Constable VAT Focus 7 May 2020

HMRC NEWS

Temporary Zero-rate for Personal Protective Equipment
HMRC has updated its recent Brief on the temporary zero-rate for personal protective equipment to include information on import VAT.

VAT Finance Manual
VATFIN5100 has been updated to reflect the changes to the VAT treatment of VAT fund management which came into effect on 1 April 2020.

Health Professionals & Pharmaceutical Products
This Notice has been updated to give more information about relevant imports that the temporary zero-rate will apply to.

Upcoming Hearings
The FTT has released a list of hearings which are going ahead at the moment and the medium through which they will be conducted.

CONSTABLE VAT NEWS

Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.

Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.

CASE REVIEW

CJEU

1. Retrospective Adjustments of VAT Deductions

This case concerned Correios de Portugal (CDP) and its right to retrospectively adjust claims for input VAT deduction. CDP is a Portuguese postal service; some of its supplies are taxable courier services, others are VAT exempt universal postal services. This means that CDP is partly exempt for VAT purposes.

In 2015, following a clarification within the Portuguese system that many of the services being treated as exempt were, in fact, taxable, CDP altered its partial exemption calculation for that year and changed the method which it used. Rather than a “pro rata” method, it sought to recover VAT incurred through a use-based method. It then attempted to retrospectively apply the new rate, which showed a higher degree of taxable supplies, thus affording increased input VAT recovery. Having netted the calculations off, CDP submitted a claim for repayment of the input VAT which it has never recovered, amounting to EUR 1,967,567.82.

Following an inspection, the Portuguese tax authority refused to make this repayment, asserting that once a recovery has already been made for a period, taxpayers are not permitted to retrospectively change the method that was used. The question before the CJEU in this instance is whether a domestic tax authority is prohibited form preventing a taxpayer from retrospectively changing the method which was used to calculate recoverable input VAT. It was also asked whether a Member State may prevent such a change in method where the taxpayer was not aware that the domestic law was incorrect.

It concluded that the EU law precludes Member States from enforcing such restrictions and held that the taxpayer’s behaviour was appropriate, and would be appropriate where:

–        “the Member State concerned authorises taxable persons to deduct VAT on the basis of the use made of all or part of the goods and services used both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, pursuant to Article 173(2)(c) of that directive;

–        the taxable person was unaware, and acting in good faith, when choosing the deduction method, that a transaction which it regarded as exempt was in fact taxable

–        the general limitation period fixed by the national law for the purposes of adjusting deductions has not yet expired, and

–        the change in the deduction method makes it possible to establish more precisely the proportion of VAT relating to transactions in respect of which VAT is deductible.”

Constable Comment: This is a positive decision for the taxpayer but applies to very specific circumstances in which a taxpayer has acted in good faith when choosing a deduction method for transactions which it regarded as exempt which were, in fact, taxable. It should also be the case that the general time limit for adjusting the period has not passed – in the UK this is usually four years. To discuss this judgment or how it may apply to your business, please do not hesitate to contact Constable VAT.

Upper Tribunal

2. YMCA: Housing Support Services

This is a compound appeal by four different YMCA organisations against a decision of the FTT which concluded that supplies of “housing related support services” were exempt from VAT.

The appellants entered into contracts with local authorities to provide welfare and housing services to vulnerable individuals – the supplies were not made to the local authorities themselves. The Tribunal found that “housing support services” encapsulates support services which are provided to any person for the purpose of developing that person’s capacity to live independently in accommodation or sustaining their capacity to do so. The individuals who received support services from the appellants also received formal care plans and were appointed key workers to assist with their development and adherence to the plan.

UK VAT law exempts the supply by a charity, state-regulated, or public body of welfare services directly connected with the provision of care, treatment or instruction designed to promote the physical or mental welfare of distressed people. The appellants argued before the FTT that its supplies fell outside of this exemption as the vulnerable people who received the services were not paying for the supply. It also argued that the services were not directly linked with the provision of instruction designed to promote the welfare of distressed people as the recipients of the services were not “distressed” once they were receiving services from the YMCA and, in any light, that there was no “instruction” of the vulnerable individuals.

The FTT dismissed these contentions and held the services to be exempt from VAT. They now appeal to the UT on the following grounds;

  • The services being supplied did not fall within the definition or purpose of the VAT exemption; the supply of services is made to a third party which pays no consideration and is not directly linked with the instruction of distressed people,
  • If its services were exempt, it would increase the cost of those services to the local authorities as it would no longer be entitled to deduct input VAT. This would go against the purpose of the VAT Directive which aims to reduce the cost of welfare provision
  • The recipients of the services were not “distressed” within the meaning of the VAT law

With regard to the third-party argument, the UT concluded that the exemption for welfare services does not exclude supplies to third parties. It also agreed with the FTT in holding that the services were supplied to distressed people and were directly linked to their instruction with a view to improving their physical and mental wellbeing. In reaching this conclusion, it was considered that “instruction” does not imply compulsion and that the educational development plans given to the individuals, which were overseen by keyworkers, do qualify as “instruction”. It was also noted that the effect on the cost of the services being provided was not sufficiently “perverse” to influence the Tribunal’s decision on this matter.

Turning to the “distressed” point, the UT observed the definition employed by the FTT, the dictionary definition, “…someone who is suffering severe mental or emotional pain, anguish or financial straits. It denotes severe, rather than mild, emotional or physical discomfort.” The appellants argued that their services were not being provided to “distressed” individuals as, once being assisted by the YMCA, they were no longer distressed. The Tribunal dismissed this argument, commenting that “distress” is not a legal state of being but a question of objective fact; the people receiving support from the YMCA were people in distress.

The Tribunal held in favour of HMRC, dismissing the appeal and confirming that supplies of housing support services, made by the YMCA to distressed individuals, are exempt from VAT.

Constable Comment: An interesting element of the appeal was the attempt by the taxpayer to rely on a purposive interpretation of an EU Directive. HMRC benefits as a result of this decision because input VAT being incurred by the YMCA’s in making these supplies will not be recoverable. HMRC had previously given rulings to 3 of the 4 appellants that these were taxable (standard-rated) supplies.


This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.