The advances in electronic services, as more businesses move into virtual marketplaces with virtual payments, continues to provide challenges to the VAT system. The first directives were drafted in the 1960s and VAT has evolved considerably since then.
Two of those areas have been addressed, in recent times, by HMRC and the EU Commission by way of the extension of the joint and several liability provisions applying to online marketplaces in 2018 and the introduction of the Directive on the treatment of vouchers (2016/1065) (the “Vouchers Directive”) in 2019. Both are legislative changes which require business and advisers to ensure they are applying the rules correctly and collecting the right amount of VAT at the right time.
On the former, the issue that HMRC were seeking to combat was underpayment of VAT from overseas unregistered sellers who are supplying goods in the UK. The extension of the provisions to include UK businesses was announced in the Autumn Budget 2017 and the Policy Paper published on 22 November 2017 described the measure as enabling HMRC “to hold online marketplaces jointly and severally liable for any future unpaid VAT of a UK business arising from sales of goods in the UK via that online marketplace…[and] any unpaid VAT of a non-UK business arising from sales of goods in the UK via that online marketplace where that marketplace knew or should have known that the non-UK business should be registered for VAT in the UK”. It also required online marketplaces to display valid VAT numbers where provided and stated that compliance with that requirement would be “supported by a penalty”.
HMRC have reported in a press release early in January 2019 that the measures have resulted in £200 million of extra VAT being declared by overseas sellers and a sharp increase in the number of VAT registration applications.
On the second at issue, at midnight on 31 December 2018 the Vouchers Directive came into force with incepting domestic legislation in amended section 51B of, and Schedule 10A to, the VAT Act 1994 and new sections 51C and 51D and Schedule 10B. The legislation applies to vouchers issued on or after 1 January 2019 and is currently before the House of Lords.
The Directive is aimed at adding structure to the treatment of VAT on the redemption of vouchers where none existed before. The EU Commission Staff Working Document Impact Assessment on the proposal noted that “Technical developments, deregulation of services (particularly telecommunications) and commercial innovation have allowed such [voucher] schemes to grow in sophistication and to extend beyond the boundaries of individual Member States. These developments have evolved since the current legislation was enacted in 1977 and there is no specific guidance there on how vouchers should be treated.”
At its heart is the need for businesses to determine whether the instrument they are using for payment is indeed a voucher within the meaning in the Directive and then crucially if it is a single-purpose voucher or a multi-purpose voucher. The latter point is essential as it governs the time and the amount on which VAT is declared and accounted.
Whatever the outcome of the UK’s exit from the EU there is nothing to suggest that there will be a change of course on both internet traders or the treatment of vouchers. The legislation for both is implemented domestically (or imminently about to be in the case of vouchers) and so will remain on our statute book regardless of the supremacy or otherwise of EU law. Equally there is no reason to suppose that the UK, through the offices of HMRC, would seek to amend that law.
As we look to the years beyond Brexit we might start seeing a divergence of domestic law from the EU VAT principles. That is however looking well beyond any transition period that may be agreed after 29 March 2019 and is difficult to predict.