Status of EU Clients

Historically, if a client was outside the UK but within the EU, the supply of legal services was outside the scope of UK VAT provided the supply was to be used for business purposes. From 1 January 2010, it is irrelevant whether the supply will be used for the recipient’s business activities. All that is relevant is whether the recipient is a “taxable” person. A “taxable” person does not mean a VAT registered person, it means someone that carries on economic activity.

It may be difficult to obtain evidence that an individual is a taxable person if they are not VAT registered, HMRC have agreed that other evidence is acceptable such as letters from the relevant tax authority, or Chamber of Commerce, plus reasonable checks. However, other member states may demand a higher level of proof.

EC Sales List for Services

Historically this was only required for intra-EU supplies of goods. On 1^st January 2010 this was extended to include the supplies of services to overseas (EU) taxable persons. The EU Sales list is not required for business to business supplies where the recipient is not VAT registered or for business to consumer supplies or where the client accounts for VAT using a reverse charge simplification such as land related supplies including conveyancing, surveying, valuation or dealing with planning permission. The information required is as follows:

• Customer country code
• Customer VAT number
• Total value of supplies in sterling
• Indicator to show whether goods or services were supplied.

The list must be submitted for calendar quarters in either paper format within 14 days or electronically within 21 days and there are penalties for non-filing.

Penalties

We are now 12 months on from the new penalty regime and our experience is that the regime is being applied harshly. VAT Officers are taking a tough stance and very high initial penalty percentages are being quoted.

There are 4 types of “behaviour” described in the new penalty regime:

• Failure despite reasonable care – mistake
• Failure to take reasonable care – negligence
• Deliberate understatement with no concealment
• Deliberate understatement with concealment

The mistake category includes such issues as a transposition error, inaccurate advice from HMRC despite all relevant details being provided and a reasonable view of the law not being upheld. The onus of proof is on HMRC.

The negligence category includes the actions of a prudent, reasonable person, an incorrect claim for input tax without advice, lack of basic systems, procedures and records e.g. for entertainment expenditure and the abilities and circumstances of the taxpayer.

The deliberate but not concealed category includes deliberate mis-recording of business sales, inflated input tax on the VAT return and knowledge and intention is necessary.

The deliberate with concealment category involves active steps to cover up the inaccuracy, false, backdated or post dated invoices, false minutes and destroying records.

Where the error is notified to HMRC the penalty will be reduced, where HMRC find the error it is more serious but will always be based on the particular facts and circumstances.