Mistakes over international tax rules are costing businesses millions, says VERONICA DONNELLY
Poor management of the rules relating to international VAT and Customs Duty are costing Scottish businesses many millions of pounds in penalties, fines and through inefficient processes. While many businesses have knowledge of their obligations, the vast majority do not fully understand the extent and complexity of these rules.
Indirect tax is now a vast and complex area with many differences and nuances in the rules across sectors, products and geography, in particular for international trade. Any business engaging in international trade needs to ensure it is following the VAT rules or risk penalties, fines or, at worst, court proceedings.
Common errors often revolve around overclaimed or underpaid VAT, unforeseen overseas VAT registrations, or insubstantial evidence to support zero-rating of export sales. UK businesses are also increasingly falling foul of the issues surrounding Customs Duty, especially ensuring goods are classified correctly and assigned the correct country of origin.
UK businesses often don’t have the resource or technical skills to address these areas and as such, are being subjected to Tax Authority reviews or are vulnerable to goods being held up at borders, impacting supply chains financially and in terms of delivery times.
When goods are physically held up at Customs borders everyone on the operational side of the business views it as a major issue. However, businesses can often proceed without knowing they have any problems at all, such as a VAT issue which can go under the radar and continue to build until a Tax or Customs Authority knocks on the door.
We are definitely seeing an increase in activity from HMRC in this area and are currently helping businesses facing international trade VAT issues running into millions of pounds.
Common issues Azets’ VAT team are seeing include:
· Businesses mistakenly recovering VAT on imports when they don’t own the goods involved e.g. goods which have been brought to the UK for purposes such as testing, repair or some other process, and are then sent back overseas.
· Drop shipments – where a business arranges for goods to be shipped directly from their supplier to their customer creating an unforeseen overseas VAT registration.
· Supply and install contracts where goods are exported from the UK and installed overseas – potentially generating an overseas’ VAT registration obligation.
· Incorrect import/export documents
· Assigning incorrect classification codes or country of origin to goods leading to customs penalties and goods held up at borders.
· Mistakes by freight forwarders and customs agents. In one example a company potentially missed out on circa £160,000 of recoverable import VAT due to errors by the agent.
As well as the potential for significant HMRC assessments and penalties for non-compliance – starting at 30% – consequences also include cash flow issues, delays at borders, returned goods and commercial problems.
Different departments within the business must talk to each other. Freight forwarders are keen to keep the goods moving and logistics teams make may decisions to facilitate this but not inform the finance/tax team.
This is where problems can begin. It is important that everyone is aligned internally and is talking to each other to minimise issues and ensure compliance.
Where businesses have unusual transactions or are unsure of the correct treatment, professional advice should always be sought as early as possible and certainly before the goods are physically moved.”
Veronica Donnelly is head of VAT in Scotland with accountancy firm Azets
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