Tag Archives: Essex VAT advice

Constable VAT Focus 13 June 2019

13th June 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the liability of certain salary sacrifice schemes, payroll services supplied to vulnerable people and the recoverability of VAT on development costs where there could be one supply of a development project or two supplies of individual buildings.

 

HMRC NEWS

Changes to the VAT MOSS rate for other countries

HMRC has released information about changes to the rates for VAT Mini One Stop Shop (VAT MOSS) for other countries.

Domestic reverse charge for building and construction services

HMRC has released further information about the VAT domestic reverse charge for building and construction services that starts on 1 October 2019.

Constable VAT has covered this topic in a recent blog which can be viewed here. This will be of interest to anyone operating in the construction industry.

 

CONSTABLE VAT NEWS

 

We recently circulated a new VAT & Charities Newsletter which is available to read on our website.

In this publication we cover some of the most important and interesting areas of VAT for charities. Whilst some of the issues and cases have been discussed in our VAT Focuses, the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector.

If you would like to receive email notifications when there is a new VAT & Charities Newsletter then please reply to this email.

 

CASE UPDATE

 

Upper Tribunal

 

1. Leasing of Cars Under a Salary Sacrifice Scheme

This case concerned the Northumbria Healthcare NHS Foundation Trust (NHT). HMRC refused a claim for repayment of input VAT made by NHT. NHT had incurred this input VAT in respect of leased and maintained cars which it acquired for the purpose of providing them to NHS employees under a salary sacrifice scheme. Under UK law, where cars are leased to employees under such a scheme, not for the purposes of the employer’s business, there is no supply of goods or services by virtue of the “De-Supply Order”. Whilst there is deemed to be no supply, UK legislation (s43 VATA) entitles the employer to recover input VAT in relation to such car schemes supplied by Government bodies such as the NHS.

NHT contended that this order applied whilst HMRC argued that the car scheme was a business activity carried on by NHT and, therefore, that input VAT was restricted to 50% as the business was leasing vehicles. In support of its claim, NHT argued that the car scheme was operated so as to facilitate a more efficient delivery of the statutory obligations (non-business activities) of the Trust: to provide healthcare. HMRC observed that there is no actual restriction placed on the use of the cars by the employees and, therefore, that the De-Supply Order was not applicable.

The Tribunal observed that the key question, given the circumstances, was whether the car scheme operated by NHT is an “economic activity” within the meaning of EU law. If it is an economic activity then the De-Supply Order would not apply and, therefore, input VAT recovery on the cars would be restricted by virtue of the Blocking Order.

The Tribunal considered that the De-Supply Order meant that there was no supply of services in this instance and therefore that there was no economic activity being pursued by NHT with regard to the car scheme so there was no taxable supply. Therefore, NHT was entitled to recover all of the VAT incurred on the supplies of leased and maintained cars.

Constable Comment: This case was complex and reflects a problematic area of the law. The result has essentially led to a situation in which the NHS receives and subsequently makes a supply which is not a supply but it can recover 100% of the input VAT incurred in making that supply. This area of VAT is particularly difficult to deal with and anyone operating similar structures should seek VAT advice for clarity.

 

2.The Glasgow School of Art: Input Tax Recovery on Property Development

This appeal concerned the Glasgow School of Art (GSA) which contested a decision by HMRC to deny 100% input VAT recovery in relation to a refurbishment project on some campus buildings. The FTT had previously found in favour of HMRC’s original decision.

The GSA refurbished three buildings; the Assembly Building, the Foulis building and Newbery Building. The buildings were all adjacent and on one site, the refurbishment project took place at the same time in relation to all of the buildings. The Foulis and Newbery buildings were demolished and replaced with the Reid building which was “wrapped around” the Assembly building. The whole project was contracted as a single development.

The GSA initially treated the input VAT on invoices from the contractor undertaking the project as residual and recovered in line with its partial exemption percentage. However, it later sought to change its argument and claimed that two distinct buildings had been built and that GSA was making a wholly taxable supply by leasing the Assembly Building to the GSA Student’s Association whilst the input VAT relating to the development cost of the new Reid Building  was recoverable in line with the partial exemption percentage. GSA therefore sought to recover the input VAT which it had previously not done so under its partial exemption calculation. It submitted a significant VAT refund claim.

The FTT had previously dismissed this appeal on the grounds that there was, materially, only one supply by the contractor to the GSA and, therefore, that the input VAT had correctly been treated as residual. The Tribunal in this instance agreed with the FTT and dismissed the appeal, concluding that the original invoicing arrangement gave the best reflection of the economic reality of the situation.

The UT also agreed with the FTT that GSA was not carrying on an economic activity. The rent paid by the student’s union was set at a level which it could afford and it would take 500 years for the charity to recoup its outlay. This is not an economic activity.

Constable Comment: In order to support the claim that there were two separate supplies received by GSA, the School went back to the contractor and split the development and invoicing into two sections and two distinct buildings. This case shows that, whilst important, contracts and invoicing arrangements are not the ultimate deciding factor; regard will always be had to the commercial and economic reality of the situation.

 

First-Tier Tribunal

 

3. Welfare Exemption: Supplies Closely Connected

This appeal concerned Cheshire Centre for Independent Living (CCIL) and the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services so they were liable to VAT at the standard rate.

Certain disabled persons may be eligible for financial assistance in order to facilitate their independent living. Some of the funding is handed to disabled individuals directly in order for the individual to take control of and pay for their own care and support services. Where a disabled individual receives these payments and uses them to pay assistants they become an employer of that person with all the relevant obligations for direct tax purposes.

CCIL offer a payroll service whereby it enters into contracts with local authorities and individuals and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.

CCIL submitted that the services supplied were in the context of a supply by a charity to a disabled person whose needs had been formally assessed under the Care Act 2014, meaning that they were exempt.

The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. Therefore it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.

Constable Comment: Interestingly this case focuses on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party. The VAT liability of similar services provided in these circumstances is not commented on in this case. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. This case also serves as a reminder that HMRC construes the welfare exemption very narrowly.

 

 

Constable VAT: VAT & Charities Newsletter

7th June 2019

Thank you for subscribing to our VAT Charity Newsletter. In this publication we cover some of the most important and interesting areas of VAT for charities. Some of the issues and cases have been discussed in our VAT Focuses, however the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector.

This issue of the Constable VAT & Charities Newsletter covers;

  1. YMCA Birmingham: Tribunal decision & HMRC’s behaviour
  2. The Wellcome Trust: Taxable Person or “acting as such”
  3. The Learning Centre Romford & LIFE Services: Welfare Services Exemption
  4. Loughborough Students Union: Supplies “closely concerned” with education
  5. HMRC Notice 317: Imports by charities free of duty and VAT
  6. HMRC VAT Notice 701/1

Also of interest to some of our readers will be one of our blogs which covers the recent case of Sandpiper Car Hire Limited and discusses some of the issues, highlighted by the Tribunal, with the way in which HMRC interact with disabled people. This can be viewed here.

 

1. VAT and the Supporting People Programme

The case of Birmingham YMCA and others (Leicester, Black Country and Burton upon Trent) deals with the VAT liability of supplies of services made under a contract entered into with local authorities (LAs). The case also gives a clear indication of how HMRC behaves in certain situations.

The Supporting People Programme (SPP) was introduced in 2003. The appellants in this case were supplying “housing related support services”. These services were aimed at helping vulnerable people live independently in the community. In the cases of Birmingham, Leicester and Black Country there was correspondence between the charities and HMRC. It was agreed that the funding received from LAs was consideration, payment of which was due under contractual obligations.

Burton, not unreasonably, followed what it believed to be the generally agreed practice and charged and accounted for VAT on its supplies.

In 2015 HMRC changed its mind and decided these supplies were VAT exempt. This was communicated in writing to Birmingham and Black Country by letter dated 19 June 2015. Leicester were advised of this volte-face in September 2016 and Burton in March 2017.

The practical implications of the position initially agreed with 3 of the 4 charities appealing the revised HMRC decision meant that they had accounted for output VAT on supplies to the LAs. The LAs recovered VAT incurred so the position would be VAT neutral. The charities would be able to recover VAT incurred on costs directly attributable to making these taxable supplies. In addition, the value of taxable supplies generated would be beneficial to all of the charities in terms of the recovery of VAT incurred on non-attributable costs, general overhead expenses.

Following HMRC’s revised opinion, the impact on input VAT recovery by the charities is likely to be significant. VAT incurred directly relating to exempt supplies will only be recoverable if the partial exemption de minimis limits are satisfied. These limits also take account of non-attributable VAT incurred and the threshold is not particularly generous, less than £7,500 in value per year (£1,875 per quarter, £625 per month) and less than 50% of total input tax incurred.

Constable VAT Comment: The decision in this failed appeal is interesting from a technical perspective but also in terms of HMRC’s approach. There are a number of cases where HMRC wish to refuse charities input VAT recovery where LAs have outsourced services. If the LA itself supplied the services, it would be able to reclaim VAT incurred on the delivery of these services. By denying charities the right to reclaim input VAT, HMRC is collecting more tax: irrecoverable VAT incurred by charities.

In these cases, because HMRC had initially agreed the VAT liability of supplies with 3 of the 4 appellants, its approach was as follows:

Regarding Birmingham, HMRC would apply the Tribunal outcome to the date of the relevant disputed HMRC decision letter on 19 June 2015. This means that, from that date, supplies made under the contract would be VAT exempt. The same date applied to Black Country. It is not clear from the Tribunal decision what practice either charity had adopted; however, if a policy of standard-rating supplies had been maintained, it is likely that retrospective VAT adjustments would be required. The charities would have to refund VAT charged in error to the LA. If VAT exempt supplies had been made, input Vat adjustment would be required.

The position regarding Leicester would be as above; however, the relevant date in this case was 27 September 2016, when the charity was notified by HMRC that its supplies were VAT exempt.

As far as Burton were concerned, HMRC took the view that it had never agreed its supplies were standard rated. This being so, HMRC’s decision letter was dated 27 March 2017 and, as such, VAT accounting adjustments will be made retrospectively to VAT accounting period 03/13. This was because HMRC had never agreed that Burton’s supplies were VAT exempt. HMRC would issue VAT assessments retrospectively in line with four-year capping legislation.

These joined cases demonstrate that HMRC can, and does, change its policy. The cases also clearly show the value of liaising with HMRC’s VAT Charities Team in cases of ambiguity. The position of 3 of the charities in this appeal were protected from retrospective treatment, from the date HMRC formally notified the change in its policy, because the VAT liability of supplies had been agreed. It is obviously disappointing that HMRC should resile on agreements made and upon which charities had relied. Unfortunately, in recent times, Constable VAT has dealt with situations where HMRC has sought to renege on agreements previously reached and apply VAT assessments retrospectively. If this is something which your charity has experienced and you would like to discuss, please do not hesitate to contact Constable VAT.

The important points to take from this decision are that each case must be judged on its own facts. It is dangerous for one charity to determine the VAT liability of its own supplies based on a decision notified to another party. It is not safe to assume that one charity can rely on an HMRC ruling given to a different charity operating in similar circumstances. It is also clear that HMRC refreshes and revises decisions previously given and it is important that charities protect their positions as far as possible.

 

 2. The Wellcome Trust: Taxable person or “acting as such”

This was an appeal against HMRC’s decision to refuse claims for repayment of overpaid VAT to Wellcome Trust Limited (WTL) amounting to £13,113,822. WTL is the sole trustee of a charitable trust which awards grants for medical research in the UK. The majority of these grants are given from investment funds. The case focussed around the correct interpretation of what constitutes a taxable person for EU law and what would be considered to be acting as a taxable person. A taxable person, for VAT purposes, is a person who is or is required to be registered for VAT owing to their pursuit of an economic activity.

The question at hand related to a place of supply issue, HMRC contending that WTL was acting as a taxable person and, as such, was liable to account for output VAT in the UK under the reverse charge provisions on investment management services it had received from non-EU suppliers. WTL arguing that the place of supply was not the UK as it was not a taxable person and, therefore, that no output VAT should have been accounted for in the UK by Wellcome Trust.

There was no dispute of facts in this hearing and the discussion focussed heavily around the meaning of “acting as such” within the EU law which states that “The place of supply of services to a taxable person acting as such shall be the place where that person has established his business”. HMRC’s contention was that WTL were acting in a taxable capacity whilst WTL argued that the investment management services were provided in relation to its non-economic activity of grant distribution meaning that the place of supply, pursuant to the EU law, would be where the supplier belonged.

There has been much case law around the issue of what constitutes a business activity and where a charity is acting in a taxable capacity pursuing an economic activity. In considering whether the Trust was acting in a business capacity, HMRC submitted that any supply to any taxable person must be regarded as taxable. The Court considered that HMRC could not be correct in this assertion as such an interpretation would mean, without any further language excluding such a person, that a taxable person receiving supplies for private purposes would still fall within Article 44 and would be required to account for VAT under the reverse charge. Therefore, it was observed, that to make Wellcome Trust fit into the definition of a taxable person in relation to these investment activities, HMRC would have to argue that the words “acting as such” exclude taxable persons receiving supplies for private purposes from Article 44 but do not take out taxable persons receiving supplies for non-economic business purposes. This was simply not a logical position to adopt.

The FTT gave much consideration to EU legislation as well as case law and concluded that WTL was not liable to account for VAT on the supplies received under the reverse charge procedure as it was not receiving the services in connection with any taxable activity, the place of supply rule determined by where the supplier belongs rather than WTL.

Constable VAT Comment: This judgment will be welcomed by charities who have both business and non-business activities and can directly attribute some input VAT costs to exempt supplies. Whilst the facts of the case are quite specific to Wellcome Trust, the decision serves as a useful reminder to those accounting for VAT under the reverse charge mechanism to clarify the VAT accounting position of their charity. The issue here, of course, was that VAT accounted for by WTL under the reverse charge procedure was irrecoverable.

 

3. VAT Exemption for Welfare Services (for private companies)

The question before the Upper Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality. Whilst the service providers were private companies they were seeking to rely on the charitable exemption for state regulated bodies.

The Learning Centre Romford (LCR) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which LCR receives funding. LCR had treated these supplies as VAT exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

LCR argued that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same type of care as LCR but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and LCR were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable VAT Comment: This decision will be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, generating taxable supplies this could be advantageous in producing a right to input VAT recovery.

 

4. VAT Exemption for Supplies Closely Linked with VAT exempt Supplies of Education

This appeal concerned whether sales of goods by a student’s union can benefit from the VAT exemption for supplies closely associated with education. The FTT had previously ruled in HMRC’s favour, holding that the supplies did not benefit from the exemption.

Loughborough Students Union (LSU) contended that it was an eligible body for the purposes of the exemption from VAT afforded to supplies of education of certain types and that its supplies were sufficiently closely connected with the overall supply of education offered by the University to receive the benefit of this exemption.

The Upper Tribunal considered that LSU could constitute an eligible body for the purposes of the exemption as it is a registered charity and any surplus cash generated is assigned to the continuance of its own, charitable activities.

However, despite being an eligible body, the Court considered that in order for the exemption to take effect the supplies being provided must be closely related to a supply of VAT exempt education. As LSU does not make supplies of education and does not make its supplies to an education provider but rather to individual students, it will not be able to benefit from the exemption.

The UT concluded that the supplies made by LSU were not closely linked to education in any event as the supplies of education provided by the University would be just as good without the supplies of household goods made by LSU. Other supplies which could be associated with education, such as stationery, were not shown adequately by LSU to benefit from the exemption.

Constable VAT Comment: This case demonstrates that a mere association with an eligible body, such as a University, does not mean that educational VAT exemptions extend to all supplies made by affiliates of that body. Where seeking to rely on a VAT exemption it is essential to ensure that it can be correctly applied. Failure to take due care in this regard could lead to large VAT bills for charities who sought to benefit from VAT exemption.

Interestingly, there was some consideration given to supplies of art materials by LSU which could be associated with education and benefit from the exemption. However LSU failed to show this to any substantial degree. The discussion around stationery and art supplies clarifies that, where it can be evidenced, exemptions can extend beyond supplies to universities where the supply relates closely itself to the education being supplied.

 

5. Update to Notice 317

HMRC has updated Notice 317: Imports by charities free of duty and VAT on 4 June 2019. Paragraph 1.3 has been updated with information about time limits if you disagree with a Customs decision.

 

6. Update to Notice 701/1

HMRC has updated VAT Notice 701/1 (How VAT effects Charities) on 1 May 2019. Section 5.9.6 has been added. This comments on the position where there is a mix of sponsorship income and donations received.

 

Constable VAT Consultancy LLP (CVC) is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities, those working overseas, and regionally based local organisations. CVC has a nationwide client base. 

We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC. 

If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry, Laura Krickova or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@constablevat.com, laura.krickova@constablevat.com and  sophie.cox@constablevat.com.  Alternatively, please visit our website at www.constablevat.com where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow Constable VAT on Twitter. 

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.

 

Constable VAT Focus 16 May 2019

16th May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the deductibility of input VAT in different situations, where a tax point arises in relation to certain types of services and what constitutes “school or university education”.

HMRC NEWS

Update to Public Notice 701/41: How VAT applies if you give or get sponsorship.

This notice explains how VAT applies if you give or receive sponsorship. A new section on crowdfunding has been added.

Update to Compliance Checks for VAT

This factsheet contains information about the penalties HMRC may charge you for a VAT or excise wrongdoing.

Update to Public Notice 700/22: making Tax Digital for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.

VAT Single Entity and Disaggregation

HMRC has updated its list of useful legal decisions in its internal guidance for single entities and the rules around disaggregation.

CASE REVIEW

 

CJEU

1. When a Tax Point Arises for a Supply of Services

This case concerned Budimex S.A., a Polish company engaged in the provision of construction services. The question which arose was when a tax point arises for a supply of services under which payment only becomes due when the customer is satisfied with the works; when the services are “performed” or when the customer certifies their satisfaction. Polish law dictates that where an invoice has not been issued within 30 days after the completion of work then the tax point arises on this date. Budimex had not issued an invoice for the supplies it made to a customer as they had not yet certified their satisfaction so had not paid any money over, the Polish authorities sought to recover the output VAT as a de facto tax point had arisen after the passing of 30 days from the completion of the services.

In considering this question, the Court highlighted that, according to EU law, VAT is to become chargeable when the goods or services are supplied. However, it was also considered that, taking into account the economic and commercial realities of the industry, that the contractual term may incorporate part of the service offered.

That is to say that Budimex was supplying construction services which, contractually, would only be “performed” when the customer was satisfied with the work, a contractual term specifically allowed for by the Federation of Consulting Engineers. Therefore it was held that the requirement for the customer to be entirely satisfied is a part of the service being offered.

The Court held in favour of Budimex.

Constable Comment: The type of rule in question stating that a de facto tax point must arise at some stage seeks to combat avoidance by companies who deliberately do not create a tax point in order to defer VAT liabilities. However this case shows that it is possible for these rules to be circumvented where “customer satisfaction” is a specific provision of the supply made.

2. Fictitious Transactions: A Right to Deduct?

This Italian referral considered whether supplies which were fictional but created no loss to the Revenue bear a right to deduct input VAT.

EN.SA is an Italian company which produces and distributes electricity, the Italian tax authorities denied recovery of input VAT in relation to certain supplies as there was no actual transmission of energy. The question arose before the Court whether this refusal breached the principle of fiscal neutrality.

Whilst accepting that it was not the case in the current circumstances, the Court considered a situation in which the customer had acted in good faith in which case, it was hypothesized, that the right to deduct would have to arise owing to the underlying principles of the EU law. Therefore it was found that the Italian law which gave the Italian authorities the right to refuse the repayment of input VAT was not contrary to EU law.

However, in considering the question, the Court also pondered whether a fine may be levied equal to an amount of the deduction made. It was found that a fine of this amount would go against the EU principle of proportionality and, therefore, that domestic tax authorities are precluded from issuing this type of fine.

Constable Comment: this was an interesting case as, on the surface, a fictional transaction should clearly not give rise to a right to deduct VAT. However, the Court was forced to consider a situation in which a customer had acted in good faith in which it stated that the right to deduct must arise. Therefore this judgment applies to very specific facts and national legislation which prevents the right to recover more broadly may be incompatible with EU law.

3. The Exemption for Private Tuition

This case concerned whether the provision of driving tuition by a private company benefits from the exemption found in EU law for the provision of education in the public interest, typically provided by schools and universities, when provided by certain private bodies.

A&G Fahrschul-Akademie GmbH (A&G) is a German company which provides private driving tuition to students with an aim of ultimately earning a driving license. It applied to have its VAT debt cleared as it believed it was exempt from VAT but the German tax authorities refused on the grounds that the tuition provided is not normally taught by schools and universities. A&G appealed this point and the question was referred to the CJEU; does the concept of school or university education cover driving schools?

In considering this point at length the Court suggested a broad definition of what does constitute “school or university education” for the purposes of the exemptions:

“…an integrated system for the transfer of knowledge and skills covering a wide and diversified set of subjects, and to the furthering and development of that knowledge and those skills by the pupils and students in the course of their progress and their specialisation in the various constituent stages of that system.”

The Court then posited, in the light of this consideration, that driving tuition provided by a private body would be specialised tuition rather than a transfer of knowledge and skills covering a wide set of subjects.

Constable Comment: This judgment will be important in the future as it provides a reasonably solid framework for what constitutes a school or university education, a part of the legislation which comes without a definition. However, whilst a good starting point, this is a broad definition with plenty of constructive ambiguity meaning the issue is likely to surface in the Courts again.

4. Incorrectly Charged VAT: Recoverable?

This case concerned whether PORR, a Hungarian company involved in construction, was entitled to deduct input VAT on certain transactions in relation to which VAT had been incorrectly charged under the normal VAT system where the reverse charge mechanism should have been applied by the supplier.

PORR sought to argue that the supplies were not subject to the reverse charge mechanism and, in any case, the tax authority had denied it the fundamental right in the VAT system to deduct input VAT. The tax authorities contended that such a right had not been denied, indeed that it had been expressly provided for under the reverse charge procedure. PORR also put forward that the tax authorities had failed to ascertain if the suppliers could correct this mistake at no expense to PORR.

The Court considered the relevant EU law and concluded both that the tax authority had no obligation to seek corrections from the supplier and that PORR has failed, in a substantive way, to fulfil its obligations under the reverse charge mechanism. The VAT charged was, therefore, not deductible by PORR.

Constable Comment: Different to the EN.SA case which dealt with fictional transactions, the transactions in this instance took place but had been classified incorrectly as normal supplies rather than reverse charge supplies. This outcome may appear harsh to a customer who has acted in good faith but it is vital to ensure that input tax cannot be deducted twice; once by the supplier and once by the customer.

5. Restrictions on Recovery of Input VAT

This case concerned Grupa Lotos S.A., a parent company to a group of companies in Poland, operating in the fuel and lubricants sector. Polish law excludes the recovery of input VAT incurred on overnight accommodation and catering services with limited exceptions where the cost relates to a supply of tourism services or, in the case of food, the provision of microwave meals to passengers. This provision in domestic law predates Poland’s accession to the EU however it was extended in 2008 to further exclude all overnight accommodation.

The dispute in the domestic court concerned whether Grupa Lotos could deduct VAT incurred on accommodation and catering services purchased, in part, for its own use and part for its subsidiaries. Grupa believed it should be entitled to recover a portion as it was not the consumer of the services and VAT is a tax on the consumption of goods or services. The Polish tax authorities disagreed and claimed that the Polish law made no distinction between the consumption and purchase for resupply of these services.

The matter was referred to the CJEU, the question being whether EU law must be deemed to preclude legislation such as the Polish law in question after its accession to the EU and whether domestic law can extend pre-existing exclusions after accession to the EU.

Giving consideration to the nature of the VAT system and relevant case law such as Iberdrola, the Court turned to look to Article 176 which provides that Member States may maintain restrictions on recovery which were in force before their accession to the EU. It was held that the Polish law, as it was in place prior to Poland’s joining the EU, was valid but that EU law would preclude the introduction of legislation akin to this were it to be introduced whilst any given Member State was within the EU. Therefore the extension to the exclusion in 2008 was invalid.

The question of VAT recovery in this particular case has been referred back to the domestic courts to determine if the supplies involved are ‘tourism services’.

Constable Comment: This case serves as a reminder of how EU law works. Whilst “direct effect” means EU law takes precedence where domestic law is incompatible with new EU laws, where a country joins the EU and becomes a member state, direct effect does not apply retrospectively. This is interesting given the current climate with five nations seeking to join the EU; they may be allowed to keep certain restrictions but will not be allowed to extend them if they successfully enter the EU.

 

Constable VAT Focus 28 February 2019

28th February 2019

HMRC NEWS

Find Software that is Compatible with Making Tax Digital for VAT

Check which software packages are compatible with Making Tax Digital for VAT.

HMRC Impact Assessment for the Movement of Goods if the UK leaves the EU without A Deal

The impact assessment originally published on 4 December 2018 has been updated to include the impacts on the customs, VAT and excise regulations laid before Parliament in January 2019.

HMRC Impact Assessment for the VAT Treatment of Low Value Parcels

Again, the original impact assessment has been updated.

 

BREXIT ALERT

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then. It is essential that any traders or businesses which may be affected by changes in VAT procedures make plans to ensure a smooth transition.

Businesses trading with the EU need to consider the following:

If goods are moved

  • Getting an EORI number
  • Registering for simplified import procedures

If electronic services are supplied

  • Registering for non-Union MOSS in an EU member state as soon as possible after 29 March if there is no deal.

If goods are supplied to consumers in the EU under distance selling rules

  • Maybe VAT registrations are required in other EU countries?

If VAT is paid in other EU member states

  • Claims for 2018 must be submitted before 29 March 2019
  • How will this VAT be claimed after Brexit?

HMRC has updated its online guidance on the above, which can be viewed here.

Contact Constable VAT if any of the above will affect you or your business, we are happy to advise on any VAT related matter.

 

CONSTABLE VAT NEWS

Remember to enrol for Making Tax Digital on time and during the right enrolment window for your VAT accounting periods. Constable VAT have analysed the enrolment windows and our summary can be found here.

 

CASE REVIEW

CJEU

 

1. The Exemption for Goods Imported to be dispatched to Another EU Member State

This case concerned whether the exemption for import VAT on goods arriving in an EU member state to be dispatched immediately to another EU member state and whether domestic tax authorities can disapply the exemption where tax evasion is involved.

Vetsch is an Austrian company which acted as a tax representative for two Bulgarian companies, “K” and “B”. Vetsch submitted declarations stating that goods imported from Switzerland, by K and B, benefited from the exemption for goods imported for subsequent dispatch. However, the subsequent dispatch did not occur and Vetsch became liable under Austrian law, as representative, for the import VAT which should have been paid.

Vetsch appealed against a decision from the domestic tax authorities to that effect but the appeal was refused. Vetsch brought an appeal on a point of law before the domestic Courts which led to the CJEU referral.

The Court came to the conclusion that, as Vetsch was unaware and there was no evidence to support the idea that it knew or ought to have known about the subsequent evasion that the exemption could not be refused.

Constable Comment: This case shows how at an EU level, the strict interpretation of the law is not always adhered to if it creates inequitable results. In finding that Vetsch did not know and would not have known if carrying on business as a reasonable person would, the Court has upheld the idea of equity.

 

2. Retroactive Application of Implementing Decisions

This case concerned the application of the Decision authorising the Hungarian Government to apply the reverse charge procedure enshrined in EU law. The Hungarian tax authorities were notified of their authorisation in December 2015 but sought to rely on the implemented provision to retroactively assess Human Operator Zrt. for the January 2015 VAT return.

The question before the Court in this instance was whether EU law precludes national legislation from retroactively applying measures authorised in an Implementing Decision where that Decision does not make a comment on the retroactive applicability of that Decision or give a date on which it comes into effect.

The Court gave consideration to the principles of legal certainty and the protection of legitimate interests. They concluded that the requirement of legal certainty must be observed very strictly when it comes to rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which the rules impose on them. It was also held that these principles must mean that EU law can only apply to situations after they have explicitly come into force.

In the absence of a provision in the Decision suggesting a different date for it to bite, the Court considered that it must be taken to be effective from the date on which it was published.

Constable Comment: This case is a good demonstration of how the CJEU seeks to protect the rights of individuals and businesses against the State. The fundamental principles of the EU and the spirit of the law are given a great degree of influence in the European Courts. This decision has prevented a seemingly unconscionable result.

 

First Tier Tribunal

3. Electric Blinds in a DIY Build

This case concerned the right to deduct input VAT incurred in relation to a DIY house build by Mr David Cosham. Mr Cosham designed an “eco-build” property and sought to recover input VAT on building materials used under the DIY housebuilders scheme. HMRC accepted certain elements of the claim but rejected the element which related to electric blinds installed at the property, asserting that electric blinds are not within the definition of “building materials” for VAT purposes associated with the scheme.

Appealing HMRC’s decision, Mr Cosham claimed that the blinds did fall within the definition as they are “ordinarily incorporated by builders in a building of that description”. He contended that “buildings of that description” should, in this case, be taken to mean “eco-builds”.

Giving some consideration to relevant case law, the Tribunal found that “eco-builds” were a well-established market sector and could be recognised as a distinct type of property. The onus was put on Mr Cosham to show that blinds such as those in question were “ordinarily incorporated” into properties of this description. Mr Cosham could produce no such evidence so his appeal was denied, the Tribunal holding HMRC’s decision to be correct.

Constable Comment: This conclusion drew on previous case law such as Taylor Wimpey and came to the conclusion that “eco-builds” are to be treated as a class of property in themselves. This is interesting as it could be argued that, compared to older housebuilding practices, the vast majority of new build homes are definable as “eco”. This case has opened up the question of what exactly is ordinarily incorporated into an “eco-build”. It is unsurprising that HMRC pursued this point. Blinds more generally are objected to by HMRC despite losing a previous case at the First Tier Tribunal on a related point.

 

4. Deception: A Supply of Goods or Services?

This case concerned Mr Owen Saunders who had been found guilty of taking money in exchange for work he promised to perform but never had the intention of performing. He had been found guilty as a criminal and been sentenced to time in prison as well as having been served a confiscation order for in excess of £60,000. The confiscated funds had been divided equally amongst his victims by way of compensation for their loss.

HMRC contended that Mr Saunders was engaged in a business activity and should have been registered for VAT. The Tribunal believed that the crucial issue was whether or not there had been a supply for a consideration made in the furtherance of business. Giving consideration to the examples of drug dealers (who can pass title in goods) and fences (who cannot as they never gained title) as well as the definition of a supply in accordance with VAT law, the Tribunal held that there was no supply by Mr Saunders for the monies he received.

The assessment and associated penalties against Mr Saunders were quashed, it was held that his conduct had led to a “total failure of consideration” which was evidenced by the fact that 100% of the confiscated money was paid back to the victims.

Constable Comment: This was an interesting case in that it analysed Mr Saunders as akin to a drug dealer or someone fencing stolen goods. A particularly interesting point raised was the fact that a drug dealer can pass title to his goods and thus his turnover represents supplies and consideration so, in turn, could create an obligation to register for VAT. This illustrates the point that a lack of compliance with the law does not discount the supplies made from turnover for VAT purposes.

 

Constable VAT Focus 14 February 2019

14th February 2019

HMRC NEWS

Check When a Business Must Follow the Rules for Making Tax Digital for VAT

Find out if and when you (or your clients) need to follow the rules for Making Tax Digital for VAT.

Use Software to Submit Your VAT Returns

If you submit VAT returns as a sole trader, limited company, partnership or as part of a VAT group, you may be eligible to join the Making Tax Digital Pilot for VAT.

Making Tax Digital for VAT as an Agent

Follow these steps if you are an agent and you want to submit VAT returns for your clients digitally.

 

CONSTABLE VAT NEWS

 

We have an upcoming Breakfast on 27th February where we will discuss the impact of Brexit on VAT. Please book yourself a spot as food will be provided for those with reserved spaces. For details, please see here.

The CIOT have released a useful illustration of when businesses must register for the Making Tax Digital pilot for VAT. Our analysis can be found here.

 

CASE REVIEW

 

CJEU

 

1. Evidence in Criminal Prosecutions

This case concerned the EU law around the collection of VAT as well as the general EU principle of effectiveness. The main case focusses on a Bulgarian VAT offence but the questions before the CJEU in this instance concerned whether EU law must be interpreted as precluding a national court from applying a national provision excluding evidence which was obtained illegally.

Petar Dzivev and others were charged with having committed fraud in Bulgaria and sought to profit by not paying over tax owed to the Bulgarian tax authorities. A Bulgarian Court ordered that telecommunications between Mr. Dzivev and others involved should be intercepted.

It is common ground that the Court which authorised the interception did not have the necessary jurisdiction to do so, therefore the interceptions were not in accordance with the law of the Charter of Fundamental Human Rights.

The CJEU held that in cases such as this, EU law cannot require a national court to disapply a procedural rule preventing the state’s reliance on illegally obtained evidence. It was observed that even in situations where only this type of evidence is capable of proving that the offences were committed, EU law still may not prevent a national court from excluding evidence obtained illegally.

Constable Comment: In this instance the right to privacy given to individuals under the Charter of Fundamental Human Rights was given priority over the ability of the state to effectively collect taxes under the principle of effectiveness. It is not a surprising result but it is demonstrative of the EU’s tendency to confer rights on individuals over member states.

 

FIRST TIER TRIBUNAL

 

2. Agent or Principal?

This case concerned whether or not Mr Bryn Williams was acting as an agent or a principal in relation to the taxi business which he operates. He takes bookings for and tenders for contracts with local authorities who provide cab travel. He sends his drivers out to complete the contracts he signs.

HMRC contended that he acts as a principal, supplying taxi services to local authorities and, in turn, receiving taxi services from drivers, all for a consideration. They stated that Mr. Williams owns some of the cars himself and he bears the running costs of the contracts, which were negotiated without driver input. Mr. Williams argued that he was an agent, highlighting various factors pointing to this such as the fact that drivers could negotiate fess with him and keep their cars at home.

As with all agent or principal cases, regard was given to the material aspects of the operation as opposed to the strict wording of contracts. The Tribunal considered the nature of the connection between the driver and the local authority who Mr. Williams paired up. A typical agency situation would involve Mr. Williams negotiating on behalf of a driver, ultimately to form a contract between the driver and the local authority.

It was found that when Mr. Williams was negotiating the contracts with the local authorities there was no pre-determined driver meaning that there was no relationship between the local authority and the driver. Therefore it was held that Mr. Williams must be acting as a principal as there was no driver on whose behalf he was acting.

Constable Comment: This case shows the delicate balance of factors that determine whether someone is an agent or a principal. Due regard must be had to the contracts in place but also the commercial reality of the transaction. This case highlighted some useful areas of consideration and if your business operates in a similar way to Mr William’s, it is essential to ensure it is operating correctly to avoid unexpected VAT bills in the future.

 

 

3. Reasonable Excuse: Default Surcharge

This case concerned Ms. Chandler, a VAT registered sole trader who used the Flat Rate Scheme (FRS) to account for her VAT. In 2015 HMRC visited her and discovered that she had failed to increase the FRS percentage used in line with both statutory increases and the expiration of the “first year reduction” of 1%. HMRC sought to penalise Mr. Chandler but she contended that the default surcharge should not apply to her as HMRC had not taken all payments made by Ms. Chandler into account.

Ms. Chandler had made payments to HMRC but had made them to the wrong account; she had previously traded using a different registration number and mistakenly paid her VAT liability into this account meaning the funds were suspended and held by HMRC. HMRC did not accept this as payment, asserting that in order for a payment to be effective it had to be credited to the correct account. The Tribunal found this to be incorrect. It was found that the VAT regulations only require VAT to be paid to the Controller: which taxpayer account is not mentioned.

Despite this, there were still some historic accounting periods which attracted a default surcharge. For these periods Ms. Chandler argued that she had a reasonable excuse for the lack of funds which rendered her incapable of making payments to HMRC. Whilst an inability to pay cannot constitute a reasonable excuse, the Tribunal is willing to accept that the underlying cause of a lack of funds may indeed constitute such an excuse. Accepting that a fraud committed against Ms. Chandler constituted a reasonable excuse for the remaining periods, the Tribunal held that all surcharges against her were cancelled.

Constable Comment: This case is a useful example of where there is a reasonable excuse for having made late payments to HMRC. Whilst HMRC and the Tribunals are normally reluctant to accept a lack of funds as an excuse for late payment, in this instance there was a clear reason for the insufficiency of funds, the effects of which were being felt later.

 

If these cases raise any points that you would like to clarify or discuss, or you have any other VAT related concerns, please do not hesitate to contact Constable VAT and we will be pleased to assist.

 

 

 

Making Tax Digital Update

13th February 2019

New Information Regarding Enrollment 

VAT registered businesses with a taxable turnover above the VAT registration threshold of £85,000 must Making Tax Digital (MTD) compliant software to submit their VAT returns from 1 April 2019. It is important to ensure that your business enrols into Making Tax Digital at the correct time in order to avoid any potential issues. The CIOT have prepared an illustration to help businesses make sure that they enrol during the appropriate window which is available to view here.

It is important to note that HMRC guidelines state that:

“If you pay your VAT by Direct Debit you will not be able to sign up in the 15 working days leading up to your submission date and the 5 working days immediately after it.”

Whilst the illustration is not a substitute for professional advice it offers useful guidance.

 

Stagger Group 1

Sign up to Making Tax Digital for VAT pilot in order to submit the January to March 2019 VAT return by the 4th May 2019 and by the 4th August for the April to June VAT return.

Stagger Group 2

Sign up to Making Tax Digital for VAT pilot in order to submit the November to January 2019 VAT return by the 4th March 2019 and by 4th June for the February to April VAT return.

Stagger Group 3

Sign up to Making Tax Digital for VAT pilot in order to submit the December to February 2019 VAT return by the 4th April 2019 and by 4th July for the March to May VAT return.

Monthly VAT Returns

Sign up to Making Tax Digital for VAT pilot in order to submit the January 2019 VAT return by the 4th March 2019 and by the 4th April 2019 for the February VAT return.

 

Before enrolling for Making Tax Digital it is essential that your business is ready as, once enrolled, it will lose the ability to submit VAT returns through the current channels. Failure to submit VAT returns will continue to attract penalties as it does now.

If you feel that you are not ready for Making Tax Digital for VAT, you should already have been registered for VAT or need any assistance with your VAT affairs prior to enrolment do not hesitate to contact Constable VAT for assistance or clarification.

International VAT Post-Brexit: Breakfast & Discussion

8th February 2019

                                                                                     

  International VAT Post-Brexit

Breakfast & Discussion with Constable VAT

 

 

Guidance On:

 

Buying and Selling Goods Cross-border Post-Brexit

International Supplies of Services

Impact on Cross-border VAT Recovery

The Future of Specified Supplies

 

Open Q&A to follow the presentation

 

27 February 2019

8AM – 10AM

Directions: Holiday Inn Express Colchester

Contact us to book your space for breakfast

Call: 01206 321 029

Email: alex.raynes@constablevat.com

Constable VAT Focus 01 February 2019

1st February 2019

HMRC NEWS

Goods or Services Supplied to Charities

Find out when suppliers can apply the VAT zero rate VAT for advertisements and goods used for the collection of donations.

Software Suppliers for Sending VAT Returns

Find out which software packages support the Making Tax Digital pilots.

VAT Supply and Consideration

Payments that are not consideration: Grants. This section of guidance will help you determine whether a payment described as a grant is consideration for a supply of goods or services and will be of particular interest to charities and other not-for-profit organisations in receipt of grant funding.

Customs, VAT and Excise Regulations: Leaving the EU with No Deal

This collection brings together regulations, explanatory memoranda and an impact assessment in preparation for day one if the UK leaves the EU with no deal.

 

CASE REVIEW

 

CJEU

1. The Deductibility of Input Tax Incurred by Branches

This case concerned the Paris branch of Morgan Stanley and whether it was entitled to deduct input VAT it incurred on expenditure relating exclusively to the transactions of its principal establishment in another member state of the EU. The branch carries out banking and financial transaction for its local clients as well as supplying services to the UK principal establishment and had deducted in full the VAT incurred relating to both types of supply. The domestic tax authorities believed that this input VAT should not be fully deductible but that it should be apportioned using the principal establishments input VAT recovery fraction.

The main question which arose before the Court was whether the proportion of recoverable VAT incurred by the branch relating exclusively to the transactions of its principal establishment should be calculated in line with the branches or the principal’s input VAT recovery rate. It was also asked what rules should be applied in relation to expenditure relating to both transactions by the branch and by the principal.

Giving extensive consideration to the wealth of case law surrounding this subject, the Court decided that, in relation to the first question, that neither of the suggested calculations was correct. It was held that in relation to such expenditure, the associated input VAT is deductible in line with a fraction calculated as:

“Taxable transaction which would be deductible if carried out in branches states / Turnover (excl. VAT) made up of those transactions alone”

With regard to the second question of general costs of the branch which are used for both domestic transactions and transactions with the principal branch it was decided that account must be taken, in the denominator of the fraction, of the transactions carried out by both the branch and the principal establishment. The numerator of the fraction must represent the taxed transactions carried out by the branch and the taxed transaction carried out by the principal establishment.

Constable Comment: This confirms that VAT incurred by branches on expenses relating to supporting its head office are recoverable by looking thorugh to the supplies made by the head office. The calculations for the recoverable amount of input VAT are complicated, especially where the look through reveals the head office to be making both taxable and exempt supplies. If your business makes supplies to a head office it would be prudent to seek professional clarification of the correct treatment of input VAT incurred in relation to these supplies. 

 

Upper Tribunal

2. Welfare Services Exemption

The question before the Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality.

The Learning Centre Romford (TLC) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which TLC receives funding. TLC had treated these supplies as exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

TLC argues that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same style of care as TLC but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and TLC were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable Comment: This was an interesting joint case which focussed on an area of disparity between the implementation of EU law in England and other devolved powers such as Scotland and Wales. Whilst there is a difference in the ways in which the law operates in different areas of the UK, the Tribunal found that this is as a result of the devolved powers implementations and not a failure of the UK to adhere to an EU Directive. This decision will also be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, would generating taxable supplies be advantageous?

 

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

This case concerned whether or not there was a direct and immediate link between input VAT incurred by Adullam Homes Housing Association (AHHA) and its taxable supplies of support services. AHHA is a partially exempt business making taxable supplies of support services and exempt supplies of accommodation.

The dispute arose with regard to whether input tax incurred on acquiring, maintaining, repairing and cleaning accommodation can be linked to the taxable supply of support services or if, as HMRC contend, there is no such link and this input VAT is wholly irrecoverable. AHHA sought to argue that the acquisition and maintenance of accommodation was necessary as part of the overall supply made of accommodation based support services.

The Tribunal gave extensive consideration to case law around the issue of attribution of input VAT incurred by a partially exempt business. The conclusion was reached that the costs, whilst related to the provision of accommodation, were incurred in order that the Appellant had clean, safe and secure premises to enable it to bid for accommodation based support contracts. This constituted a direct and immediate link with the provision of support services.

It follows from this conclusion that the inputs incurred by AHHA in relation to maintain the accommodation were residual and fell to be recovered in line with their partial exemption percentage.

Constable Comment: Certain difficulties present themselves when performing partial exemption calculations, one of the most common is in deciding whether particular inputs should be directly attributed to taxable or exempt supplies or if they fall to be apportioned. Where looking through to the recipients onward supplies it can become difficult to ascertain the correct treatment of input VAT in line with the principles highlighted in this case. If your business is partially exempt and the calculations are complicated it is advisable to regularly review the attribution of VAT incurred and to seek professional clarification to ensure compliance if any obligation exists.

 

 

Constable VAT Focus 10 January 2019

10th January 2019

HMRC NEWS

 

VAT MOSS Exchange Rates

December 2018’s VAT MOSS Exchange Rates have been published

VAT Payment Deadline Calculator

Work out the VAT payment deadline for your accounting period. You cannot use this calculator if you make payments on account or use the annual accounting scheme.

Flat Rate Scheme for Small Businesses

Find out how to use the Flat Rate Scheme, who can us it and how to apply to join the scheme.

Importing Goods for Disabled People Free of Duty and VAT

This notice explains how to import goods specially designed for disabled people free of duty and VAT.

 

CASE REVIEW

 

CJEU

 

1. Special Scheme for Travel Agents

This case concerned the supply of holiday residences rented by Alpenchalets Resorts GmbH (Alpenchalets) and subsequently let in its own name to private customers as holiday rentals. Alongside the supply of holiday rental property, Alpenchalets also provided cleaning services and, in some cases, a laundry and “bread roll” service.

Alpenchalets calculated its VAT liability on the basis of profit margin as permitted by the special scheme for travel agents. In 2013 Alpenchaltes wrote to the German tax authorities requesting that it be allowed to apply the reduced rate of VAT (7%). This permission was refused so Alpenchalets brought proceedings before the German Courts which referred the issue to the CJEU for a ruling on whether the supply of a service which is essentially holiday accommodation is subject to the special margin scheme for travel agents and, if so, if that supply could also be liable to the reduced rate of German VAT.

The first question asked whether the activity of supplying holiday accommodation, alongside ancillary services such as cleaning, could still benefit from the special margin scheme where the agent (Alpenchalets) provided its own services as well as the accommodation bought in from third parties. The Court considered that as the mere supply of accommodation by an agent is covered by the scheme, the ancillary services do not have a bearing on the scheme’s applicability to the supply.

With regard to the second question, The Court found that single services provided by travel agents are not described within the legislation allowing certain supplies the reduced rate of VAT. The supplies made by Alpenchalets were subject to the standard rate of VAT.

Constable Comment:  This case confirms that under EU law, the supply of holiday accommodation on its own is capable of being caught by the Tour Operators Margin Scheme; it is not necessary for other supplies alongside the accommodation. The Tour Operators Margin Scheme is simple in theory but can often cause problems when it comes to practical application. If you are, or think you may be entitled to be, operating a margin scheme then it is prudent to seek professional advice to ensure compliance.

 

2. The VAT Liability of Royalties

This case concerned the VAT liability of royalties payable to an author of an original work of art on the basis of the resale right.

The European Commission contended that royalty payments should not be liable to VAT as they are not payment in exchange for goods or services. The State of Austria sought to argue that such payments should be liable to VAT on the basis that just because the author of a work of art does not take part in the agreement between the buyer and seller of the art, does not preclude taxation of that payment.

In essence, Austria argued that the payment was in exchange for goods or services; the author has created a work of art and has profited from its supply thus establishing a direct link between service supplied and the value given in return.

The Court considered that a supply of goods or services is made for consideration only if there is a legal relationship between the supplier and the customer, in the context of which there is reciprocal performance; the remuneration received by the supplier constituting the value actually given in return for the goods or services supplied. Whilst The State of Austria contended that the royalty payable constituted consideration for an exchange of services giving rise to a legal relationship.

In concluding, the Court ruled that a legal relationship arises only between the buyer and seller of a piece of art, if the sale is a resale then the only legal relationship created is between the supplier and the customer; the artist is not a party to this relationship. Therefore there should be no VAT payable on royalty sums received.

Constable Comment: Giving consideration to some of the fundamentals of the VAT system and contract law was helpful in this case. This case is useful as a demonstration of how the European Commission can seek to enforce a uniform interpretation of the VAT law.

 

Upper Tribunal

 

3. Exemption for Management of Special Investment Funds

This appeal by Blackrock concerned the VAT exemption for the supply of management services which relate to special investment funds (SIFs) and whether a single supply of management services to Blackrock could be apportioned between SIF and non-SIF to reflect that exemption.

The Tribunal gave consideration to whether the supply to the SIFs could be seen as one of management services, asserting that it would only be possible to consider apportionment if there was anything to be apportioned: the European exemption applies specifically to management of SIFs, not merely a supply of services to a SIF. Relying on a rich tapestry of case law, the Tribunal concluded that the services supplied to Blackrock were management services and were therefore capable of exemption.

Having decided that the supplies were capable of benefiting from the exemption, the Tribunal turned to the question of whether the single supply to Blackrock was capable of being apportioned in line with its use by Blackrock as relating to SIFs and non-SIFs; non-SIF management being a taxable supply. Blackrock sought to argue that, in order to give effect to the exemption from which the supplies benefited it was necessary to allow apportionment of the supply. This argument had been rejected by the FTT on the ground that if apportionment were to be allowed then a precedent could be set allowing apportionment in relation to other composite supplies where the ancillary element is exempt.

After a length consideration of case law and relevant EU legislation, The Tribunal concluded that it is equally arguable that apportionment of the services should be allowed and that it should not, no conclusion was reached on this topic. The Tribunal stayed the appeal in order to seek guidance from the CJEU.

Constable Comment: This case gave a long and considered analysis of what can and cannot be regarded as management services for the purpose of the exemption in question. Whilst a conclusion was not reached around the apportionment issue, the clarification offered by the considerations given in regard to the first question is no doubt of use to any business supplying management services and seeking to benefit from the exemption. We await a CJEU decision on whether or not apportionment of these supplies is acceptable.

Constable VAT Focus 13 December 2018

13th December 2018

HMRC NEWS

Refunds of VAT in the UK for non-EU businesses

This brief explains changes for verifying claims for VAT refunds submitted by non-EU businesses under the Overseas VAT Refund Scheme.

Software suppliers for VAT returns and the EC Sales List

Find recognised suppliers and software for filing your VAT returns online.

VAT when you buy a vehicle to sell on

VAT registered motor dealers can reclaim the VAT charged and shown on the invoice when they buy vehicles to sell on.

 

CASE REVIEW

CJEU


1. Restrictions on Bad Debt Relief

This case concerned a Portuguese company, Tratave, which was refused the right to adjust the amount of VAT previously paid in relation to supplies to eight companies which are now insolvent. Following an inspection by the tax authorities, the adjustment was disallowed on the ground that Tratave had failed to notify the insolvent companies of its intention to seek bad debt relief against supplies made to them.

The requirement to notify the insolvent companies is a Portuguese restriction which gave rise to the question before the Court; does the principle of fiscal neutrality and relevant EU law preclude national legislation which denies the adjustment of VAT in the event of non-payment where the supplier has not notified its insolvent customer?

The Court posited that the relevant EU law around bad debt relief gives member states discretion as to the requirements they may impose on businesses seeking bad debt relief for VAT. This discretion is to allow member states to effectively combat tax evasion but any extra requirements must not have a significant impact on the VAT system or make it unnecessarily difficult for businesses to recover VAT.

In coming to a conclusion, the Court considered that the obligations imposed were not excessive and did not distort the system of VAT. Tratave had failed to comply with a reasonable domestic requirement for bad debt relief for VAT and, therefore, the Court held that the principle of neutrality and relevant EU law do not preclude national laws akin to those in the present case.

Constable Comment: This case shows that Member States of the EU are given some discretion, albeit not unfettered, in how they apply VAT law. As each country deals with different issues and cultures it is necessary to afford some leeway so the VAT system can be effectively enforced in each domestic region.

 

Upper Tribunal

 

2. Best Judgment Assessments

DCM Optical Holdings Ltd (DCM) appealed against an FTT decision dismissing DCM’s claims that, inter alia, HMRC had acted outside of its authority by retrospectively amending VAT returns which were out of time for assessment. The appeal also concerns assessments made on ‘best judgment’ of underpaid output tax for four VAT periods prior to February 2004.

DCM submitted VAT repayment returns for multiple periods including 07/05 and 12/08 which are the returns in question. HMRC contended that mistakes had been in calculating these returns and amended the returns to reflect the correct calculation of VAT due. It was HMRC’s belief that the method of apportionment used by DCM between taxable/exempt supplies was not appropriate.

DCM asserted at the Tribunal that these returns were out of time for assessment and that HMRC could therefore not refuse the repayments retrospectively. DCM also highlighted that all of the periods prior to February 2004 were out of time for assessment and these should not have been issued.

The Upper Tribunal allowed DCM’s appeal in part, holding that the assessments relating to periods before February 2004 were out of time. However, it upheld the FTT’s decision that there was no time bar preventing HMRC from retrospectively amending a reclaim VAT return. It was stressed that the time limits only apply to the power to assess, not the power to investigate and decide if a repayment claim was correct when submitted. HMRC is allowed, by virtue of section 73(6) VATA 1994, in this case, to raise a VAT assessment one year after evidence of facts

Constable Comment: Opticians supply a mixture of exempt supplies of medical services and taxable supplies of glasses frames. This has given rise to multiple input and output VAT issues for DCM but also for others operating in the same sector. In areas of uncertainty it is essential to seek professional advice when classifying supplies and establishing a method of calculating a businesses’ partial exemption percentage to minimise the risk of any mistakes which could give rise to assessments and penalties.

 

 

 

Constable VAT Budget Focus: Autumn 2018

30th October 2018

 

Philip Hammond has delivered the last Budget before the UK leaves the EU in March 2019. He has based the Budget on an assumption of an average free trade deal being struck between the UK and the EU. However, if no agreement can be reached between the two parties, the Chancellor has stated that a different strategy would be necessary and the UK has been working on contingency plans for different possible Brexit negotiation outcomes. Here we look at the key VAT issues which have been covered in the announced Budget issued but will provide continued coverage of any progression in line with Brexit negotiation results.

 

VAT registration and deregistration thresholds

The VAT registration threshold of £85,000 has stayed at the same level again in this Budget, as has the de-registration threshold of £83,000. It has been confirmed that these will stay in place for the next two years. The effect of this measure, when inflation is factored in, is that there will be an increased number of smaller businesses that are required to register for VAT.

 

VAT grouping eligibility to be extended

The Government has announced that it will extend the eligibility to join a VAT group to certain non-corporate entities in the Finance Bill 2018-19. This extension will allow partnerships and sole traders to benefit from VAT grouping provided the entry criteria are met.

 

The treatment of vouchers from 1 January 2019

The Government intends to introduce legislation to give effect to an EU Directive in the UK providing for the VAT treatment of vouchers issued on or after 1 January 2019. It will impact vouchers for which payment has been made and which will be used to make a purchase.

The aim of the measure will be to harmonise the rules for the taxation of vouchers within the EU and, ideally, to prevent any non-taxation or double taxation of goods or services. This is not a true Budget measure as the new rules were agreed sometime after extensive discussions within the EU.

 

Specified Supplies Order

For a brief summary and an analysis of the Specified Supplies Order, we recently provided coverage of the issues presented by Brexit and the Specified Supplies Order on our website. There has been some clarification around some of the issues associated with the Order offered as part of the Budget 2018. In essence, the Order allows companies who export certain financial services from the EU to third countries to reclaim input VAT on what would normally be an exempt supply giving no right to recovery.

 

HMRC believe the Order is currently being abused by companies who form agreements with associates located outside the EU and re-supply those services back to UK consumers meaning that the company can reclaim the input VAT on the specified supply and gain a VAT advantage. This measure seeks to prevent “looping” by restricting the applicability of the Order to cases where the final consumer is not in the UK. We are not convinced that either existing UK measures or the proposed measures are compliant with the EU VAT directive and, were the UK to remain in the EU, we would be surprised to find that the proposed measure is not challenged in the Courts. Brexit may nullify this consideration.

 

VAT reverse charge anti-avoidance amendment

A measure has been introduced which allows for the disapplication of the existing anti-avoidance provision in relation to any specified reverse charge. Originally the provisions were introduced to prevent criminals avoiding reverse charge measures by supplying non-VAT registered businesses instead and charging VAT. This measure will allow regulations to be made to prevent unintended consequences for small businesses who trade below the VAT threshold which will remain at £85,000.

 

VAT and higher education

It has been announced that the Government will amend VAT law to enable bodies registered with the Office for Students, in the approved (fee cap) category, to exempt supplies of education. This is a measure aimed at ensuring continuity of VAT treatment for English higher education providers following the Higher Education and Research Act 2017. Constable VAT will follow the development of this policy, if your business is likely to be affected then please do not hesitate to contact Constable VAT.

 

Unfulfilled supplies and prepayments

HMRC’s policy around the VAT treatment of prepayments where customers have been charged for a supply but have failed to collect or use what they have paid for and have not received a refund. These prepayments will be brought into the scope of UK VAT from 1 March 2019 and VAT will be due on the prepayment.

 

Increase or decrease in consideration after supply (Regulation 38)

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the supply on which VAT is due, and a corresponding change in the amount of VAT charged.

 

It has been announced that legislation will be introduced to ensure that a credit note is issued to customers who receive a discount to ensure a higher degree of transparency with businesses, ensuring that they do not benefit by reclaiming VAT that should be refunded to either the customer or paid to HMRC.

 

Alternative method of VAT collection for online sales

Following a recent consultation, the Government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. An industry Working Group is to be set up by HMRC to work with relevant stakeholders to consider this further.

 

The effects

If you require further information or assistance on any of the points raised above, please speak with your usual Constable VAT contact.

CVC VAT Focus 13 September 2018

13th September 2018

HMRC NEWS

HMRC and online marketplaces agreement to promote VAT compliance

The list of signatories has been updated with a new addition.

Claim a VAT refund as an organisation not registered for VAT

Use this online service (VAT126) to claim back VAT if you are exempt from it as a local authority, academy, public body or eligible charity.

Software suppliers supporting Making Tax Digital

The list of software suppliers supporting Making Tax Digital has been updated.

Cash accounting scheme (VAT Notice 731)

Information on how to account for VAT if you leave the scheme voluntarily or because your turnover exceeds the threshold has been updated.

CVC MAKING TAX DIGITAL UPDATE

 

Paragraph 2.1 of HMRC Notice 700/22 (Making Tax Digital for VAT) states, “With effect from 1 April 2019, if your taxable turnover is above the VAT registration threshold you must follow the rules set out in this notice. If your taxable turnover subsequently falls below the threshold you will need to continue to follow the Making Tax Digital rules, unless you deregister from VAT or meet other exemption criteria (see paragraph 2.2 of this notice).

Only businesses with taxable turnover that has never exceeded the VAT registration threshold (currently £85,000) will be exempt from Making Tax Digital.”

This paragraph appears to suggest that if a business has ever exceeded the VAT registration threshold (including prior to 1 April 2019) the business will be impacted by the new MTD rules. However, the Chartered Institute of Taxation (CIOT) has reported this month that HMRC has confirmed that MTD will only apply where the business’ turnover has exceeded the VAT registration threshold at any time after 1 April 2019. The CIOT are anticipating that HMRC will update the Notice to make this clearer.

Similarly, businesses registered for VAT under the ‘intending trader’ rules will only be subject to the MTD rules when their taxable supplies breach the VAT registration threshold, irrespective of the value of input tax claimed in the interim period.

 

CASE REVIEW

First Tier Tribunal

1. Colchester Institute (Lead Case) – Whether funded education is a business or non-business activity

This appeal by Colchester Institute Corporation (CIC) is against a decision of HMRC to reject an application for repayment of overpaid VAT. CIC receives government funding to provide education and vocational training.

Before the rules on this issue were changed in 2010, CIC wrote to HMRC requesting to use the Lennartz mechanism for input VAT recovery in relation to some construction work. Under this arrangement input VAT was reclaimed in respect of both the taxable business and outside the scope non-business activities. Private or non-business use of the building then gave rise to deemed supplies, chargeable to VAT as such use occurred. HMRC agreed to CIC’s proposal and until 2014 CIC paid over output VAT on non-business use of the building as it arose.

In 2014 CIC submitted a claim for repayment of output VAT on the grounds that the provision of education and vocational training should be regarded as a business activity, regardless of how it is funded, and no output VAT should have been due. Whilst this view would also point to CIC’s original refund claim of VAT on the construction costs being incorrect, the time limits that apply meant that HMRC’s ability to seek a refund of the input VAT was constrained. [HMRC did have an alternative arrangement to deal with this point but this was not considered by the Tribunal.] Effectively, CIC sought a windfall benefit because the output VAT refund it sought was sufficiently recent to allow a recovery from HMRC, whereas the input VAT over claim occurred too long ago for HMRC to seek a rebate.

Giving lengthy consideration to the relevant EU law and UK legislation and, in particular, the potential dissonance between the terms “economic activity” and “business activity, the Tribunal found in favour of HMRC, asserting that the provision of education and vocational training, to the extent that it is funded by the funding agencies, is not an “economic activity.” Therefore, the Lennartz mechanism as it then stood gave CIC a right to deduct VAT and an ongoing liability for the output VAT which CIC sought to reclaim. As a result the appeal was dismissed.

CVC Comment: This case was designated as a lead case and a number of other institutions had their cases stood behind it. It addressed a historical issue but on the underlying points concerning “business” and “economic activities” it highlighted once again how nebulous the legal position can be. It is increasingly difficult to see a clear logic and, as one case follows the other, it seems to us that often there is a great deal of subjectivity and often the position is being construed to deliver a “sensible” outcome rather than the application of clear law to facts. For example, HMRC guidance states quite clearly that an activity cannot simultaneously be both a business and non-business activity which, in some respects, is what HMRC argues with its proportional non-business approach. It is also interesting that more was not made in the case of the acceptability of the UK law leading to ongoing output VAT declarations, bearing in mind that this was a sticking plaster applied when the previous UK law was recognised to be defective following a decision of the CJEU.

 

2. Golden Cube – Whether output tax was understated

In this instance, the appellant trades as a franchisee of Subway. In 2016 it received a VAT assessment when HMRC took the view that certain supplies of food had been incorrectly treated as zero-rated cold take-away food. The Appellant appealed the assessment, stating that the zero-rated supplies were correctly classified.

Three HMRC invigilations took place at the franchise. These revealed a higher percentage of standard rated-sales than Golden Cube declared. The appellant sought to appeal against these invigilations as they took place during weekdays, so did not account for evening and weekend trade. It was also argued that the inspections were carried out at a cold time of year so more people would have been purchasing hot food and eating their food in the premises, leading to a higher degree of standard rated sales. It was also asserted that the till system used at the Franchise was automatic and linked to Subway itself, leaving no room for human error in terms of VAT calculation.

Hearing witness statements from employees and examining the till system used by the Appellant, the Tribunal concluded that there were no systematic issues with staff training and that the till had not been tampered with to display more zero-rated sales than it should. On this basis, it was held that the assessment issued to the Appellant was excessive. Deciding that the Appellant had accounted correctly for all sales and associated VAT, the appeal against the assessment was allowed.

CVC Comment: This case goes to show that the Tribunal will take more into consideration than just the content of an HMRC invigilation. It also highlights the benefits of an electronic till system which automatically records the VAT liability for each transaction individually as it can be used as effective evidence when defending or appealing against HMRC. HMRC is often inclined to collect detailed information for a limited period and extrapolate large under declarations. In our experience, HMRC is more likely to use this as a tool to seek more VAT than is actually due from businesses that have some level of suppression. However, hard evidence of sales is the best defence, bearing in mind that at the stage that HMRC carries out physical observations on sales, it is likely to already have reached the conclusion that the tax is being underpaid and will see everything through this prism. If you have any issues similar to the ones at hand, do not hesitate to make contact with Constable VAT.

 

3. Rowhildon Limited – Belated notification of an option to tax

This appeal is against a decision by HMRC to refuse a belated notification of an option to tax land and property.

The Chief Finance Officer for the appellant provided a witness statement in which she stated that the property was purchased after agreement by the board of the company and she had been asked to deal with the paperwork.

Having completed the form (VAT 1614A) on 1 July 2016 the notification was given to the company’s management accountant who missed the post that day and so posted it the next working day, 4 July. HMRC claim to have never received this notification and requested proof of postage for the form. The appellant conceded that the notification had not been sent recorded delivery. However, it submitted to HMRC the minutes of the board meeting in which there was a decision to opt to tax as well as computer records to evidence that the decision to opt to tax had been made and to show that the form had been completed on 1 July 2016 and their own retained copy of the form. HMRC were unsatisfied with this and refused to accept the notification.

At Tribunal, the appellant demonstrated that the form could not have been back-dated as HMRC’s website does not allow a past date to be inserted when completing the form. The fact that the retained copy showed 1 July 2016 as the date proved that the decision to opt had been made on that date.

The Tribunal found in favour of the appellant, holding that HMRC’s refusal to accept all of the evidence presented to it without proof of postage was remiss. It is concluded that HMRC had no good reason to not accept the notification and that its decision was not made reasonably.

CVC Comment: HMRC should seek to achieve a fair, just and reasonable result in all dealings with businesses and should act in good faith. There may be circumstances in which the law does not give any latitude to HMRC but this was not such a case. This case seems to us to have been unnecessary. As far as we can judge, there is absolutely no suggestion that refusing the taxpayer application was necessary to guard against an unfair tax loss. HMRC seemed to have no reason to question the veracity of the taxpayer’s explanations. Even more importantly, the taxpayer proved that HMRC’s own systems not only supported its assertion but proved them unambiguously. It is difficult to understand why, in supposedly straitened times, HMRC would waste taxpayers’ money and force the appellant to incur costs itself on a case of this kind. We would like to say this is unusual but unfortunately it is not.