HMRC’s retrospective change on VAT and contract terminations: practical options for businesses
Out-Law Analysis | 12 Nov 2020 | 3:54 pm | 12 min. read
Businesses have a six month window of opportunity to carry out a thorough VAT change management project, if they have not done so already, in order to eliminate or at least mitigate the financial costs associated with implementing VAT into their business and the future risk of tax disputes. This can be done in advance of publication of the final Oman VAT Regulations, expected to be released in early December, using the experiences from other Gulf Cooperation Council (GCC) states that have already implemented VAT as a guide.
It has undoubtedly been a difficult decision for the Sultanate of Oman to press ahead with VAT implementation, given current economic volatility as a result of the Covid-19 pandemic and the oil price dip. However, there is no doubt that VAT has an important part to play in Oman's journey towards stabilising and diversifying state income, as recommended by the International Monetary Fund (IMF) in its latest annual report on Oman. It is estimated to generate over OMR 300 million (US$ 780m) in its first 12 months of implementation, subject to economic conditions.
It also may be positioned as the first of many significant tax changes to be implemented in Oman over the coming 24 months, as Oman has indicated it may also choose to introduce an income tax regime with effect from 2022. This would make Oman the first GCC country to implement a fully fledged income tax system.
As usual, whenever a country implements a new VAT system from scratch or significantly increases the rate, we can expect to see an increase in spending by businesses and consumers ahead of April 2021 - especially on more expensive assets and luxury items, together with guaranteed fixed price annual renewals. We are also likely to see many businesses taking advantage of this by promoting 'VAT Free' prices significantly in the coming months, or making the decision to consume the cost of VAT post-April 2021 themselves as a competitive pricing strategy. The introduction of VAT will have a short lived impact on inflation which generally tails off within 12 - 18 months as it gets absorbed into new norm pricing.
Businesses have a six month window of opportunity to carry out a thorough VAT change management project, if they have not done so already, in order to eliminate or at least mitigate the financial costs associated with implementing VAT into their business and the future risk of tax disputes.
The introduction of VAT will impact all departments across the whole business, and will therefore need time to be managed and completed in an effective way. It is therefore imperative that businesses commence their VAT readiness projects at the earliest opportunity – in particular, to avoid the significant and unnecessary penalties that we have been seeing businesses in other GCC states incurring under the respective VAT regimes for non-compliance over the last two years.
Oman is currently set to be the fourth GCC state to implement VAT since the signing of the GCC VAT Agreement at the end of 2016.
The Sultanate has highlighted that the impact of VAT on businesses, trade and individuals in Oman is expected to be minimal as a 5% standard rate is among the lowest in the world.
The Oman VAT Law was published in the official gazette on 18 October, according to Royal Decree No. 121/2020 issued by the Sultan of Oman on 12 October. This triggered a 180-day countdown to the effective date of 16 April 2021.
Oman's VAT Regulations are expected to be issued in December 2020, and should provide more granular detail covering the interpretation and application of the law including the VAT period length, VAT invoice content, place of supply rules, zero ratings and exemptions. The Ministry of Information and the Oman Tax Authority (TA) have already begun to issue VAT information leaflets summarising some aspects of the regime, with more likely to follow in the coming weeks.
The TA is currently developing a VAT registration portal, expected to go live in January 2021, to allow businesses to complete their registration applications on a timely basis. The mandatory VAT registration threshold will be OMR 38,500 (approx. US$100,000), with a voluntary registration threshold of OMR 19,250 (approx. US$50,000). Whether or not a taxable person has exceeded the relevant registration threshold will be based on the current month supply values plus 11-month 'look-forward' and 'look-back' tests (i.e. 12 months in total) counting taxable supplies, including reverse charge transactions. Tax registration exception is available for businesses making wholly zero-rated supplies similar to some of the other GCC states.
Non-residents will be liable to register for taxable supplies in Oman in certain circumstances from the first OMR 1 of sales, together with self-employed traders, with direct registration and compliance possible and the use of a tax representative optional. This option will be warmly welcomed by non-resident traders who faced difficulties with the registration and compliance process in other states.
We have already seen news of the new Tax Card system in Oman earlier this year. VAT registered persons will be also be issued a Tax identification Number (TIN) and will be required to file periodic VAT returns by the 30th day of the month following the tax period, although the standard VAT period length will be confirmed via the Regulations. The Oman VAT Law allows for tax payers to amend previously filed returns and for the amended return to tax the place of the originally filed return, something which is not possible for example under the UAE VAT regime. The amendment must be filed within 30 days of identifying the error. This is a warmly welcomed aspect of the law and will allow for easier correction of errors by taxpayers, especially when the regime is new.
Under the VAT Law, taxpayers have a unambiguous three year window within which to deduct VAT on purchases, with a standard five year statute of limitations for audit purposes and an extended period of 10 years in the event of later registration. This is an important extension of the look back period available to the tax authorities and of importance to businesses.
The exact VAT invoice content requirements and timeline for issuance will be confirmed within the regulations but we do not expect these to stray too far from what we have seen across the other Gulf states (see Tax Authority guide linked above for further invoice content insights). The law has confirmed, however, that any currency may be used on the VAT invoice once the tax amount is shown in Omani Riyals using Central Bank of Oman daily rate.
Taxpayers will be obliged to retain normal VAT records for a standard period of 10 years and an extended period of 15 years for real estate capital assets, with further details on administrative requirements to be provided within the VAT legislation.
Businesses can expect some teething issues once the VAT registration portal opens, as has been the case in other GCC states which have already implemented VAT. We often see a lot of initial back-and-forth in determining the correct information and documentation required for registration, especially in cases involving non-residents, intending traders and international businesses.
The Oman VAT Law sets out some initial transitional rules to be followed for transactions and contracts spanning the effective date of 16 April 2021.
Similar to other GCC VAT regimes, these rules deal with the correct treatment to apply when invoices have been issued or payments have been received prior to the implementation of VAT, but all or part of the supply to which they relate occurs after the implementation. In a very helpful way, these transitional rules also cover pre and post VAT Registration, which will give them longer-term application to businesses coming into the Oman region.
The transitional provisions also seek to deal with the questions of whether pre-agreed prices should be treated as VAT exclusive or VAT inclusive where no specific tax clause is included within the transitional contract. This rule set out within the Law implies that all such prices would need to be treated as inclusive of VAT. However, as it also goes on to reference the Regulations, we expect that this rule may be extended to impose certain conditions on this treatment, for example a dependency on the status of the customer. This will be an important point for businesses that have already signed longer term contracts and may wish to seek to amend them (where possible) in advance of April next year.
VAT will be liable on all taxable supplies of goods and services, together with imports, generally at the standard rate of 5% - the initial rate of VAT as agreed by the GCC back in 2016. This is one of the lowest standard VAT rates across the globe, which should help the government and businesses to implement the tax with the lowest level of disruption to revenues, trade activities and customer demand.
The law allows for a reasonably high number of zero-ratings and exemptions, with the highest number of exemption categories that we have seen so far across the GCC states. The general principles of VAT neutrality for businesses will apply: VAT deductions will be available for VAT on purchases directly associated with 5% and zero-rated taxable supplies; no deduction will be available for VAT on purchases directly associated with exempt supplies; and partial deduction will be available where costs are directly linked to a mix of taxable and exempt activities.
The impact of these zero-ratings and exemptions will be twofold; from a customer perspective, they should minimise the overall impact of VAT for individuals; from a business' perspective VAT cash flow management may be more difficult if continuously in a refund position due to zero-ratings and many businesses will feel the real cost impact of VAT on purchases associated with exempt transactions.
Generally, VAT regimes with minimal to no zero-ratings or exemptions are viewed as the most efficient as they ensure that VAT is not a real cost for businesses in the supply chain and that the burden of the VAT sits with the end customer. In the case of the Oman VAT regime, there is the potential for trapped VAT in certain industry sector supply chains, potentially resulting in price increases and inflation through businesses seeking to protect their profit margins. There will also be additional administrative burdens and complexity for businesses.
Businesses with transactions in this space will be keenly awaiting the additional guidance provided on zero-ratings and exemptions set out with the VAT Regulations to allow them to fully understand the impact of VAT on their business, cash flows and real VAT costs.
The categories of zero-rated supplies of goods and services are:
The categories of exempt supplies of goods and services are:
Similar reliefs as those which apply in other GCC states will be introduced for transactions which avail of customs reliefs and which occur within special zones.
Pre-registration VAT may be recovered by tax payers subject to conditions to be clarified under the Regulations. Businesses which will need not register for VAT immediately, but which are incurring costs subject to Oman VAT, such as start-ups or intending traders should take advantage of this.
VAT grouping is available under the law, subject to conditions to be set out within Regulations. VAT group members will be jointly and severally liable for the tax obligations and liabilities of the entire group. However, they will only need to file one VAT return with the TA periodically and should be resolved from charging VAT on most, if not all, intra-group transactions. Cross-border VAT grouping is not available.
The profit margin scheme will be available to businesses who trade in certain second hand goods in Oman. Transfer of business relief will be available for businesses seeking to restructure post the implementation of VAT which will be welcomed given the current economic climate in the region.
The reverse-charge mechanism will be applicable to certain cross-border transactions, with an application for reverse-charge on imports requiring up front approval by the TA. Import reverse-charge tends to be critical to some businesses in ensuring that VAT does not negatively impact the efficiency and flow of goods and cash within their business.
A VAT refund scheme will be available for foreign businesses and tourists, subject to certain conditions, to encourage continued foreign direct investment and tourism into Oman.
The Oman VAT Law clearly states: "it shall not be permissible for the Person liable to tax to enter into an agreement for the transfer of its liability to others, and all agreements to this effect shall be invalid".
This is a very important legal point for consideration by tax advisors. Commercial contract terms cannot override mandatory law provisions; however, most commercial contracts nowadays include terms which shift the ultimate liability for all taxes under the contract to a particular party. It will be interesting to see how contracting responds to this provision, and whether we will see a change in approach to such tax clauses in the future. TA guidance on this point would be welcomed.
Under the Oman VAT Law, a resident "responsible person" must be appointed by non-resident taxpayers – for example, entities with no local branch or other permanent establishment - who will be charged with acting on behalf of the taxpayer in respect of its duties under VAT law. The identity of this responsible person must be notified to the TA.
If the taxpayer fails to appoint a responsible person, the TA may do so on the taxpayers' behalf. The responsible person must not remain outside of Oman for 90 consecutive days or more in any one tax year (i.e. calendar year). In the event of audit, the TA may request the physical presence of the responsible person within a given timeline.
With the above conditions in mind, while a non-resident may register for VAT purposes and meet all of its Oman VAT compliance obligations remotely and directly itself, it will need to engage an agent to act on its behalf as "responsible person", or to put at least one employee on the ground in Oman, in order to be compliant. Practically, non-resident businesses are likely to face difficulties with this requirement, and they should therefore put plans in place as soon as possible.
The Oman VAT Law sets out two sets of penalties applicable for non-compliance with the new VAT regime, which will be in addition to any other penalties set out within the Regulations or other applicable laws in the region. These are:
As an example, if a taxpayer is viewed as deliberately refraining from registering with the tax authority on a timely basis the penalty can be up to OMR 20,000.
The penalty regimes for non-compliance with VAT legislation in the GCC seem to have become more and more significant and extreme as we have progressed through different states' implementation, with this upper limit of OMR 20,000 for certain types of non-compliance being comparably high. That being said, experience in the region also tells us that the most important factor will be the practical application of the penalty regime and how rigidly it will be applied by the TA.
It is also important that the Oman VAT Law has set out the procedures, including timelines, for disputing a decision of the Tax Authority on a point of law or the application of penalties. We have seen many businesses in the GCC already raising contentious tax matters with the authorities and seeing this through the relevant disputes committees and courts to a resolution. This is a key area that businesses will be eager to understand better as the new VAT system is implemented.
HMRC’s retrospective change on VAT and contract terminations: practical options for businesses