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VAT Memo 2007-2008 Newsletter Issue 1

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Missing trader fraud — reverse charge

 

From 1 June 2007, a new reverse charge procedure has come into effect for transactions involving mobile telephones and computer chips. This means suppliers do not charge VAT because it is the customer who becomes liable to account for the output tax instead.

Scope

For the reverse charge to apply, the goods must be sold to a taxable person (¶2620) for a business purpose.
However, if affected goods are supplied in either of the following situations, the reverse charge will not apply:

- where the seller chooses to use a second-hand margin scheme (¶6620); or

- goods are supplied for free as gifts or samples.

Payments on account (POA) (¶3182) depend on the trader's annual VAT liability, which includes reverse charges. However, affected businesses can apply to HMRC to exclude the output tax due under the reverse charge when:

- deciding whether a business is required to make POA; and

- calculating the size of monthly payments.

Any reverse charge transaction is excluded from the cash accounting and flat rate schemes.

Affected goods

Mobile phones include Blackberrys and Pay As You Go phones, but exclude:

- phones which are supplied with an airtime contract (also replacement phones and upgrades supplied under the terms of an airtime contract);

- walkie-talkies;

- 3G data cards; and

- WiFi cards.

Any accessories which are supplied:

- within a single package are also treated as part of the phone supply e.g. a charger, battery, cover or hands-free kit; or

- separately, are not within the scope of the reverse charge.

The reverse charge applies to computer chips when they are in a state prior to integration into end-user products, or sold separately and not as part of an assembled item. All chips covered by the reverse charge fall within the tariff commodity code 8542 3190 00, which includes:

- all integrated circuits (i.e. central processing units or CPUs);

- discrete integrated circuit devices i.e. microprocessors or microprocessor units (MPUs) and microcontrollers or microcontroller units (MCUs); and

- chipsets which are the dedicated cluster of integrated circuits which support MPUs.

If there is any doubt whether the reverse charge should apply, a written ruling should be obtained from HMRC.

 

Value subject to the reverse charge

If an invoice includes both affected goods and other supplies, only the affected goods are subject to the reverse charge.

The £5,000 de minimis limit relates to the total value of goods which are supplied together and detailed on a single invoice. So where separate low value orders are combined into one invoice, this limit may easily be exceeded. Similarly, where a bulk order is fulfilled in separate consignments, no reverse charge may arise due to the de minimis. However, if both parties agree, smaller invoices which combine to fulfil an order in excess of £5,000 can all be subject to the reverse charge, ignoring the limit altogether.
For the purpose of the de minimis, unconditional discounts can reduce the value of the goods e.g. the reverse charge will not apply to an invoice value of £5,400 where there is a prompt payment discount of 10%.

Customer status

The supplier should undertake reasonable checks on the VAT and business status of the customer, as follows:

- normal commercial checks on creditworthiness and customer status which are good commercial practice for the trade sector;

- whether the VAT registration number is genuine and belongs to the person who is quoting it;

- whether there is any indication in the pattern of orders that the customer is attempting to manipulate the £5,000 de minimis limit; and

- considering if there are any grounds to doubt the bona fides of the customer.

Where a trader takes no such action, he could be liable to for any VAT not paid by the customer.
If the seller has any doubts on the veracity of the customer, he must consider whether the transaction should go ahead. If the supplier still proceeds, he may wish to ask the customer for a refundable deposit equivalent to the output tax for which he will become liable if the reverse charge is applied in error. This may be especially helpful if the customer has applied for, but not yet received, a VAT registration number.
If a retailer (including an online supplier) is unable to ascertain the business status of his customer, VAT should be charged in the normal way. However the usual checks which are put in place to prevent fraud and money laundering should be used to prevent manipulation of the de minimis limit.

Reporting by suppliers

Reverse Charge Sales Lists (RCSLs) are submitted online, and follow the submission dates of the trader's normal VAT return (¶2985+). Traders must notify HMRC within 30 days of making the first supply to which the reverse charge applies, and also when they cease to make such supplies (and subsequent recommencement). Lists must always be submitted, even where no reverse charge transactions have been made. The list must contain the VAT registration number and the total value of reverse charge supplies made each calendar month to each affected customer (including nil months). Therefore, traders selling goods within the reverse charge regime will need to obtain the VAT registration numbers of affected customers.
When completing the VAT return, a supplier excludes any reverse charge output tax from box 1, although he must enter the value of such sales in box 6.

Invoicing

Suppliers must show all the information normally required to be shown on a VAT invoice (¶2858). In addition, the invoice should clearly indicate that the reverse charge applies and that the customer is required to account for the VAT. The amount of reverse charge VAT due must be identified on the invoice but should not be included in the amount shown as total VAT charged. HMRC state that any of the following are acceptable:

- "customer to pay output tax of £x to HMRC";

- "UK customer to pay output tax of £x to HMRC"; or

- the amount of tax is shown elsewhere on the invoice, and one of the following is indicated:

- “VAT Act 1994 Section 55A applies";

- “s 55A VATA 94 applies";

- "customer to account for the VAT to HMRC";

- "reverse charge supply - customer to pay the VAT to HMRC";

- "customer to pay VAT to HMRC"; or

- "UK customer to pay VAT to HMRC".

Where electronic invoicing is used, HMRC are prepared to allow coded representation of the above instead of actual text.

Where the purchaser is using self-billing (¶2904), he will issue the invoice but account for VAT on the reverse charge himself. The supplier must still complete a RCSL. In relation to the invoice, HMRC state that any of the following are acceptable:

a. “we will account for and pay output tax of £x to HMRC”;

b. “as the UK customer we will pay output tax of £x to HMRC”;

c. the amount of tax is shown elsewhere on the invoice, and one of the following is indicated:

- “VAT Act 1994 Section 55A applies";

- "s 55A VATA 94 applies";

- "we will account for the VAT to HMRC";

- "reverse charge supply - we will pay the VAT to HMRC";

- "as the customer: we will pay VAT to HMRC"; or

- "as the UK customer we will pay VAT to HMRC".

Effect on customers

Customers must account for the VAT due on the supply as indicated on the invoice, applying the normal time of supply rules (¶750+). Failure to comply will result in an assessment for the amount of output tax as reduced by any likely input tax claim. Further, where the customer fails to tell the supplier that the reverse charge should apply, and output tax is charged by the supplier, HMRC will take this as indicating fraud, and any input tax claimed by the customer will be subject to stringent verification.
When completing a VAT return, a customer must enter the reverse charge output tax in box 1, but he must exclude the value of the purchases from box 6. The input tax is reclaimed in box 4 in the normal manner (subject to any partial exemption restriction), and the value of the purchases are included in box 7.
Where customers will be using goods for both business and non-business purposes (e.g. charities and local authorities), the reverse charge still applies. So the customer should account for output tax under the reverse charge procedure and apply the appropriate restriction to the deduction of the resulting input VAT.
The reverse charge will apply to onward sales of affected goods which are sold to another VAT registered business in the UK if the invoice value is £5,000 or more. This applies to any sale on or after 1 June 2007, even if the goods were purchased beforehand.
Unregistered customers will need to take into account the purchase of affected goods when monitoring the registration thresholds (¶2668), although the first £1,000 of such purchases per month is disregarded.

Price adjustments

Where price adjustments occur, HMRC state that the easiest solution is for both parties to agree not to amend their VAT records (which takes advantage of an existing concession). However, the supplier will still need to amend the RCSL. Credit or debit notes issued for supplies made before 1 June 2007 will never bring the transaction within the scope of the reverse charge.
Otherwise, the following guidance applies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HMRC Brief 24/07
Information Sheet 8/07
SIs 2007/1418, 2007/1420, 2007/1421

 

 

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