Mobile Telephones & CPU Businesses - Reverse Charge Update

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1 On 19th March 2007, the Government announced the implementation of the reverse charge measure for mobile phones and computer chips with effect from 1st June Reverse charge will not apply to electronic storage media used in connection with computers, mobile phones or certain other electronic devices, and electronic devices used for the storage, processing or recording of electronic data. It will, however, apply to businesses buying and/or selling any of the following goods: Mobile telephones Integrated circuit devices, such as computer chips/microprocessors/central processing units, in a state prior to integration into end user products. Mobile phones supplied under an airtime contract are excluded from the provision. Pay As You Go mobile telephones, however, will be subject to reverse charge accounting. Reason for the Introduction of the Reverse Charge System The reverse charge accounting rules are being introduced by the UK Government to tackle Missing Trader Intra-Community (MTIC) fraud which is prevalent within the mobile telephone and computer chip industry. This involves goods being imported VAT-free from another EU Member State and then sold on through a series of companies within the UK. The goods are then subsequently exported, very often to the original EU Company from which the goods were originally purchased at the start of the chain. A tax loss occurs as the original importing company disappears without paying the VAT charged on the initial sale of the goods in the UK to HMRC. The loss is compounded when the trader exporting the goods from the UK makes a repayment claim to HMRC. Under reverse charge accounting, it is the responsibility of the purchaser, rather than the seller, to account for VAT on a given transaction. The supplier will not charge VAT, but instead, will have to specify on the relevant invoice that the reverse charge applies. Provided that the purchaser has correctly accounted for the VAT to HMRC under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules. De Minimis Limit The reverse charge will only apply to supplies of mobile telephones and computer chips with a VAT exclusive value of 5000 or more. This will apply to the total value of goods subject to the reverse charge supplied together and detailed on a single invoice. Supplies of goods below this level will be subject to normal VAT accounting. The Reverse Charge In Practice For a quick summary as to how the scheme operates in practice, please see the Flowchart at Appendix 1. Onus on Seller to Carry out Requisite Checks It is important to note that, before deciding not to account for VAT on the sale of goods, a seller will be required to take reasonable steps to establish that the reverse charge should apply. This will entail carrying out commercial checks on his supplier. A trader who is deemed not to have taken reasonable steps such as considering whether the purchaser is registered for VAT and is intending to use the goods for a business purpose may be held accountable for the VAT should his customer fail to apply the reverse charge. It is anticipated that the commercial checks of the type detailed in Notice 726 will be, in normal circumstances, adequate for reverse charge purposes provided they are properly evidenced, unless the supplier has doubts about the reliability of the customer. It is therefore important that all due diligence checks undertaken are preserved and documented, with evidence to show not only that the checks have been undertaken, but that the results of such checks have been properly considered. It is imperative that businesses selling goods under the reverse charge procedure obtain the VAT registration numbers of the relevant customer as these are required for the Reverse Charge Sales Lists (discussed below). Customs guidance states that in general, there will be no need to verify a VAT registration of a customer with whom a supplier has an established trading relationship. However, as a matter of prudency, we would suggest that a re-verification of the VAT registration is carried out in respect of each deal.

2 Preparation of Sales Invoice Where Reverse Charge Applies Suppliers, when making a sale to which the reverse charge applies, must show all information normally required within a VAT invoice. However, the invoice should further be annotated to make clear that the reverse charge applies and that the customer is now required to account for the relevant VAT. The amount of VAT due under the reverse charge must be clearly stated but should not be included within the amount shown as VAT charged. There is no prescribed wording however, the following examples will suffice: Customer to pay output tax of X.XX to HMRC UK Customer to pay O/T of X to HMRC Alternatively, the following would also be acceptable provided that the amount of tax is shown elsewhere in the invoice, but 1 not in the box for total output tax charged : Section 55A VAT Act 1994 applies or s. 55A VATA 94 applies Customer to account for VAT to HMRC Reverse charge supply - customer to pay the VAT to HMRC Customer to pay VAT to HMRC UK customer to pay VAT to HMRC A Sample invoice can be found attached at Appendix 2. Requirement to Submit Reverse Charge Sales Lists (RCSL) Any supplier of goods to which the reverse charge applies will be required to submit a RCSL. This will enable HMRC to ensure that the reverse charge mechanism does not lead to any new revenue loss. This will be very similar to an EC Sales List, particularising each customer and transaction details to which reverse charge accounting has been applied. Businesses will be required to notify HMRC within 30 days of making their first supply to which the reverse charge applies. Further, businesses will be required to notify HMRC when they cease to make such supplies. If they subsequently recommence such supplies, HMRC must again be notified. Businesses subject to the reverse charge, when making sales, must submit a list for each period or make a nil declaration for any period that the business did not make any relevant supplies. RCSLs may be submitted in 2 ways: Keying data on-line 2 Submitting bulk data via a comma-separated value (CVS) file ; RCSLs covering the same period as the VAT return must be submitted within 30 days of the end of the relevant business s VAT return period in which the supplies are made. Further, the information required for each customer will be: Their VAT registration number, AND The total value of reverse charge supplies made each calendar month to that customer. A RCSL for a typical quarterly return will resemble the following: Company VAT registration number: Start date of VAT period: XX/XX/XXXX End date of VAT period: XX/XX/XX Nov Dec Jan Vat Registration No. Value of sales Value of sales Value of sales Vat Registration No. Value of sales Value of sales Value of sales Further guidance to submitting RCLS declarations is published on the HMRC website on the VAT internet page via VAT Reverse Charge for mobile phones and computer chips. How to Complete VAT returns When the Reverse Charge Applies When completing their relevant VAT return, suppliers of goods under reverse charge accounting must not enter in Box 1 any output tax on sales to which the reverse charge applies. Instead, the value of such sales must be entered in Box 6. Customers however, must enter in Box 1 the output tax on purchases to which the reverse charge applies. They must not enter the value of such purchases in Box 6. Box 4 of the VAT return must be used to reclaim the input tax on their reverse charge purchase and the value of such purchases must be included in Box 7 in the normal way.

3 Penalties for Failure to Comply with the Reverse Charge Scheme HMRC have recognised that there may be initial difficulty in implementing the reverse charge scheme. As such, where there is no loss of tax, HMRC have stated that they will apply a light touch in dealing with errors that occur within the first 6 months after the introduction of the reverse charge. However, it is anticipated that if HMRC do discover a tax loss, they may seek to recover such loss from the customer and beyond if they can show a failure to carry out reasonable checks on the supply chain. Summary / Checklist In preparation for the implementation of reverse charge accounting from 1st June 2007, businesses buying and/or selling mobile phones and computer chips should: Continue with commercial checks of all VAT registered suppliers and customers including thorough due diligence checks. Not only should the fact that the checks have been carried out be evidenced, but there should also be some evidence that the checks have been fully considered. Amend sales invoices to incorporate the new reverse charge accounting wording and/or format. Notify HMRC, within 30 days of making the first supply to which reverse charge accounting applies. Submit a Reverse Charge Sales List for the same periods as the Company s VAT return, within 30 days of the Company s VAT return period in which the relevant supplies are made. Familiarise themselves with the new way to complete VAT returns in relation to reverse charge supplies and purchases. The guidance within this bulletin is not intended to constitute legal advice but is simply our interpretation of the new scheme and is subject to change as and when HMRC provide further information. Companies trading within the mobile phone & computer chip industry should consider all of the guidance produced by HMRC in respect of reverse charge accounting and liaise with HMRC when complying with the new scheme Footnotes 1. No further guidance on this type of annotation has been provided by HMRC at present. However, we take this to mean that if the amount of output tax charged does not form part of the annotation (e.g. Customer to pay output tax of X.XX to HMRC ) it must be particularised elsewhere on the invoice, other than in the box detailing total output tax charged. 2. The technical specification for the CVS file for bulk upload is published on the HMRC website on the VAT internet page via VAT Reverse Charge for mobile phones and computer chips. For further information on the above, or for any other regulatory advice, please contact Siân Darlington or Olga Tocewicz at Pannone LLP on Alternatively, please any queries to or Pannone LLP, All rights reserved. The information provided in this document is provided by Pannone LLP and the law was correct at the time of printing. Note there may have been changes subsequently which have not been incorporated into the material located here and therefore the information supplied should not be applied to any particular set of facts or relied upon without legal or other professional advice.

4 Mobile Telephones & CPU Businesses Appendix 2 ABC LIMITED ABC Limited Invoice date: ABC Street ABC Ville A12 3BC Tel: (0123) Fax: (0123) Invoice to: Invoice no XYZ Limited 123 XYZ Road XYZ Ville X12 3YZ Description Quantity Unit price Amount ( ) Intel P4 CPU 21, ,656, Total: 2,656, VAT: 464, Any of the following annotations will suffice: Customer to pay output tax of 464, to HMRC UK Customer to pay O/T of 464, to HMRC Alternatively, the following would also be acceptable provided that the amount of tax is shown elsewhere in the invoice, but not in the box for total output tax charged 1 : Section 55A VAT Act 1994 applies or s. 55A VATA 94 applies Customer to account for VAT to HMRC Reverse charge supply - customer to pay the VAT to HMRC Customer to pay VAT to HMRC UK customer to pay VAT to HMRC REGISTERED IN ENGLAND NO VAT REGISTRATION NO No further guidance on this type of annotation has been provided by HMRC at present. However, we take this to mean that if the amount of output tax charged does not form part of the annotation (e.g. Customer to pay output tax of 464, to HMRC ) it must be particularised elsewhere on the invoice, other than in the box detailing total output tax charged (as above).

5 Appendix 1 UK Company A (supplier) Sells goods of 1000 value. VAT of attached. UK Company A (importer) Imports goods from EU Company A at value of 900. Zero-rating applies therefore no payment to HMRC is required. EU Company A Sells goods to UK Company A at 900. EU Company E HMRC Purchases goods at 1300 value paid to UK Company D VAT VAT. UK Company B (customer) Purchases goods at 1000 value paid to Company A VAT paid direct to HMRC. UK Company B (supplier) Sells goods at 1100 value. VAT of attached VAT UK Company D (customer) Purchases goods at 1200 value paid to Company C. 210 VAT paid direct to HMRC. UK Company D (exporter) Sells goods at 1300 value. UK Company C (customer) Purchases goods at 1100 value paid to Company B VAT paid direct to HMRC. UK Company C (supplier) Sells goods at 1200 value. VAT of 210 attached. Note 1: An invoice under reverse charging accounting should be annotated to make clear that the reverse charge applies and that the customer is now required to account for the relevant VAT. The amount of VAT due under the reverse charge must be clearly stated but should not be included within the amount shown as VAT charged, for example: Customer to pay output tax of X.XX to HMRC. Note 2: Provided that the purchaser has correctly accounted for the VAT to HMRC under the reverse charge procedure, he will retain the right to input tax recovery, subject to the normal rules. Note 3: Customers must enter in Box 1 of their VAT return the output tax on purchases to which the reverse charge applies. They must not enter the value of such purchases in Box 6. Box 4 of the VAT return must be used to reclaim the input tax on their reverse charge purchase and the value of such purchases must be included in Box 7 in the normal way. When completing their relevant VAT return, suppliers of goods under reverse charge accounting must not enter in Box 1 any output tax on sales to which the reverse charge applies. Instead, the value of such sales must be entered in Box 6.

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