Tag Archives: input VAT

Constable VAT Focus 29 November 2018

29th November 2018

HMRC NEWS

Declaration on Future EU/UK Relationship

The UK Government has published a draft of the declaration on the future relationship between the EU and the UK.

HMRC has released its monthly exchange rates for 2018

Here you can find foreign exchange rates issued by HMRC in CSV and XML format.

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

MAKING TAX DIGITAL UPDATE

Economic Affairs Finance Bill sub-committee calls for further delays of Making Tax Digital

The House of Lords Economic Affairs Finance Bill sub-committee has asked the Government to delay the introduction of Making Tax Digital for VAT by at least a further year to give businesses a chance to prepare.

CASE REVIEW

CJEU

1. The Right to Deduct Input Tax

This case concerned an individual, Mr Vadan, who undertook multiple property developments and around 70 property transactions between 2006 and 2009. During this time Mr Vadan’s turnover significantly exceeded the Romanian VAT registration threshold but he had failed to register for VAT. Owing to this the tax authorities sought to recover roughly EUR 4,000,000 in unpaid output tax, penalties and interest.

Mr Vadan appealed against the assessed amount on the basis that he had been refused the right to deduct input tax, despite not having any legible or valid invoices relating to the period. It was, in essence, his assertion that if he had been a taxable person at the time of the transactions and owed output tax to the authorities in regard of those supplies then the tax authorities necessarily owed him the right to reclaim input tax, despite his inability to provide proof by way of VAT invoices. He claimed that the assessment from the tax authorities which contained, inter alia, a Court commissioned Expert report, should create a right to deduct input tax relating to the relevant output tax.

The question referred to the CJEU was whether a taxable person who satisfies the substantive requirements for the right to deduction may be refused the right to deduct on the grounds that they can provide no substantive evidence.

Previously, the Court has held that the fundamental principle of the neutrality of VAT requires that deduction be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some formal conditions. In this instance the Court conceded that the strict application of the substantive requirement to produce invoices would conflict with the principle of neutrality. However, it is considered to be the taxpayer’s burden to prove his right to deduct VAT.

In concluding, the Court considered that the expert report on which Mr Vadan sought to rely to prove his right to deduct could not prove that he had actually paid any VAT so could not be used as proof of a right to deduct that input tax. It was held that a person cannot benefit from the right to deduct input VAT solely on the basis of an expert report.

Constable Comment: This conclusion demonstrates that whilst the right to deduct is absolute, as has been reaffirmed many times by the Court, an assessment to output VAT based on an expert report cannot, in circumstances such as these, give rise to a right to deduct an unquantifiable and unprovable amount of input VAT. Whilst the right to deduct exists, the requirements of proof to exercise that right are not expunged because a business has failed to keep records.

2. Calculating Taxable Turnover by Extrapolation

This appeal concerned a retrospective assessment to VAT served on the appellant, Ms. Fontana, which was based on a “sector study” ordered by the Italian tax authorities who, for several reasons, felt it necessary to do so as there were discrepancies in her own tax returns.

Ms. Fontana challenged the amount of VAT to which she was being assessed, arguing that the tax authorities had incorrectly interpreted her business as “accountancy and tax consultancy” rather than “HR and Management” and had so been incorrectly assessed. She also claimed that the sector study did not give a consistent or fair image of income generated by her company.

This was dismissed but a further question was raised which was referred to the CJEU; whether EU law precludes domestic legislation allowing Member States to assess VAT based on retrospective extrapolation.

The CJEU considered that if a taxable person fails to declare all of the turnover achieved in the course of their business, the tax authorities should not be hindered in collecting VAT as a result. It was concluded that as Member States have a margin of discretion with regard to their means of achieving the objectives and collection of VAT and preventing evasion.

Constable Comment: This result does not come as a surprise and follows the Opinion of the AG. In cases of under declaration of VAT or pure VAT evasion, it is necessary for tax authorities to be able to extrapolate and reasonably calculate estimates of amounts owing. The real question in this case was whether the Italian “sectoral method” was acceptable which the Court has confirmed it to be.

Upper Tribunal

3. Unjust Enrichment of HMRC

This case is an appeal against an HMRC tax assessment on J&B Hopkins Ltd (JHBL). JBHL had made supplies to Rok Building Ltd (Rok) who were in turn providing onward zero-rated supplies to a charity which had provided Rok with a zero-rating certificate for some building works stating that the intended use of the building would be a relevant residential purpose (RRP).

JHBL had incorrectly zero-rated its supplies to Rok believing that the certificate issued by the charity extended to sub-contractors. When this mistake was discovered, JHBL did not correct this by issuing VAT only invoices to Rok as Rok had become insolvent and gone into liquidation.

HMRC assessed JHBL for the VAT which it should have paid on supplies made to Rok. JHBL appealed the assessments on two grounds; primarily that HMRC would be unjustly enriched if JHBL had to pay over VAT which should have been paid by Rok, secondarily that HMRC had failed to exercise best judgment in raising the assessment.

The Tribunal considered on appeal that the correct analysis of the position as regarded the unjust enrichment of HMRC is that any enrichment gained by HMRC would be at the expense of the liquidated Rok, not JHBL who had failed to invoice correctly. Despite its contention that it was the only company “out of pocket”, this was only because Rok had not paid the full price to JHBL as JHBL had failed to invoice correctly. Giving some consideration to historic case law, the Tribunal held that JBHL had made an error in its invoicing and that the VAT owed was actually the expense of Rok, the VAT system does not have an obligation to insulate the taxpayer from making mistakes and therefore dismissed the appeal on these grounds.

Constable Comment: Errors in property transactions can cause significant VAT problems further down the line, as has been demonstrated by this case. It is essential when taking on development projects, especially where a zero-rating certificate is involved, to seek professional advice to ensure compliance from the start of the development. In this case Rok would have been able to recover VAT charged to it by JHBL as this VAT would be a cost component of its own taxable (zero-rated) supplies.

4. Legitimate Expectation – Judicial Review

Vacation Rentals (UK) Ltd (VRL) has been successful in its seeking of Judicial Review preventing a retrospective assessment to VAT. VRL is a booking agent for property owners who wish to lease their homes as holiday lets.

Holidaymakers could reserve properties and make payment online using credit and debit cards for which they were charged a small card handling fee. VRL, following HMRC guidance (BB 18/06), treated these fees as exempt from VAT. A subsequent development in the CJEU ruled that such fees were to be taxable and not exempt as had been HMRC’s published and accepted policy. On the grounds of this change in law, HMRC sought to retrospectively assess VRL to output VAT on all of the supplies of card handling which it had made.

VRL claimed that, whilst not enshrined in law, HMRC’s policy of treating the services of card handling services had created a legitimate expectation that they would not be taxed on these transactions.

In situations where HMRC create a legitimate expectation with the Commissioner’s guidance, HMRC are bound by that guidance even where that expectation has been incorrectly created according to the law. There is a particularly high burden on the taxpayer to prove that the expectation was created by HMRC guidance and that it would amount to an abuse of power by HMRC to not adhere to their own guidance.

This Judicial Review concluded that HMRC had created such an expectation, on which VRL had relied, and therefore that HMRC were bound by their own guidance meaning that VRL need not pay the VAT which it owed following a strict interpretation of the law.

Constable Comment: Whilst this is possibly an unusual result in that the taxpayer has not been ordered to pay VAT in line with the law, it is refreshing to see HMRC has been held to account for misleading businesses and the public with its own guidance. It seems unequitable for HMRC to issue one policy and then retroactively pursue a different one. The Court has here recognised this fact.

CVC VAT Focus 18 October 2018

18th October 2018

HMRC NEWS

HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT. The businesses regarded as complex and a list of the new guidance can be found on our website.

CONSTABLE NEWS

Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. Our coverage of this opinion can be found on our website.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your input VAT recovery position now. Constable VAT will be happy to assist in this exercise.

CASE REVIEW

CJEU

1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.

First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment: This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.

3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services. It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.

CVC VAT Focus 26 July 2018

26th July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

HMRC has published further information on Making Tax Digital to support businesses and agents in the run up to the start of the mandatory Making Tax Digital VAT service from April 2019.

Revenue and Customs Brief 7 (2018): VAT – motor dealer deposit contributions

This brief explains HMRC’s policy on the VAT accounting treatment of promotions where payments are made to finance companies by motor dealers for the customer.

Draft legislation: Amendment of the VAT (Input Tax) (Specified Supplies) Order 1999

This is the consultation on draft amendments to the Specified Supplies Order to address the issue of VAT off-shore looping in the financial services sector.

Registration scheme for racehorse owners (VAT Notice 700/67)

Find out if you can register for VAT under the VAT registration scheme for racehorse owners

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

CASE REVIEW

CJEU

1.Acquisition and holding of shares: An economic activity?

This French referral concerned the letting of a building by a holding company to a subsidiary and whether this would constitute involvement in the management of that subsidiary, giving rise to a right to deduct input VAT incurred on the acquisitions of holdings in the subsidiary. If found to constitute management, the acquisition and holding of shares in the subsidiary would be an economic activity.

Marle Participations (Marle) is the holding company of the Marle Group. It let a building to some of the subsidiaries whose shareholdings it also managed. It conducted a restructuring operation which led to purchases and sales of securities, it sought to recover input VAT incurred in the course of the restructure. During a VAT audit, the tax authorities issued assessments to recover VAT claimed. This was on the basis that the expenditure by Marle was capital in nature and so a right to deduct VAT incurred did not arise. Marle appealed this decision.

The referral from the French court asks whether the VAT Directive must be interpreted as meaning that the letting of a building by a holding company to its subsidiary constitutes involvement in the management of that subsidiary, which must be considered an economic activity.

The CJEU considered case law and the VAT Directive. It was held that the involvement of a holding company in the management of subsidiaries constituted an economic activity where the holding company carries out a taxable transaction. The Court decided that the letting of a building to the subsidiary did constitute an economic activity so there was a right to deduct VAT incurred on expenses relating to the restructuring giving rise to the acquisition of shares in the subsidiary.

However, it was also held that where the holding company is only involved in the management of some subsidiaries but not all, then a fair apportionment method must be used to calculate the amount of input VAT to be recovered.

CVC Comment: This decision is relevant to the recovery of VAT incurred by holding companies. If holding companies make taxable supplies (in this case taxable lettings of buildings to subsidiaries) then, subject to the usual rules, input VAT recovery rights are likely to arise. Restructuring a company and transferring securities can lead to very complex supplies and processes which can be hard to classify. What can, on the face of it, take place as an accounting entry can give rise to a real-life tax liability. Before taking on any restructuring projects professional advice should be sought to provide certainty of compliance.

2. Right to deduct: Transactions did not take place

The Court heard two requests for a preliminary ruling concerning the interpretation of the EU law concerning the right to deduct input tax.

The two companies, SGI and Veleriane, are established and operate in France purchasing equipment intended to be leased to operators in France. Following a VAT audit, the tax authorities challenged the right to deduct VAT on various purchases as the invoices did not relate to any particular delivery and issued assessments of VAT to this effect. Both companies claim to have acted in good faith with regard to these transactions but the referring court highlights that the companies could not have been unaware of the fictitious nature of some of the transactions and the associated overcharging.

SGI claims that, in the absence of any serious indication of fraud, it is not obliged to prove to the authorities that the transactions took place and Valeriane claim the referring court did not consider whether the tax authorities had adduced the necessary proof that it knew or ought to have known that the transactions were connected with VAT fraud.

The domestic Court referred the question of whether the EU law must be interpreted as meaning that, in order to deny a taxable person in receipt of an invoice the right to deduct VAT appearing on that invoice, it is sufficient that the authorities establish that the transactions covered by that invoice have not actually been carried out or whether those authorities must also establish that taxable person’s lack of good faith.

Giving consideration to the principles of legal certainty and fiscal neutrality, the Court held that under the EU law it is sufficient for the tax authorities to establish that the transactions have not taken place and there is no requirement to show a lack of good faith when denying the right to recover input VAT on transactions which have not taken place.

CVC Comment: The right to recover input VAT arises when VAT becomes properly chargeable. If no supply can be evidenced to have been made in relation to the invoice giving rise to a claim to deduct VAT then the VAT incurred is not deductible. It is important to be aware of supply chains and to ensure that each transaction actually takes place before submitting a VAT reclaim to avoid unexpected tax assessments.

Supreme Court

3. Relying on claims made by a former member of a group VAT registration

This appeal by HMRC concerns the validity and timing of claims for the repayment of incorrectly paid VAT by Carlton Clubs Limited and whether those claims could be relied on by the representative member of a group VAT registration.

HMRC had refused a number of claims for repayment of incorrectly paid VAT made on behalf of Taylor Clark Limited (TCL) by a subsidiary. TCL was the representative member of a VAT group registration which contained Carlton Clubs Ltd (CCL) by whom the claims were made as it carried on the activity of Bingo to which the claims related. TCL contended that these claims should be recoverable by itself as the representative member of the VAT group, highlighting that CCL was no longer in the group.

The FTT held that the subsidiary would have been entitled to the repayment of VAT and TCL could not rely on the claims as they were not made by TCL. The UT found that whilst TCL may have been able to reclaim VAT it did not make a claim for repayment within the time limits allowed, therefore there could be no repayment. The Court of Session, however, ruled in favour of TCL, stating that a claim may be made on behalf of the representative member of a VAT group by a former member and subsidiary.

The Supreme Court has ruled that the Court of Session erred in finding this to be the case. It was held that HMRC’s liability for overpaid output tax is owed to the person who accounted for the VAT (CCL). Unless CCL was acting as an agent to TCL at the time the claims were submitted, the claims cannot be relied upon by TCL now. After extensive consideration of the relationship between TCL and CCL, the conclusion was that CCL was not acting in the capacity of an agent by submitting the claims. The Supreme Court held in favour of HMRC and allowed their appeal.

CVC Comment: This case serves as a reminder of the importance of considering who is entitled to benefit from claims for overpaid VAT in the context of a group VAT registration. A consequence of VAT grouping is that any business activity carried out by a group member is treated as if it is done by the representative member.

UTT

4. Direct and immediate link with main economic activity

This appeal concerns whether a company established outside the EU is entitled to recover input VAT on the cost of tools leased to an EU company for no consideration. JDI is incorporated in the Cayman Islands and is part of a group of companies (The Baker Hughes Group). The FTT had previously agreed with HMRC that there was not a sufficient link between the acquisition of the tools by JDI and an economic activity to allow repayment of the VAT incurred.

JDI acquired the tools as part of a company restructure along with the intellectual property rights for the tools, VAT was charged on this supply which JDI sought to recover. The intellectual property gave JDI the right to manufacture further tools and spare parts. Rather than producing the tools itself, it gave out contracts to manufacturing companies to fabricate them. JDI paid the manufacturing companies for this but made no charge to the Baker Hughes Group in the Netherlands when leasing the tools to them. It contended that its main economic activity is the supply of spare parts to companies using the tools and therefore that there is a direct and immediate link between the acquisition of the tools and its main economic activity.

The Upper Tribunal agreed with the FTT and HMRC that the required direct and immediate link had not been established. There was no charge for the leasing of the tools. They were not connected with a taxable supply, VAT incurred was irrecoverable. It was also confirmed that JDI was not, in this capacity, acting as a taxable person.

CVC Comment: This case serves as a reminder of the importance of considering all aspects of arrangements entered into with connected parties. VAT incurred is recoverable to the extent that it relates to taxable business supplies. In this case as there is no charge for the lease of the tools there was no connection with the original purchase of those tools to a taxable supply so input VAT was wholly irrecoverable.

5. Place of supply rules

This appeal concerns the place of supply for the supply made by IC Wholesale Limited (ICW), a UK company, to customers in the Republic of Ireland of cars acquired in Cyprus and Malta. ICW contended that as it had invoiced the customers in Ireland before the cars left Malta and Cyprus, despite the fact that the cars entered the UK, the supplies took place outside of the UK and therefore should not bear UK VAT.

The FTT found against ICW, concluding that the supplies had taken place in the UK as the cars physically arrived in the UK before being sold. It was also noted that ICW held insufficient evidence to demonstrate that the cars had been removed from the UK.

The UT agreed with the FTT, asserting that ICW used its UK VAT registration number when ordering the cars and the cars physically entered the UK. The suppliers were not informed that the vehicles would be re-sold and, in the absence of sufficient evidence of export, ICW must be treated as acquiring the goods in the UK and therefore the appeal must be dismissed.

CVC Comment: When exporting goods it is essential to retain evidence in order to support zero-rating of the supply. The place of supply rules are also important and should be borne in mind for each transaction involving the movement of goods into and out of the UK. For advice with any place of supply issues please contact CVC as there could be significant financial implications if VAT accounting errors are made.

6. Business/non-business apportionment

The Tribunal considered a claim for repayment of VAT relating to services supplied by NHS Lothian Health Board (LHB) to non-NHS, private customers such as local authorities. It was an agreed fact that VAT had been incurred and paid but not recovered by LHB in the period from 1974-1997.

The FTT originally rejected the claim for repayment on the basis that a business/non-business apportionment had not been calculated to an adequate extent. The FTT gave some consideration to partial exemption and direct attribution. This appeal focussed on whether this was incorrect. The appellants asserted that it was an error to consider direct attribution and partial exemption when all that was required was a business/non-business apportionment.

The UT found that it would have been an error of law for the FTT to rely on partial exemption principles when apportioning business/non-business activities for the purpose of input tax recovery. However, whilst the FTT did discuss partial exemption, the UT was content that the FTT had not relied on it and that they instead relied on the reasonableness of the proposed apportionment.

It was held that the FTT was entitled to find the proposed business/non-business apportionment unreasonable and its decision to reject the claim for input VAT recovery from 1974-1997 stands.

CVC Comment: In this case LHB sought to retrospectively extrapolate a partial exemption recovery percentage from a specific period from 2006 to 1997. Before making a retrospective claim for input VAT recovery it is important to be clear on the appropriate methodology. In cases where the business is not fully taxable an apportionment is required to reflect non-business or VAT exempt business activities. If you think your business or charity may be entitled to a retrospective repayment of VAT incurred on costs that cannot be directly attributed to taxable supplies please do not hesitate to contact CVC to discuss the best strategy for your individual case. Please remember that, if VAT registered, retrospective claims are capped at four years.