MBY Feb 2012 - Legal Aid (VAT) article

[Hurricane]

VAT again

Something doesnt sound right in the story on page 100 of this month's MBY.
Professionally supplied article.
I've said many times that I'm no expert on these matters but we've had many conversations on this forum and it seems to me that there's spmething fishy about this article.

VAT is a tax on a transaction.
In this case, the owner of the boat was clearly the third generation owner - VAT being accountable by the first owner.

So, how can he be responsible for VAT owed by a previous owner?

The only thing I can think of is that the boat was originally exported out of the UK and because of a fradulent transaction never became imported back into Europe. This would make him liable to VAT as an import but only at the time he owned the boat and he cant be responsible for anyone elses tax - surely?

If I'm correct, then this whole article is very missleading - it doesnt mention anything about import/export.

IMHO, its irresponsible statements like this that make the whole matter confusing. Brokers that dont understand basic VAT law "latch" onto comments made by professionals like this and incorrect rumours start to circulate.

 

[jfm]

It wasn't a great VAT analysis Hurricane

1. I think where the article was going (and didn't explain well) is the following. VAT is indeed generally a transaction based tax and generally the only parties liable for the tax are the parties to the transaction (normally seller), not a 4th hand owner. However, as i have said on here before, there is an exception...

2. The exception, in UK law, is that VAt triggered by importation (as opposed to by a sale/purchase) falls partly under the import duties part of UK law and if defaulted on by thr party who owes it (ie the importer) it attaches to the imported goods themselves, by operation of statute. Thus, if UK import VAt was not paid on a boat imported by the last-but-4 owner, HMRC could pursue the current owner for the debt (to the extent HMRC could seize the smuggled boat). This is VERY rare, but the law provides it could happen. It is the one exception the the rule that you can't be liable for someone else's VAT (ignoring carousels, which isn't relevant here)

3. Just to be clear on #2 above, only import VAT can attach to a smuggled boat, not VAT that arises on a VATable sale/purchase of the boat. In other words, there has to be smuggling for VAT to attach to the boat itself

4. I do not know if spanish law is the same and don't have time to check but let's assume it is. Seems likely. Then the boat in question was imported Gib-Spain without payment of correct import VAT in Spain, ie smuggled, and hence the prospective 5th-hand owner of the boat is correct in being concerned about the risk the boat could be seized by the Spanish Revenue to collect the unpaid tax. It might be a small/unliklely risk, but it isn't a non-existent risk.

That was the point of the article I think. It unhelpfully didn't give the back story on WHY a 5th hand boat owner could be affected by the first owner's unpaid import VAT, ie it did not mention the important disinction between VAT on ordinary buy/sell transactions and VAT on smuggled goods, ho hum. I totally agree your last sentence

 

[Brian Legal]

VAT

Thanks for your comments. I was the writer.

The theme of the article was "make sure that you have proper proof of VAT".

VAT is very topical because there are many many disputes and debates over whether VAT has been paid or is payable and what documents constitute proper proof.

The point is that in the absence of acceptable proof it will be difficult to sell a boat VAT paid or (as in this case) represent that it is VAT paid. Indeed many brokers will simply refuse to market the boat as such unless the documents are available and in order. I would wholeheartedly agree with this approach.

Generally, evidence of VAT will be an invoice, showing the VAT and a VAT number, or similar document, such as a completion statement. In the absence of original and valid documents, VAT is deemed not have been paid. When travelling in the EU the original document should really be on board the boat. It also is not unknown for boats to be asked to prove their VAT paid status in foreign ports and if they cannot, they will be impounded.

If you are therefore thinking of selling a boat and you cannot comply, it is very likely that a buyer will look elsewhere - certainly to a boat of equivalent age, where all the documents are in order. Proof of VAT therefore directly affects the "saleability" of your boat.

The answer is therefore that VAT is payable on the boat when it enters the EU. If it purchased as new VAT is pad at that time and on the price paid. If a boat is purchased second and imported into the EU VAT is payable when the boat is imported and at the second hand value of the boat.

In this particular scenario the boat was purchased new in the UK and only exported as far as Span - another EU country. VAT / IVA was therefore payable on the price as purchased. The innocent first purchaser paid the tax to an agent, who fraudulently failed to pay it to the Spanish tax authorities. Innocent he was, but the tax was never received and the boat was deemed as non VAT paid. When he sold it, he sold it as VAT paid and with a fraudulent VAT certificate, again no deliberate fault on his part.

The fraud came to light some time later and the person innocently at fault was the first purchaser. Technically, no VAT / IVA had been paid. In legal terms therefore the person that sold the boat was in breach of contract. Simply put, the first owner breached his contract with the second and the second with the third and so on. Rights of action only arise as against the persons who directly contract so all the parties in the chain only had a right of action against their respective seller. Subject of course to legal limitation - in this case 6 years (that is another subject).

There was no question of import / export and if advice is required on importing a boat, this is a different subject.

Your comments are always welcome and I do accept that this is a difficult subject to cover in a few words.

 

[jfm]

Thanks for joining the forum Brian Legal.

In your MBY article you did not explain the facts fully as to this boat's history. There is much devil in the detail. People with similar but different facts might have a different VAT outcome, but because they can't compare their facts with yours they wont see that.

You wrote in your penultimate para above that there was no question of import/export, and in your 4th-last para you said that the boat went UK-Spain and an agent failed to pay VAT so the boat wasn't VAT paid. That's all possible, but doesn't ring hugely true or hang together well. You gotta be clear about the facts before you get into saying what the tax rules are. Based on the murky description of facts there are 3 main plausible scenarios here (plus other more specialist scenarios), and i don't know which is correct or what actually happened:

1. The boat when new was bought from UK dealer, zero-rated for VAT ("exempt with credit" for non UK readers) on grounds it was delivered to Gib. Then it was imported from Gib to Spain, and the importation agent committed the sin of not paying the Spanish import VAT, resulting in a non VAT paid boat. Based on that fact pattern, which seems the most likely (twas/is a common thing, though you say (sort of) that this isn't what happened), the boat was not VAT paid and the 5th owner did indeed have a theoretical tax liability in the sense the Spanish tax authorities sieze the boat to get the tax.

2. The boat was bought new in UK for delivery to Spain and was thus a distnace sale by a UK dealer or a local sale if the vendor used their Spanish subsidiary/branch to make the sale. This means spanish, not UK, VAT is due. If the local agent (why would one choose one based in Gib in this scenario?) failed to pay the VAT then the boat is still VAT paid so far as the first customer was concerned, and therefore so far as the second and subsequent owners are concerned. I don't expect, and will bet much beer, though I haven't checked, that the Spanish tax authority have any right to seize the boat for the VAT in this specific circumstance.

3. The boat was bought in UK and form 411 etc filed in UK to set it up as an NMT sale. The boat was quickly exported to Spain by its first customer (not the selling dealer). This would give exemptiion from UK VAT (with conditions) and a liability to Spanish VAT. If the Spanish agent handling the VAT (again, why use a Gib firm?) failed to pay the VAT then I believe the boat is not VAT paid and is seizable by the Spanish. But this is a generally unlikely fact pattern becuase although a boat owner doing this would suffer 16% tax vs 17.5%, the risks and overheads are high. Possible though.

To sum up, you have to describe the transaction before you can say what the VAT consequences are, else you just add to the confusion on this topic.

Separately, there are a number of specific statements you wrote in your post obove which I don't think are correct but no point listing them out here I think

 

[Brian Legal]

VAT

Thanks

I think that we must leave the facts as vague as they are and look at the principle, based on the brief facts.

It is quite easy to suppose a number of scenarios and as this actually happened, I think the moral of the tale is the important point - one which I will try to get over a bit more succinctly in the future. It is generally not a "black and white" subject which is why there is a lot of comment on it and litigation surrounding it.

Your nearest scenario is number 3. VAT was eventaully paid in the UK at UK rates and on the current (second / third / fourth hand) value - something which is actually quite difficult to persuade HMRC to do on a vessel that was never outside the EU in the first place!

Feel free to email me personally if you would like to comment a little less publicly. The address is on the article.

Best wishes

Brian

 

[Hurricane]

Thanks for your comments. I was the writer.

The theme of the article was "make sure that you have proper proof of VAT".

VAT is very topical because there are many many disputes and debates over whether VAT has been paid or is payable and what documents constitute proper proof.

The point is that in the absence of acceptable proof it will be difficult to sell a boat VAT paid or (as in this case) represent that it is VAT paid. Indeed many brokers will simply refuse to market the boat as such unless the documents are available and in order. I would wholeheartedly agree with this approach.

Generally, evidence of VAT will be an invoice, showing the VAT and a VAT number, or similar document, such as a completion statement. In the absence of original and valid documents, VAT is deemed not have been paid. When travelling in the EU the original document should really be on board the boat. It also is not unknown for boats to be asked to prove their VAT paid status in foreign ports and if they cannot, they will be impounded.

If you are therefore thinking of selling a boat and you cannot comply, it is very likely that a buyer will look elsewhere - certainly to a boat of equivalent age, where all the documents are in order. Proof of VAT therefore directly affects the "saleability" of your boat.

The answer is therefore that VAT is payable on the boat when it enters the EU. If it purchased as new VAT is pad at that time and on the price paid. If a boat is purchased second and imported into the EU VAT is payable when the boat is imported and at the second hand value of the boat.

In this particular scenario the boat was purchased new in the UK and only exported as far as Span - another EU country. VAT / IVA was therefore payable on the price as purchased. The innocent first purchaser paid the tax to an agent, who fraudulently failed to pay it to the Spanish tax authorities. Innocent he was, but the tax was never received and the boat was deemed as non VAT paid. When he sold it, he sold it as VAT paid and with a fraudulent VAT certificate, again no deliberate fault on his part.

The fraud came to light some time later and the person innocently at fault was the first purchaser. Technically, no VAT / IVA had been paid. In legal terms therefore the person that sold the boat was in breach of contract. Simply put, the first owner breached his contract with the second and the second with the third and so on. Rights of action only arise as against the persons who directly contract so all the parties in the chain only had a right of action against their respective seller. Subject of course to legal limitation - in this case 6 years (that is another subject).

There was no question of import / export and if advice is required on importing a boat, this is a different subject.

Your comments are always welcome and I do accept that this is a difficult subject to cover in a few words.

Firstly, thanks for answering my post and sticking your head over the parapet.

However, I think your article was very missleading and hasn't done much for everyday understanding of VAT.
I'm sorry if I offend but it seems to me that solicitors like to make situations like this more complex that they really are.
There is enough missunderstanding about the term "VAT status" as it is - we dont want any more confusion.
Generally speaking, IMO, there is no such thing as "VAT Status".
To me, VAT is payable on a transaction or as a result of import into Europe. I fully appreciate that a fraudulent import (i.e. a boat that didnt pay its VAT at import) could be seized by the relavent authority but dont lets confuse things - just for the sake of it.

 

[Brian Legal]

VAT

Thanks

There is no offence taken but please do not think that I am out to make this into a "black art" whereby you have to spend lots of money on legal fees every time the issue of VAT is mentioned.

The problem is that that there are many disputes over VAT. This scenario is not unique and it actually happened. Disputes like this do not come about because solicitors make the matter more complicated. In this case the issue was complicated and a relatively large amount of money was at stake.

You are certainly correct regarding VAT but the point is that if VAT / IVA was not paid, the person with the boat is liable to pay it. This was the ultimate owner. There was no export / import of the boat because the boat was never outside the EU.

Best wishes

Brian

 

[stillwaters]

May I add a word or two of caution,please?
Whatever we might think should reasonably and logically happen,both HMRC and particularly the Spanish authorities have proven track records of doing exactly as they please and,although I imagine this scenario will not be common,maybe the article has some value if it makes any would-be buyers as dilligent about getting the paperwork checked as they would hopefully be about getting the boat's condition surveyed.
For what it's worth,my beer money is on the fact that if the VAT had never actually been paid then it would definitely be due and,if left unpaid,sufficient assets even in excess of the boat,if it was deemed of insufficient value,would probably be seized. The principal is similar to say a car being stolen that is then sold on to a third party (or fourth & so on) which,if recovered still belongs to the original owner (or insurers if paid out on) with no recourse to any "illegal" owners even though they may not be aware that it was stolen.
By the way,if anyone doubts the disregard of the Spanish authorities for EU law,then have a look at what horrors they have imposed on numerous property owners in recent years,especially in the Valencia region.

 

[jfm]

my beer money is on the fact that if the VAT had never actually been paid then it would definitely be due and,if left unpaid,sufficient assets even in excess of the boat,if it was deemed of insufficient value,would probably be seized.

No, so far as the 3rd or 4th owner down the line is concerned, the Spanish cannot pursue the owner's private assets other than the boat. The tax debt does not transfer to the new owner. He simply owns a boat over which someone else has a security/distress/mortgage style interest

 

[jfm]

Thanks

I think that we must leave the facts as vague as they are and look at the principle, based on the brief facts.

It is quite easy to suppose a number of scenarios and as this actually happened, I think the moral of the tale is the important point - one which I will try to get over a bit more succinctly in the future. It is generally not a "black and white" subject which is why there is a lot of comment on it and litigation surrounding it.

Your nearest scenario is number 3. VAT was eventaully paid in the UK at UK rates and on the current (second / third / fourth hand) value - something which is actually quite difficult to persuade HMRC to do on a vessel that was never outside the EU in the first place!

Feel free to email me personally if you would like to comment a little less publicly. The address is on the article.

Best wishes

Brian

I'm a bit amazed you are so content with unclear facts. And surely better to debate openly than do in private correspondence?

If as you say it is close to my scenario 3, then I'm very sceptical about what you have done. Paying VAT to UK HMRC and getting a piece of paper to prove you did so does nothing to eliminate a spanish VAT debt secured on the boat. If you're doing this right, you have to establish based on the very precise facts (i) which country (occasionally, but rarely, countries) the unpaid VAT is due to, (ii) then figure out if it is charged on the boat (ie is it your client's problem?), then (iii)settle with that country. You cannot settle a "country A" VAT libility by paying "country B".

Are you quite sure that the deal you reached with HMRC in the UK fully cures a problem that started with a Gib agent fraudulently failing to pay a Spanish IVA liability? Or have you just paid several grand to HMRC for a bit of paper that makes the boat look VAT paid, thus perpetuating the misrepresentation next time the boat is sold?

Sorry for the interrogation (!) but this is a subject you cannot half bake .

 

[Hurricane]

You are certainly correct regarding VAT but the point is that if VAT / IVA was not paid, the person with the boat is liable to pay it.

I'm afraid I still find your statement very missleading.

In most cases, VAT is accountable by the seller - usually a VAT registered company.
So the situation of unpaid VAT rarely occurs.
IMO your statement just scares people unnecessary.

 

[Brian Legal]

VAT

To Hurricane - yes, but the seller did not. That is why the buyer is responsible and that is why the seller was sued by the buyer. I have no wish to mislead you.

To jfm - Yes you can pay the VAT in another country. As indicated, if you wish to be more specific you are welcome to discuss this in private.

Otherwise, I think that I should sign off and let you get on with the debate.

Best wishes

Brian

 

[jfm]

I'm afraid I still find your statement very missleading.

In most cases, VAT is accountable by the seller - usually a VAT registered company.
So the situation of unpaid VAT rarely occurs.
IMO your statement just scares people unnecessary.

I agree with you 100% Hurricane.

Please Brian Legal will you cite the (UK) law that gives HMRC a right to seize non-imported goods, now owned by a bona fide purchaser, on which the seller failed to account for VAT. (Hint: it doesn't exist). In the alternaive, if the unpaid tax you have in mind with this statement is Spanish IVA as opposed to UK VAT, how does paying money to HMRC extinguish the Spanish liability (a repeat of my earlier Q)?

 

[kashurst]

vat checks

I think the article was unhelpful too. The vat situation on boats seems to me to be overstated. If the authorities were so concerned that boats are sailing about vat unpaid why then are they not going around marinas demanding evidence. We have seen in Spain in particular the matriculation tax and now we are aware of a potential wealth tax in future based on asset values (boats included) when the tax authorities were chaining boats to the docks.

If boat vat fraud was such a big issue why don't the tax people start going around marinas asking to see invoices?? - with all the budget issues at present in theory boats are an easy target but so far no-one is chasing us.....

Also there was a poll on this forum a while back about documents that get checked whilst travelling about, Insurance and registration where often checked but I don't think anyone ever got asked for a VAT invoice...(someone will no doubt show me to be wrong)

Also isn't there a time limit on this issue. I asked for a new copy vat receipt from the original dealer on my boat a few years ago as mine is a bit scruffy. He pointed out that in Spain he is only required to keep records for six years - so how can any future owner on any boat know if the vat was ever paid, regardless of the quality of their original or copy invoice?

 

[stillwaters]

No, so far as the 3rd or 4th owner down the line is concerned, the Spanish cannot pursue the owner's private assets other than the boat. The tax debt does not transfer to the new owner. He simply owns a boat over which someone else has a security/distress/mortgage style interest

In this instance the Spanish connection is a bit of a smoke screen. The boat was originally supplied in the UK and,because no VAT had actually been paid to HMRC,either directly or indirectly via payment to the original supplier,the VAT would still be deemed by HMRC to be due and,because they always go for the easiest target to pin the default against,it will usually end up with whoever is last holding the parcel. And,whilst the rest of us have a statutory time limit imposed on us for claiming bad debt by The Limitation Act 1980,there is no time limit for the reclaimation of unpaid VAT or tax.
Had the boat been supplied by an intermediary in Spain then IVA at the then prevailing rate should have been paid in Spain,unless the buyer elected to buy ex-tax...but this clearly didn't happen.

 

[gjgm]

2. The boat was bought new in UK for delivery to Spain and was thus a distnace sale by a UK dealer or a local sale if the vendor used their Spanish subsidiary/branch to make the sale. This means spanish, not UK, VAT is due. If the local agent (why would one choose one based in Gib in this scenario?) failed to pay the VAT then the boat is still VAT paid so far as the first customer was concerned,

Just so those of us at the back can keep up, when you say "as far as the first customer is concerned", do you mean, as far as the first customer "believes"- not meaning he can treat the boat as VAT paid?

 

[Brian Legal]

VAT

Thanks to all who have posted.

My last couple of replies do not seem to be on the forum (probably my fault) but the gist of them is that the position is as stated in the article. I will now sign off and leave it to the rest of you to take a view.

You may consider that the problem is exaggerated and misleading but the fact is that many boat sales fall through because the seller cannot prove the VAT status of the boat.

Put simply, if you cannot prove that VAT (or its equivalent) was ever paid in whatever jurisdiction, you are liable to pay. I'm not sayinjg you will pay, but you are liable. If in doubt ask HMRC!

Best wishes.

Brian

 

[jfm]

In this instance the Spanish connection is a bit of a smoke screen. The boat was originally supplied in the UK and,because no VAT had actually been paid to HMRC,either directly or indirectly via payment to the original supplier,the VAT would still be deemed by HMRC to be due and,because they always go for the easiest target to pin the default against,it will usually end up with whoever is last holding the parcel. And,whilst the rest of us have a statutory time limit imposed on us for claiming bad debt by The Limitation Act 1980,there is no time limit for the reclaimation of unpaid VAT or tax.
Had the boat been supplied by an intermediary in Spain then IVA at the then prevailing rate should have been paid in Spain,unless the buyer elected to buy ex-tax...but this clearly didn't happen.

Stillwaters I'll happily be corrected if i have lost the plot but i don't think you are right. The situation here is that Spanish VAT was meant to be paid by a Gib VAT agent, but he didn't pay and pocketed the money. So Spanish exchequer never got their VAT. It has nowt to do with UK VAT

Reference your second sentence, you are 100% wrong. There is no ability for UK HMRC to claim VAT from the innocent purchaser of a UK boat, or any subesequent secondhand owner, or to seize the boat, just becuase the original selling dealer of the boat failed to pay VAT to HMRC on the new-boat-sale transaction. None whatsoever.

As I said earlier, you have to be absolutely precise as to the facts before you can say what the VAT answer is, so of course if I have the facts wrong i'll happily be corrected.

 

[kashurst]

From reading the original feature it implies that it is possible to get confirmation from a tax authority that vat has been paid on a specific transaction. Admittedly a boat is usually a big vat payment, but do the vat offices really keep records of every boat ever sold?

If that was the case why do we need invoices?

I thought that the vat office only keeps records of a summary of a companies claims or payments for a given quarter or year. The specific transactions by that company are held in the companies records that they only need to keep for 7 years (6 in spain).

So if the dealer was naughty and didn't actually pay the vat amount to the vat office how can a boat purchaser know it has been paid? and how can they check it ?

Is it me or is boat vat invoice keeping a nonsense that has been propagated and expanded on over time? Has anyone had their vat position questioned by a tax authority?

 

[jfm]

Just so those of us at the back can keep up, when you say "as far as the first customer is concerned", do you mean, as far as the first customer "believes"- not meaning he can treat the boat as VAT paid?

No I don't. I mean the boat IS vat paid. Not believed or treated, but ACTUALLY.

1. If i buy a TV tomorrow from Curry's for £120, i give Curry's £120 and get a TV and a VAT receipt and walk out of their shop. If, next day, Curry's goes bust and does not pay the £20 to HMRC that month, I still have a VAT-paid TV. HMRC cannot come after me to get the missing £20.

2. Now, extending the scenario, let's say i am a VAT registered trader in TVs and I sell it to you at a 50% markup, so I charge you £180 for the TV. I will give you a VAT receipt showing £150 TV and £30 VAT. I will pay over that £30 to HMRC at the end of the month, and i will deduct the £20 I paid in VAT to Curry's, So my actual cash paid to HMRC is £10. I get full credit for the £20 VAT that Curry's ought to have paid, even though HMRC never got it. You get a VAT paid TV and are free to take it anywhere in the EU.

3. If i was Harrods and you were Russian and taking the TV home to Russia, HMRC would give you a cash refund of the £30 under the VAT free shopping export scheme thingy, even though poor HMRC only actually got £10 of the VAT, not £30.

4. And that is the whole point: in a non-import transaction the ONLY people who take notice if the VAT is or isn't paid by Curry's are Curry's and HMRC. The fight is between them. It doesn't involve me or you or the russian.

5. Note also: suppose Curry's went bust but had some money, so they paid exactly half their VAT bill that month and then got wound up. How does anyone know if the VAT they paid was on my TV or on someone else's TV? No-one does know that, becuase the payment of VAT is fungible. It is not allocable to any particular TV. Or boat.

6. Boats are exactly the same as TVs


Get my drift?

Getting back to the boat, if say I am a UK person and I buy a sunseeker from marina estrella for delivery+handover in spain, a pretty common scenario, then they can sell it to me as a distance sale from their UK office and account for Spanish VAT that way, or they can put the sale through their Marbella office and account for Spanish VAT just as they would if selling me chandlery in Spain, or a TV. Either way I get a boat with a VAT paid invoice showing Spanish VAT. That is my "scenario 2" that you quoted. If for some reason Marina Marbella doesn't actually pay the VAT to the spanish exchewquer(UK as a distnace seller, or Spain as a local seller, it makes no difference), I am unaffected. I am just like the TV customer. The non payment of VAT aint my issue and my TV or boat cannot be seized

Now, I don't think that is the circumstnace here with Brian Legal's boat. He sort of hinted it was similar to an NMT import from UK to Spain. That would require the boat owner to pay spanish VAT, normally using an agent, and it seems the import agent pocketed the VAT money and forged the docs. In which case Spanish VAT is due on the boat, and the poor boat owner is liable, and cannot benefit from the "Curry's analysis" and nor can any subsequent inocent owner of the boat. The boat can be seized. I am perplexed how giving money to HMRC in the UK cures that predicament but Brian Legal will explain that soon I hope.