The viability of these options will very much depend on each business’ circumstances. But importantly, if the tapering down – and eventual ending – of the furlough scheme is causing financial concerns within your organisation, remember that there are other forms of support in place.

1. Coronavirus

Predictably, the worsening coronavirus epidemic, which on Wednesday saw the number of UK cases rise to 416, took centre stage in the Chancellor’s speech.

As previously reported, the government has coordinated its response to be complement measures announced by the Bank of England. A £30 billion “stimulus package” has been set aside to mitigate the effects of the outbreak and prop up UK businesses for the duration.

Further to this, a £500 million hardship fund has been pledged  to local councils for the purpose of providing care to the vulnerable, and small firms have been guaranteed access to “business interruption” loans of up to £1.2 million. In addition, statutory sick pay will be granted in all cases where individuals are advised to self-isolate, whether or not they are judged to have displayed symptoms of the virus.

The Chancellor also announced a raft of pledges aimed at shoring up the NHS, including an initial £5 billion emergency response fund for the NHS and public services, and an additional £6 billion for the NHS alone to be divulged over this Parliament. The Chancellor made assurances that the NHS would receive “whatever it needs, whatever it costs”.

2. Taxation

As initially announced in November, the threshold for National Insurance Contributions will be raised from £8,632 to £9,500, a move that will see roughly 500,000 employees removed from the tax bracket altogether. Employees with salaries above that £9,500 threshold are expected to save an average of £85 a year as a result.

Tobacco taxes will once again rise by 2% above the national retail price inflation rate, while duties on spirits, cider, beer and wine are to be frozen. Additionally, tampon products will no longer be subject to VAT from January 2021 once the UK has split from the EU.

No further announcements were made in regards to national insurance, income tax or VAT.

3. Business and Science

Entrepreneurs’ Relief will be retained, but with its lifetime allowance reduced from £10 million to £1 million – a move that is slated to save taxpayers around £6 billion, but has received mixed reactions from business owners.

Eddie Bines, Director at Duff & Phelps said in a statement that the tax relief changes “could be a significant blow to business owners and will come at the expense of the UK entrepreneurial community”.

The science and technology sectors also saw a significant funding boost, with £5 billion earmarked to expand the reach of gigabit-capable broadband to rural areas not currently covered. A funding boost of £1.4 billion has been granted to the Science Institute in Weybridge, Surrey, and a further £900 million has been pledged for research into nuclear fusion, electric vehicles and space technology.

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4. Environment and Climate

The Chancellor’s Budget speech saw changes to many environment-adjacent policies, with subsidies for “red diesel” (fuel used in off-road vehicles) slated to be scrapped across “most sectors” within two years.

A tax will be levied against non-recyclable plastic packaging from April 2022, which will charge both manufacturers and importers £200 per tonne of material.

A £640 million “nature for climate” fund will be established for the protection of natural habitats, with an additional aim of planting 30,000 hectares of new trees.

To combat the continuing threat posed by flooding, £120 million in emergency relief funding will also be distributed to communities that have been affected this winter, and the next five years will see investment in flood defences doubled to £5.2 billion.

5. Transport and Housing

The government has pledged a £640 billion boost to infrastructure spending for the next five years, singling out roads, rail, housing and broadband among the areas to receive additional funding.

More specific expenditures include £27 billion for motorways and additional key roads such as a new tunnel on the A303 near Stonehenge. A further £2.5 billion will be released over the coming five years to resurface roads and fill potholes.

In response to the Grenfell Tower fire, a new £1 billion building safety fund has also been established to remove all unsafe combustible cladding from private and public housing greater than 18 metres tall.

Finally, a £650 million package will be set aside to tackle homelessness, with the aim of providing an extra 6,000 safe places to accommodate rough sleepers.

From the characteristics of MITC fraud arrangements to the tangible damage that such schemes can cause, below Jérôme Bryssinck, Head of Government Solutions at Quantexa, talks Finance Monthly through the options for fighting VAT carousel fraud.

Europol believes that missing trader intra-community (MITC) fraud (usually known as ‘VAT Carousel’ fraud) costs authorities around €60 billion annually. MITC is a highly sophisticated form of fraud which can be carried out due to the way that pan-European legislation means cross-border trade may be carried out VAT free. Due to the complexity of the schemes, MITC is hard to fight, and entire legal businesses frequently become unwitting participants in the carousel. Innovative technologies and new policies must be used to tackle this fraud robustly.

What is MITC fraud?

By its nature, the EU trading bloc enables the converging of regulations and standards and the removal of barriers to international export, in order to make trade within the bloc simpler and less expensive. MITC fraud works by taking advantage of the EU legislation around cross-border transactions- traders receiving services or goods from an entity in the EU do not have to pay VAT, as intra-community transactions are VAT exempt.

To create a ‘carousel’, a criminal will create or buy companies to acquire goods (let’s call them Company A in this example). These companies will next buy goods from a company in the EU (Company B). Company A will then purchase goods from Company B, with no VAT being due. Company A will then peddle these goods to a different company (Company C). This company could be a legitimate one, or a company managed and set up by the criminals. Here, VAT will be added to the sale price. Since the goods have been sold domestically, Company A must legally declare the VAT it has included on the goods, and pay this to HMRC. In the case of MITC fraud, though, Company A will vanish, and the VAT will not be paid. The goods will then be passed through many other companies which function as a buffer so as to complicate any potential investigation. Next, a company (Company D) will send these goods out of the EU and reclaim the VAT that was not in fact ever paid to HMRC. This loss of tax revenue negatively affects the provision of crucial public services for the country including education, policing and healthcare, and also increases the tax obligations of honest taxpayers.

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How MITC fraud is being fought

Because millions of euros worth of goods are traded daily, it is hard to identify illegal activity amongst so much legal activity. Combatting VAT carousels is made more difficult by the way that member states need to coordinate across separate national borders. The data needed to investigate MITC fraud criminals will commonly be stored in different forms and will be owned by disparate regulatory or government bodies across the EU. In many cases, ‘carousels’ will already have dissipated by the time authorities realise criminal activity has occurred, allowing the criminals to remain unidentified and the money to have already been lost. Those seeking to fight MITC fraud are therefore unlikely to be able to act to prevent such crimes from being carried out.

Bettering our defences

Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud. A priority is to speed up the sharing and analysing of data at a European level. Data analytics technology should be used to better comprehension of the broader context of each individual company, so that tax departments build a bigger picture of the trades that are being carried out.

Technology must be leveraged more effectively to empower tax departments to proactively tackle MITC fraud.

Such technology would be able to identify anomalies and red flags, such as if a company with an annual turnover of €200K was able to order €2 million’s worth of goods. Under an improved system of data gathering and sharing, VAT information would be collated and interpreted by machines, and AI would be utilised to create risk models that would help improve the accuracy of identifying anomalous results. This information could be shared with a case handler, who would be able to act more swiftly to investigate criminal activity.

As well as this, each EU Member State needs to improve their operational and analysis capabilities. The pace at which each state reacts to the flagging of anomalous results needs to improve if action will be taken effectively. At present, many member states do not have the technical means required to enable them to bring together external data. Some member states must also grow the amount of information they are gathering from traders. VAT receipts, for example, could be collated in a machine-readable format which would improve data collection.

Next steps

VAT Carousel fraud has so far proved difficult for EU Member States to combat. If we are to prevent criminals benefiting at the expense of the taxpayer, we will need a pan-European, multi-pronged approach. The amount of information gathered and collated about company and trade accounts must increase, and we also need to make use of innovative technologies which will facilitate the garnering of actionable insights from the vast amounts of data collected. Only by enacting such a systematic approach will be truly be able to tackle this crime.

This initiative is called Making Tax Digital (MTD) and is part of the UK’s plan for a more digital future, but not all businesses are ready. If you’re one of them, here Damon Anderson, Director of Partner at Xero explains what you can do to avoid huge fines.

1. Check your eligibility

If your business makes more than £85k each year in taxable turnover, Making Tax Digital for VAT will apply to you from April 1. After this date you won’t be able to complete a paper-based VAT return, or complete your VAT return online at the HMRC VAT portal.

If you suspect your business will soon fall within the VAT threshold, keep records digitally using HMRC-compatible software to stay within the rules.

2. Act now

If you’re eligible, first you need to find an HMRC-approved software vendor. Xero has bridging software to make it even easier to make the switch and it’s MTD tools are now live, are free for Xero users and allow you to:

• Know when VAT returns are due
• Keep a history of the VAT returns that have been filed
• Calculate how much VAT is due
• Identify the method of payment
• Post VAT returns in real time

MTD for VAT will change to the way businesses file their tax, so there’s no escape. If you’re not sure where to turn, speak to an accountant who can advise you. To help small businesses and their advisers to comply, we’ve also created Dexter the digital tax adviser who is putting a friendly face to the legislation.

Keep in mind that some VAT-registered businesses have a deferred start date of October 2019. You can find more information on eligibility here.

3. Know your penalties

HMRC can charge a maximum penalty of £500 for failure to keep the required VAT records. But don’t panic: HMRC understands Making Tax Digital is a big step, and while penalties will apply to record keeping requirements, it is expected to be sympathetic where the trader has made reasonable efforts to comply.

There’s no doubt that businesses are dealing with a lot at the moment and HMRC has said they will not pursue record-keeping penalties when businesses are doing their best to comply with the law. However, eligible businesses should still make the effort to comply by 1st April.

4. Embrace it

Millions of businesses already do so much of their business online, from banking, paying bills to interacting with their customers or suppliers, and many already using accounting software and are seeing the huge benefits. By moving to digital tax, many of the existing paper-based processes will be put to bed, allowing businesses and their agents to devote more time and attention to growing and nurturing their business.

Making Tax Digital will make tax filing simpler and more accurate. The sooner you get used to digital tax filing the more time you’ll have to grow your business.

Below, Finance Monthly hears from Kim Hau, Senior Proposition Manager for ONESOURCE Indirect Tax, Thomson Reuters, on preparing your business for MTD.

HMRC’s move is in-line with the global trend towards a more digital relationship between tax authorities and businesses, as well as increased regulatory guidance from the Organisation for Economic Co-operation and Development (OECD) for greater transparency in tax data.

Digital Records and Submission

The first stage of MTD for VAT mandates digital record keeping and filing for all VAT registered businesses with a turnover of £85,000 or more, providing a “soft landing” period for businesses before mandating the requirement to have digital links between their data. The ultimate aim is to improve the quality of record keeping, while reducing the mistakes often caused by manual processes and reducing the perceived tax gap – of which £12.6 billion relates to VAT.

A recent Thomson Reuters survey on MTD found that 79% of respondents keyed in submissions directly into the government gateway, something that will not be acceptable come April 2019, or, October 2019 for more complex businesses.

Instead, businesses will have to store and maintain all Accounts Payable and Accounts Receivable data in electronic form using functional compatible software. In other words, using technology that can store and maintain records, perform the required calculations, and submit the information to HMRC directly via their Application Program Interface (API). Those wedded to the use of spreadsheets will find that whilst they can continue to be used, they will require additional software to handle the digital submission piece and certain conditions must be met to ensure a digital trail.

Digital Links

The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications. This is a move to limit mistakes from manually inputting figures and comes into effect for all VAT registered businesses in April 2020.

The second stage mandates digital links, the requirement that any transfer or exchange of information in the VAT return process is made electronically between software programs, products or applications.

By far, this is anticipated to be the most complex and difficult requirement of MTD for VAT, forcing businesses to assess every single step of the UK VAT return process for each of their entities.

While there will be some flexibility in the first year of MTD going live there will be no bending of the rules. Connecting all digital records will not only help to ensure the business is compliant but will also future proof organisational systems and processes before penalties are enforced.

The Road to Digital Transformation

An obvious first step is for businesses to understand to what extent they are already compliant, focusing on where relevant data is collated, what kind of data is available via digital means and understanding the processes used for producing VAT returns.

At this stage, companies will be able to decide on what level of change is required. However, with further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.

With further reforms expected after 2020 it is highly recommended that companies do not settle for a “sticking plaster” solution.

There are many solutions available to meet each gap of MTD for VAT compliance, however piecemeal solutions should be put in context of the general trend towards a digital tax agenda, and their long-term suitability.

Reviewing the options with internal and external stakeholders such as IT, software providers and external consultants will ensure that the most appropriate solution to meet operational needs is selected. This could include considering data security policies, compatibility with existing systems (e.g. ERP) and developing a tax technology strategy. After all, while MTD for VAT is a UK initiative, it is also worth considering the growing impact on tax teams of similar reporting requirements in other jurisdictions.

From the pending implementation of VAT to the introduction of Inter-Governmental Agreements with foreign countries, below Finance Monthly hears about Kuwait’s most recent tax affairs through the lens of one the world’s largest professional services and accountancy firms, EY, and one of its top Partners and experts in Kuwait, Alok Chugh.

Despite previous plans, Kuwait’s parliament has recently announced that it will not implement VAT before 2021. What could this decision mean, both in the short and long term?

We are closely monitoring the progress in implementation of VAT and are in regular contact with all the key officials. Based on our discussions, we believe the VAT may be implemented sooner than 2021 (probably by January 2020).

While some businesses take a sigh of relief, this only seems to be short term, as once the other countries implement the VAT, the pressure on Kuwait will only increase.

What are the key challenges that could come with this decision?

Timing difference in implementation of VAT in Kuwait and in the neighbouring countries will have concerns by businesses involved in cross border transactions that may result in higher cash outflow. For Kuwaiti businesses, this is a blessing in disguise as this gives them additional time to prepare for VAT and also leverage from experiences of other countries.

What have been any other tax trends in Kuwait in the past six months?

Kuwait has signed the Inter-Governmental Agreements with the United States (US) for implementation of US FATCA. The financial institutions are required to do an annual FATCA reporting to the Ministry of Finance (MoF) and audit report prepared by a certified auditor is required to be submitted by the FIs on an annual basis.

In addition, Kuwait is a signatory to CRS Multilateral Competent Authority Agreement (MCAA). The MoF has recently issued additional guidelines for CRS, which among other things include appointment of an auditor for CRS reporting purposes (similar to the requirements for FATCA reporting).

Besides, from corporate tax point of view, there have been recent legal cases decided in the Kuwaiti courts, where the MoF has subjected the foreign principals and suppliers of products to tax in Kuwait, based on certain types of agency/distributorship agreements/arrangement. This effectively means a significant potential increase in the tax base. Kuwait is largely an importer of products and services wherein a number of foreign principals sell products and services through Kuwaiti agents.

Are there any concerns or future considerations regarding long term attractiveness for Kuwait as a place to do business? If so please elaborate.

Kuwait government is making efforts for: ease of doing business in Kuwait and has brought about legislative changes to attract foreign direct investments in Kuwait. Kuwait continues to spend on the mega projects in strategic Oil & Gas and Infrastructure projects. In addition, there are various other mega projects in pipeline, for which the tenders will be issued soon during the course of the year.

These projects definitely have promising business opportunities for local business as well as international companies wanting to participate in the Kuwait projects as subcontractors.

In addition, Kuwait has recently announced its Vision 2035, which will require significant investments in infrastructure, education, healthcare, over the course of 5-10 years.

Is there anything else you would like to add?

I take this opportunity to share our firm credentials. Our firm represents about 70% of the tax payers in the country and we are proud to serve almost all the major market players. We are a team of about 50 tax specialists, the largest tax team amongst the tax service providers, which includes team of experts in VAT, BEPS, Transfer Pricing, cross border tax advisory and tax compliance services.

Alok is a partner with EY’s Middle East practice and is based in Kuwait. He has lived and worked in Kuwait for over 25 years and has detailed knowledge of business and taxes in Kuwait. He has considerable experience in advising entry-level strategies for foreign multinationals wishing to do business in Kuwait.  Alok has been involved in a number of consulting assignments (including cross-border planning, application of double tax treaties and the efficient handling of tax and commercial affairs for project due diligence, business paper preparation or review, and structuring operational activities). Alok is a member of the Institute of the Chartered Accountants of India and is an active member and frequent lecturer at the American Business Council, French Business Council, British Business Forum and Canadian Business Council in Kuwait. He is also on the Board of the American Business Council in Kuwait. Alok has been consulted by various government organizations in Kuwait on the practical implementation of various regulations in Kuwait, including the Ministry of Finance. Alok also works closely with the Kuwait Direct Investment Promotion Authority (KDIPA) and a number of other government institutions.

Contact details

Alok Chugh

Partner - MENA Government and Public Sector Tax Leader

Mobile: +965-97223004 / +965-97882201

Phone: +965 22955104

alok.chugh@kw.ey.com

www.ey.com

Floor 18-21, Baitak Tower, P. O Box: 74, 13001 Safat, Kuwait

Finance Monthly speaks to Patrick Waldron, the CEO of Fintrax Group - an Irish FinTech company specialising in processing complex payment transactions.

Tell us a bit about the services that Fintrax offers?

Fintrax offers three main products: firstly we process VAT refunds for tourists in over 30 countries, working with 50% of the world’s top 150 luxury brands and Department stores such as Gucci, Dolce & Gabbana, Louis Vuitton, Ralph Lauren, Armani, Valentino, Printemps and El Corte Ingles. The market has been growing strongly over the last 20 years, driven by increased tourists from China, Russia, the Middle East, USA and Latin America visiting Europe and Asia in particular. The outlook for the next 10 years is also very positive with the expansion of the middle class across the world.

Secondly, we offer currency conversion services for travellers in 47 countries worldwide and we are the largest player in this market after the acquisition of Planet Payment in December 2017 for $250m. We also offer multi-currency processing capabilities to a range of specialist companies that need this service for complex payment transactions.

The business was bought by a leading UK Private Equity company, Exponent, in 2012 for €170m and then sold to Eurazeo, a leading French investment company in 2015 for €550m.

What are the challenges or opportunities Fintrax and the Irish FinTech sector at large are facing?

For us, the continued expansion of travel, especially from Asia, the Middle East and Latin America underpins luxury purchases as tourists prefer to buy expensive jewellery and handbags in person on the Champs Elysee in Paris, Sloane Square in London or Via Montenapoleone in Milan.

On the currency conversion side, a recent EU report has recommended greater transparency on pricing and mark-ups which we are very supportive of, as we tend to keep out currency conversion rates in line with VISA and MasterCard. The largest challenge for us is helping our acquiring bank partners to train their merchants well so that they understand currency conversion and make the offer to tourists.

In terms of the Irish FinTech sector at large, it has been a very successful period for them. There are still plenty of opportunities in the payments sector that can be exploited but the largest challenge is regulation with PCI, GDPR, Sapin 2, PSD2 to name just a few and these are requiring the hiring of significant extra resources. Given the stream of data breaches we have seen recently, I can only see compliance and regulation getting more onerous over time.

Fintrax acquired Planet Payment and GB Tax Free in 2017 – can you tell us about the acquisitions?

Before we acquired Planet Payment, 85% of our revenues and profits were generated by the VAT refund product so we wanted to rebalance this. Planet Payment was an obvious opportunity for us and now the revenue and profit mix is 60:40 in favour of VAT refunds. By operating in 57 countries, we also can weather any downturn in a specific country or continent. We also see opportunities for cross-sales with Planet Payment and jointly, we are already pursuing both VAT refund and currency conversion in Russia which is now allowing tourists to reclaim the VAT paid on key goods. Planet Payment have a very experienced management team and this builds extra bench strength for the Group.

GB Tax Free is a much smaller acquisition and helps us build our market share in the UK where we have been underweight.

What do you think 2018 holds for Fintrax? 

2018 is all about integrating the two acquisitions we made in 2017, as well as continuing to develop our Finland-based fully digital business, which we bought in 2017. So the focus is on helping the management teams deliver on their plans and budgets for 2018. The other major focus is on making the VAT refund process as easy as possible for merchants and tourists through the deployment of digital solutions. We have a fantastic management team comprised of deep experience coupled with fresh new talent, so I am excited for the future.

Website: http://www.fintrax.com/

Companies are losing out on $20bn globally in unclaimed VAT, research by recovery experts, VAT IT reveals.

The figure is largely due to the complex and time consuming European rebate system, resulting in businesses not claiming back money that is rightfully theirs.

The company says the global figure is a result of more than one-fifth of companies who incur VAT in foreign countries claim they are unable to recover it, due to procedures being too complex and burdensome.

Global business travel is worth $1.4trillion, with 5% relating to reclaimable VAT. Industries such as engineering, pharma companies and IT firms are among the worst affected, as well as large companies with complex global structures. VAT IT has argued that the eye-watering figure is serving to restrict company growth and investment.

European Managing Director, Ann Jones, said: “Companies are effectively leaving fortunes in the hands of overseas treasuries which they could – and should - rightfully reclaim. This is money that bosses have said goodbye to, but which could be reinvested across businesses. Much of the reason for this is down to nothing more than a lack of knowledge and the difficult-to-manage reclaim procedures designed to hinder - not help - companies in this process.”

“These problems extend across Europe, US, Africa and Asia. Of course, foreign governments do not wish to give up VAT so easily, so firms must step up to the plate themselves. The findings come at a time when cash flow issues are becoming increasingly problematic for UK companies, as the impending exit from the Single Market and Customs Union creates increasing financial uncertainty.”

CEO of VAT IT, Brendon Silver, said: “Reclaim procedures are long, complex and time consuming when undertaken in house but this isn’t just a bureaucratic issue, there’s a shift that needs to be made in the general attitude businesses have towards their tax reclaims. We have seen that despite the directive stating that any refund due must be made within six months of the date of submission, many administrations do not respect this deadline. It becomes clear that when some companies wait up to two years to receive a refund, they are simply just putting off claiming in the first place.”

(Source: VAT IT)

Written by Nigel Mellor, Senior Policy Adviser, the Office of Tax Simplification 

On 7 November 2017, the Office of Tax Simplification (OTS) laid before Parliament its report entitled Value Added Tax: routes to simplification. The OTS is a small team of independent, expert advisers who undertake detailed research into tax complexity issues typically on behalf of Ministers but it can undertake reviews at its own instigation. The parties consulted for the report included professional bodies, trade associations and micro-businesses through to global corporations. In addition, the team worked closely with HM Treasury and HM Revenue and Customs. Once a report has been finalised, the OTS then lays it before Parliament and typically the Chancellor gives a formal response to any recommendations which have been made.

The 80-page report contains 23 recommendations of which 8 are described as being core recommendations and 15 are categorised as additional recommendations. In essence, the report can be broken down into three main areas; namely,

• The issues and impacts involved if the registration threshold were either higher or lower than it is at present;
• Administrative changes which could help businesses, advisers and HMRC better achieve their common aim of easing friction points in the system;
• The extent to which the definitions of the type of supply which are currently relieved from VAT create complexity for businesses and administration.

Registration threshold issues

The UK’s £85,000 VAT registration is often seen as being a tax simplification measure as many small businesses can comfortably operate below this level without needing to register for VAT. The report points out the current threshold is the highest in the EU and the OCED and at present, the average threshold in the EU is around £20,000. The report also highlights the fact that based on submissions received and academic analysis of HMRC data, the threshold is clearly having a distortive impact on business growth. This is considered to be because businesses are deliberately limiting their expansion, for example, by not taking on an extra employee, an extra contract, or closing their doors for a period to keep their turnover below the threshold. The distortions which this creates can clearly be seen in the graph below.

The OTS has therefore recommended that the government should examine the current approach to the level and design of the VAT registration threshold, including consideration of the potential benefits of introducing a smoothing mechanism.

Administration including guidance, rulings, penalties and appeals

The OTS in earlier reviews has highlighted feedback which it has received that practical issues are often the most important to users of the tax system and many contributors identified where improvements could make life easier for businesses.

A range of concerns were expressed to us about the benefit which is obtained from certainty when decisions need to be made about the VAT treatment of goods and services they supply and/or when dealing with one off events such as a complex restructuring. Concerns were also raised with us about the quality of the guidance produced by HMRC, problems relating to penalties (particularly where a business had made a voluntary disclosure), and issues relating to appeals. The OTS has made a number of recommendations in this area so as to try and address some of these concerns.

Multiple rates

Goods and services supplied in the UK are by default subject to VAT at the standard rate. There are various exceptions under which the goods or services may be subject to a reduced rate, zero-rated or exempt from VAT. As most readers will be aware, these boundaries can create absurdities and the different treatments can cause complexity and be administratively burdensome. This complexity has arisen over many years and on occasion the treatment has links to how goods were classified for purchase tax.

The OTS recommended that rather than trying to address these complexities in a piecemeal fashion, the time is now right for HM Treasury and HMRC to undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.

Partial exemption

During the course of the review, it became apparent that many more businesses are now captured by the partial exemption regime than would have been the case when the tax was introduced over 40 years ago. There are many reasons why this has happened including the fact that there is now more diversification by businesses but a contributing factor is that the de minimis limits which are designed to keep smaller businesses out of partial exemption have not been increased for decades. Similarly, many larger businesses expressed concern that when they need to negotiate or renew a partial exemption special method, the process was frequently taking years to obtain approval.

As a way of resolving these issues, the OTS recommended that the government should both increase the de minimis limits and explore alternative ways for businesses incurring insignificant amounts of input tax to be relieved from carrying out partial exemption calculations.

Capital Goods Scheme

The Capital Goods Scheme (CGS) requires businesses to consider each year after the purchase or first use of the asset whether the use of the asset has changed. The rules around the necessary adjustments can be quiet complex. The scheme currently captures land and building works in excess of £250,000 as well as computers, aircraft and yachts costing more than £50,000. There are several issues with caused by the complexities of the scheme but the most important is that the threshold for scheme adjustments relating to land and property have not increased since 1990 despite a huge increase in property values. The OTS have recommended that the land and property threshold should be increased and it has also questioned whether the other categories are still needed.

Option to tax

The option to tax allows businesses to charge VAT on certain land a property transactions which would otherwise be exempt and this enables a recovery of input VAT on costs associated with that supply. The OTS explored a number of potential changes in relation to this area and it has recommended that HMRC should consider how the record keeping and audit trails for options could be improved for example by handling options to tax on-line.

In addition to the core recommendations which have been outlined above, the report has made a number of additional recommendations. These recommendations are explained in more detail in the report and a pdf can be downloaded from the OTS section on the gov.uk website. This can be found at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/657215/Value_added_tax_routes_to_simplification_print.pdf