Tag Archives: input VAT recovery

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 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 March 2019

28th March 2019

HMRC NEWS

Trading With the EU if the UK Leaves Without a Deal

HMRC has updated its guidance on  leaving the EU  in particular to reflect the fact that there is to be an extension to arrangements already announced regarding the use of Transitional Simplified Procedures (TSP), which will make importing goods easier.

Impact Assessment for VAT and Services if the UK Leaves Without a Deal

HMRC has released an impact assessment on the effect on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU.

VAT Treatment of Pension Fund Management

The policy of allowing insurers to treat all pension fund management services as exempt from VAT under the insurance exemption is to be discontinued. This policy change applies from 1 April 2019.

 

CASE UPDATE

CJEU

1. Exemption for Letting Immovable Property

This case concerned the interpretation and applicability of the VAT exemption for the letting or leasing of immovable property. The Portuguese tax authorities assessed Mr. Mesquita for VAT on contracts relating to the transfer of the use of vineyards for agricultural purposes for a period of one year. These transactions had been treated as exempt from VAT.

The question before the Court was whether the exemption for letting immovable property related to this contract.

The Court considered that the purpose of the EU law conferring the exemption on certain transactions was owing to the fact that the leasing of immovable property is normally a relatively passive activity which does not generate a large amount of income.

Where services are supplied along with the immovable property in a single transaction, such as supervision or maintenance, then the whole transaction is subject to VAT. However, the Court found that there were no services provided with the vineyards so the exemption could be applicable.

Constable Comment: The contract in the main Portuguese proceedings led to what the tax authorities believed to be a transfer of assets thus creating a taxable supply. The Court held that even if assets are transferred in this type of contract, they are ancillary to the main supply and the exemption still applies to the whole contract value.

 

Supreme Court

2. Education Exemption: Meaning of “eligible body”

This appeal concerned the criteria to be applied when determining if a particular body is eligible for the purposes of the VAT exemption afforded to certain bodies providing education to students.

The appellant, SEL, the English subsidiary of a Dutch company, contended that its supplies of UK education were exempt from VAT as it was a college of Middlesex University (MU). It appealed against assessments to VAT raised by HMRC. The appeal was allowed in the First Tier Tax Tribunal but it was escalated by HMRC and eventually ascended to the Supreme Court.

MU is a UK university and as such benefits from the exemption from VAT. This exemption is, under UK law, extended to “… a university and any college, school or hall of a university”. The Court, therefore, gave some consideration to what constituted a college of a university and observed that the “integration test” employed initially by the First Tier Tribunal was correct. The following five factors must be considered in arriving at a conclusion as to whether a particular undertaking can be considered a college of a university:

  • Whether they have a common understanding that the body is a college of the university
  • Whether the body can enrol students as students of the university
  • Whether those students are generally treated as students of the university
  • Whether the body provides courses of study which are approved by the university
  • Whether the body can present its students for examination for a degree from the university

In examining whether or not these criteria applied to SEL and its arrangements with MU, the Court concluded that the exemption did apply to SEL which had been referring students for degrees from MU since the beginning of their arrangement in the 1980s. It was found that there is no need for there to be a constitutional association with a university in order to be a college of that university.

Constable Comment: The criteria laid down in this instance for determining whether or not a body is eligible are not intended to be definitive and the Court observed that, in each instance, regard must be had to the individual facts of each arrangement between a university and an associated body.

 

Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

This case concerned whether or not input VAT incurred by a company in defending its director was deductible by that company as input tax. Mr. Ranson left a company, CSP, and set up his own rival firm in the same area, taking three employees with him. It was alleged by CSP that he had breached his fiduciary duties and also that he had misused a contact list from CSP for establishing his own business. CSP sought an account of profits earned by Mr. Ranson as a result of his breach of duty and sought to recover funds from Praesto.

In defending against these claims, Mr. Ranson instructed solicitors who were successful in his defence. The issue arose as a result of the solicitors addressing one invoice to Praesto and a further eight to Mr. Ranson individually. HMRC did not dispute the deductibility of the input VAT in relation to the invoice addressed to the firm but disputed the others as a result of the addressee.

VAT incurred is deductible so far as it has a “direct and immediate” link with the company’s taxable supplies. However where the legal costs form a part of the cost components of the company’s supplies it is also accepted that they have a direct link with the company’s economic activity as a whole.

HMRC placed a lot of emphasis on the fact that the invoices being disputed were addressed to Mr Ranson. Mr Ranson argued that Praesto were party to the proceedings in all but name and there was a direct benefit to the company in defending him. The economic reality of the situation was the solicitors were defending both Mr Ranson and Praesto.

The Court agreed with Mr Ranson that there was a direct benefit to Praesto in defending claims against him as if the claims had succeeded against Mr Ranson, CSP would have sought to recover profits made by Praesto. It was concluded that the VAT incurred by Praesto in mounting a defence against the allegations of CSP was, indeed, deductible.

Constable Comment: This is an interesting topic as, more often than not, the actual receipts and contracts are looked through to the economic reality of the supply. Whilst this appeal was allowed, one judge dissented, believing the fact that the invoices were addressed to Mr Ranson personally to be fatal to the appeal. This type of case will always need to be considered carefully, it is prudent to seek professional advice in relation to input VAT recovery in this scenario.

 

4. Default Surcharge: Reasonable Excuse

This appeal against a default surcharge turned on whether or not the applicant had a reasonable excuse for late payment. The appellant argued that he was unable to log in to the online gateway necessary for making VAT payments.

Mr Farrell received a notice of liability to surcharge which required payment by 7 May 2017. He was unable to log in to the Gateway using the information he previously saved in his computer. When he contacted the webchat he was told that he needed to speak to technical support. Technical support informed Mr Farrell that they could not deal with his enquiry until after 8 May 2017; after the due date for payment of the surcharge.

On the 8 May he spoke to the technical support team and was told that he had been using an incorrect User ID, a new one was sent to him but it turned out to be the first ID he was given before having it changed by HMRC when the Commissioners updated the system. Based on the changing of his logon details, he contended that he was not to blame for missing the payment date.

HMRC denied that his logon details had ever been changed and said there was no record of the webchat which Mr Farrell claimed to have had. Mr Farrell had clear evidence that this was not the case in the form of a saved conversation with Alexander form HMRC’s webchat and his “Browser Password Recovery Report”. This showed that his ID had indeed been changed when HMRC updated their system and that it had changed back to the original.

HMRC sought to argue that Mr Farrell had been using an incorrect ID number and therefore that he was responsible and did not have a reasonable excuse.

The Court held that Mr Farrell made reasonable efforts to pay the VAT due and that it was not clear why HMRC did not have the facilities to deal with Mr Farrell’s enquiry. The appeal was allowed; there was a reasonable excuse.

Constable Comment: This case demonstrated that HMRC do make mistakes when dealing with the taxpayers. It is a useful reminder that it is always prudent to maintain your own records of conversations with HMRC officers in order to evidence advice given or any mistakes made on HMRC’s behalf. We would recommend obtaining an officer name and a “call reference number” when speaking with HMRC.

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 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 15 November 2018

15th November 2018

 

This VAT Focus provides the usual updates of HMRC news, in particular updates on the availability of certain HMRC services in the upcoming planned downtime. We also cover some of the most recent developments from the Tax Tribunal and Court of Justice of the European Union including the decision in the C&D Foods Acquisitions ApS case.

 

HMRC NEWS

 

Service Availability of VAT Mini One Stop Shop

Check for any issues and service availability of the VAT Mini One Stop Shop.

Service Availability of EU VAT Refunds online

Check for any issues and service availability of EU VAT Refunds online.

Service Availability of VAT online

Check for any issues and service availability of VAT online.

Service Availability of EC Sales List

Check for any issues and service availability of ECSL.

Service Availability of Reverse Charge Sales List

Check for any issues and service availability of Reverse Charge Sales List

 

CASE REVIEW

CJEU

 

1. Holdings Companies Recovering VAT

C&D Foods Acquisition ApS was the Danish parent company in the Arovit group which included Arovit Holdings. Arovit Holdings controlled Arovit Petfood which, in turn, owned other companies within the group. C&D Foods provided management and IT services to Arovit Petfood in exchange for a fee to which VAT was added.

The Arovit group failed to repay a loan received from Kaupthing Bank so the group was acquired for EUR1 by the bank. The bank then entered into a number of consultancy agreements on behalf of C&D Foods in relation to selling the shares in Arovit Petfood to satisy the outstanding debt. Having paid the money over for the consultancy, C&D sought to recover the input VAT on the fees.

The Danish tax authorities refused this claim on the grounds that the expenditure by C&D did not relate to their taxable supplies or exhibit any connection with them at all.

The Court held that owing to the fact that there is no connection between the taxable activities of the company being sold and the input VAT incurred on consultancy relating to that company’s sale, the transactions are themselves outside the scope of VAT and, therefore, no right to deduct the VAT ever arose.

Constable Comment: This decision gave much consideration to the rules of holding companies seeking to recover VAT on activities other than purely holding and acquiring shares which is outside the scope of VAT. The rules are complicated and can easily lead to mistakes and there is significant case law relating to holding companies recovering VAT. It is always prudent to seek professional advice before making a VAT reclaim using a holding company involved in a complex business structure.

 

Upper Tribunal

 

2. Exemption for Supplies Closely Linked with 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.

The Upper Tribunal considered that Loughborough Student’s Union (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 the SU. Other supplies which could be associated with education such as stationery were not shown adequately by LSU to benefit from the exemption.

The appeal was dismissed.

Constable 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. Interestingly there was some consideration given to supplies of art materials by LSU which could be associated with education and therefore benefit from the exemption, however LSU failed to show this to any substantial degree.

 

 

3. Amending Grounds of Appeal

This decision relates to an application by Ballards of Finchley Plc (Ballards) to amend its grounds of appeal relating to a historic Fleming claim for overpaid output VAT.

Ballards submitted a claim in 2003 claiming repayment of VAT overpaid during the period from 1 April 1973 to May 1999. Following the decision in Fleming, HMRC wrote in 2017 agreeing to pay part of the total amount claimed subject to certain confirmations and that, if the House of Lords were to overrule Fleming, an agreement to pay back the money to HMRC.

There was correspondence between the parties during which the accountants of the appellant wrote to HMRC seeking to adjust the amount of the reclaim, asserting that the retail price index used by HMRC failed to take into account times of great inflation. It was on these grounds that Ballards sought to amend their appeal. HMRC sought to deny the amendment on the grounds that the claims had already been settled and could, therefore, no longer be subject to the Tribunal’s discretion.

Giving consideration to case law, this decision revolved around whether the claims could be regarded as “completed” by the agreement in 2007. It is an established principle that where a claim has been paid in full the Tribunal has no jurisdiction to amend the grounds of appeal since it can no longer hear the appeal.

The Tribunal decided that, despite the fact that Ballards may have to pay the money back, the claims are to be seen as settled and there is no right to amend their grounds of appeal. The Tribunal also refused to employ discretion in this case on the grounds that “…it would be to no avail.”

Constable Comment: Legislation and case law both dictate that once a claim has been settled or “completed” then it is no longer within the jurisdiction of the Tribunal to analyse that claim. In this instance Counsel for the appellant sought to increase the value of a claim by asserting that incorrect inflation calculations had been performed when calculating the initial claim. This case reaffirms that once an agreement is reached between HMRC and the taxpayer, that agreement is, in most cases, conclusive.

 

 

CVC VAT Focus 23 August 2018

23rd August 2018

HMRC NEWS

Local authorities and similar bodies

Decide which activities are business or non-business for VAT purposes if you’re a local authority or other public body.

Apply for the Fulfilment House Due Diligence Scheme (Notice FH1)

Find out if you need to be registered to store goods in the UK for sellers established outside the EU.

Administrative agreements with trade bodies (VAT Notice 700/57)

Details of administrative agreements relating to VAT on certain specific transactions between members of trade bodies and HMRC.

Software suppliers supporting Making Tax Digital

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

 

CASE REVIEW

CJEU

1. Estonian Sales Tax Illegal?

The issue before the court in this instance was whether Article 401 of the VAT Directive must be interpreted as barring the maintenance or introduction of a local sales tax. The City of Tallinn introduced a 1% local sales tax which affected Viking Motors and other appellants, Viking Motors challenged the legality of this tax on the basis that the EU law on VAT only allows one turnover tax: VAT.

Giving consideration to the nature of VAT and how it is applied, it was concluded that there were sufficient differences between EU VAT and local sales tax for the two to run in tandem. It was held that Article 401 does prevent the introduction of another turnover tax but in this instance, as the cost could be absorbed by the business rather than being passed on to the consumer, the two taxes are sufficiently different to not breach EU law.

CVC Comment: There is a very high degree of scrutiny offered by the Courts when it comes to challenging the legality of domestic laws and taxes under EU law. In this case it was held that the nature of how the tax is applied, despite being materially the same, made the two taxes sufficiently different.

 

2. VAT on Joint Venture Costs

 

TGE Gas Engineering GmbH (TGE) is a company established in Germany which entered into a joint venture with a company called Somague Engenharia SA in Portugal in order to expand a gas terminal in Portugal on behalf of a utility company. TGE obtained a Portuguese tax ID number as a non-established person in that country in order to create an economic interest group to carry out the joint venture.

After this TGE set up a branch in Portugal and obtained another tax ID from the Portuguese authorities. This branch provided services to the joint venture which were charged on to the utility company and it was also invoiced for the costs to TGE in Germany.

The Portuguese tax authorities had previously denied recovery of the input VAT incurred on these costs based on special domestic rules applying to joint ventures. The Court held that Articles 167 and 168 of the VAT Directive and the EU principle of neutrality must be interpreted as preventing domestic tax authorities from regarding a company which has its headquarters in another Member State and the branch which it has in the first of those States as constituting two separate taxable persons. For that reason, they are also prevented from refusing that branch the right to deduct the VAT on the expenses incurred on behalf of the joint venture/parent company.

CVC Comment: The UK tax authorities may view joint ventures as a taxable person in its own right for VAT purposes. In that scenario, it is the joint venture that has the right to recover any VAT incurred, rather than the parties to the joint venture. This serves as a useful reminder that purchase invoices should be addressed to the correct taxable person. The business activities of a joint venture should be considered in its own right, and an obligation for a joint venture to VAT register may arise if the parties arrangements are considered to form a partnership. A joint venture may choose to VAT register voluntarily in order to recover VAT incurred (subject to the usual VAT recovery rules).

 

3. Municipalities: Entitled to deduct?

 

The Polish municipality of Ryjewo constructed a building in Poland and the made a “cultural centre” responsible for the management of the property, allowing them to use the building free of charge. This was allocated as a non-taxable activity for the taxation authorities, despite The Municipalities’ VAT registration, as there was no charge made.

Four years later a part of the building was rented out commercially, The Municipality sought to adjust the deduction of input VAT paid for the building, now attributing this part of the building to a taxable supply. The relevant Polish Minister had reached a decision that VAT was not deductible for The Municipality as the building was not used for an economic activity. This is appealed against.

The Court find in favour of The Municipality, concluding that at the time the building was constructed it was acting in its capacity as a taxable entity and not as a non-taxable Government body. VAT is deductible despite the building having initially been put to 100% non-taxable use by a public body.

CVC Comment: Even though no intention to later use the building to make taxable supplies was declared and there was an argument for no economic activity having previously taken place, the deduction was allowed by the CJEU. This is because the right to deduct input VAT is a fundamental aspect of the VAT system. Ultimately, the first use of the building did not matter as this only determines the initial reclaim, adjustments are to be made in line with changes in taxable/non-taxable use. This case may be of interest to organisations that have made an initial non-business use of capital expenditure on property.

 

First Tier Tribunal

 

4. Gaming Machines and Fixed Odds Betting Terminals

 

The issue before the Tribunal in this instance concerned revisiting the EU principle of fiscal neutrality. The Rank Group (Rank) made supplies of gambling through gaming machines including fixed odds betting terminals (FOBTS) and “casino jackpot machines”. The casino jackpot machines were specifically excluded from the exemption to VAT but FOBTS were exempt from VAT before 6 December 2005 when the definition of “gaming machine” was extended.

Rank made a claim for repayment of VAT which it had charged and accounted for in relation to the jackpot machines on the grounds that the two machines were similar and treating their supplies differently for VAT purposes was contrary to the principle of fiscal neutrality.

After a detailed consideration of relevant case-law and analysing the different types of machines to draw similarities and differences between the two, the Tribunal concluded that, despite certain differences, these differences did not have a significant influence on the average consumer’s decision to use one or the other. The Tribunal found in favour of Rank and allowed the appeal against a decision to deny VAT recovery.

CVC Comment: This case shows that the Tribunal will have regard to how the consumer interprets what he/she is purchasing and the material aspect of the supply. It was observed in the judgment itself that to try to draw distinctions within individual gaming machines and games could lead to absurdities of different rates of tax being applicable to one machine. HMRC will often apply similar tests to that of the Tribunal although when analysing transactions.

 

 

CVC VAT Focus 12 July 2018

12th July 2018

HMRC NEWS

VAT grouping eligibility criteria changes

This latest measure will allow certain non-corporate bodies to join VAT groups. For example a charitable trust which is VAT registered as a partnership may now be able to form a group VAT registration with its wholly owned trading subsidiary.

VAT treatment of vouchers

Draft legislation about the implementation of an EU Directive of the VAT treatment of vouchers.

VAT Notes 2018 Issue 2

This note explains how to receive payments by Bankers Automated Clearing System (BACS) and applications to the Fulfilment House Due Diligence Scheme.

Revenue and Customs Brief 4 (2018)

This brief sets out HMRC’s policy on the changes to the time limits for VAT refund schemes if you are a local authority, police or similar body.

HMRC and online marketplaces agreement to promote VAT compliance

Find out more about the agreement and how it will help build collaborative relationships. The list of signatories has been updated.

OTHER NEWS

CVC advises many charities. Our clients include a number who offer support to vulnerable people and those with disabilities.  The recent decision in Sandpiper Car Hire Limited saw the Tribunal criticise HMRC’s approach to dealing with disabled people.

This article by one of our partners, Stewart Henry, gives an engaging analysis of the Court’s criticisms of HMRC and how it struggles to handle some of the challenges presented when dealing with more vulnerable members of the public.

CASE REVIEW

CJEU

1. Transfer of immovable property from a Municipality to the Treasury

 

This referral from the Polish Court asked whether the transfer of ownership of immovable property owned by the Municipality for compensation constitutes a taxable transaction for VAT purposes where the property continues to be owned by the Municipality as a representative of The Treasury.

 

In this case the State acquired, by compulsory purchase, immoveable property in order to develop a new national road from the Municipality. Concluding that the Municipality is a taxable person, the Court went on to outline three criteria necessary for a taxable supply to have arisen; a transfer of a right of ownership, made in the name of or by order by a public authority and there must have been payment.

 

On analysis of the circumstances in the case, it was concluded that there was a transfer of legal title of the property. With regard to the compensation received, as this was a State purchase of a Municipality piece of land, the purchase was handled as an internal accounting entry which it was argued prevented it being seen as payment for a taxable supply. The Court held that it was irrelevant as there had been consideration for a taxable supply of immoveable property; internal accounting or not.

 

In summary, the CJEU held that in circumstances where there is compensation given in exchange for immoveable property between taxable persons there is a taxable supply for VAT purposes even where the compensation is by way of an internal accounting entry.

 

CVC Comment: A supply of immovable property in exchange for consideration will constitute a taxable supply, even where the consideration is made purely by way of an internal accounting entry. A transfer is a transfer and the Court will be reluctant to read into supplies that they are not taxable transactions in the absence of any substantive evidence to the contrary. Before making any transfer of a significant value, or where operating in a grey-area, then it is always prudent to seek professional advice.

 

2. Buying back shares by transferring immovable property: A taxable supply?

 

The CJEU has responded to a Polish referral asking if the transfer by Polfarmex, a limited company, to one of its shareholders of immovable property as consideration for shares in that limited company by way of a share buy-back constitutes a taxable supply. Polfarmex  argued that the plan was to restructure the share capital of the company by buying shares back and it was therefore not subject to VAT as the transaction did not form part of its business activities.

 

The Court stated as common ground that the transaction proposed by Polfarmex and the shareholder would lead to the transfer of the right of ownership of immovable property and that Polfarmex is a taxable person in Poland. In the absence of any place of supply issues, the main question looked at by the Court is when a supply of goods is made for “consideration”.  It was held that a supply is made for consideration only where there is a legal relationship between both parties which requires reciprocal performance.

 

It was concluded that if the transfer of the immovable property to buy-back shares in Polfarmex would be subject to VAT if the actions by Polfarmex are ruled by the referring Court to constitute a part of its economic activity. The Court did not give direction on this topic.

 

CVC Comment: When restructuring companies and acquiring shares, complex VAT issues arise, as is demonstrated by this case. Before taking on the challenge of restructuring a company it is vital that professional advice is sought in order to ensure the highest degree of compliance is maintained.

 

3. Exemption on imported goods subsequently despatched to a taxable person different to that named on the invoice for the supply.

 

This decision relates to Enteco Baltic (EB), a Lithuanian wholesaler of fuel who imported fuel from Belarus free of VAT as it was to be sold onto third parties in other European Union member states.

 

Complying with relevant EU and domestic rules, EB provided the tax authorities with their own, the supplier’s and the purchaser’s VAT registration numbers and certificates of origin within the relevant time limits prior to import. However, EB’s intended supplies did not go ahead and the fuel was subsequently sold to businesses in other EU Member States. In order to remain compliant and to continue to benefit from the exemption for import VAT when an onward supply to a taxable person in another member state, EB declared this to the tax authorities with the VAT registration numbers of the new intended recipients. Whilst initially the tax authorities accepted this, an inspection in 2014/15 led to a discovery that the recipients’ VAT registration numbers declared on the initial import document did not correspond with those of the actual recipients.

 

In reaching a conclusion, the CJEU held that the exemption from VAT applying in the present circumstances is available where three core criteria are met;

 

  • The supplier has the right to dispose of the goods,
  • The supplier establishes that those goods are shipped to another Member State
  • As a result of the despatch the goods physically move out of the territory.

 

The inclusion of the purchasers VAT registration number on the invoice for the supply is not, therefore, essential, especially in situations such as those in these proceedings where the tax authorities were informed of the situation. It was held that application of the relevant exemption cannot be prohibited unless the supplier intentionally is participating in tax evasion.

CVC Comment: This complicated set of circumstances came down to a three-point test by the Court in order to reach a conclusion. The judgment reached shows that the Court will have regard to the economic reality of the transactions taking place where rigorous application of the law results in an unfair result.

 

Court of Appeal

4. VAT is not recoverable on supplies incorrectly treated as exempt by UK law

 

Here The Court of Appeal considered a question of whether the appellant, Zipvit, was entitled to deduct input tax on services received from Royal Mail which were treated as exempt by UK law at the time of supply but which should have been treated as standard rated according to EU law.

 

Royal Mail believed its supplies to be VAT exempt and it did not issue VAT invoices to Zipvit, nor pay over VAT to HMRC. The contract between the two parties made no comment with regard to VAT. Zipvit contended that it had a right to deduct VAT that should have been charged and should be deemed to be included in the invoices it had already received.

 

Two main issues fell before The Court; was VAT due or paid on the supplies by Royal Mail and whether the lack of VAT invoices barred any input VAT recovery by Zipvit anyway. Ultimately, the decisions of the FTT and UT were upheld by the Court; no VAT was paid over by Royal Mail and no right to deduct had arisen for Zipvit. The judgment focussed particularly on the importance of the lack of VAT invoices issued to Zipvit which ultimately ensured that no right to deduct had arisen.

 

CVC Comment: Zipvit has been a lead case and it will be interesting to see if it is appealed further as there have been many cases “stood behind” this judgment. Whilst this is a disappointing result for the appellants and others, it serves as an important reminder to always give consideration to VAT when drafting contracts in order to avoid complex and potentially costly situations such as the one at hand arising. The decision also emphasises the importance of obtaining correct evidence to support a right to deduct VAT incurred.

 

First Tier Tribunal

5. Failed zero-rating of a disposal of a renovated property

 

This case concerned an appeal against a decision reducing the input tax claim of a property development company.

 

Fireguard Developments Limited (Fireguard) renovated and subsequently sold a property (the property), believing the house had been vacant for ten years making the onward supply zero-rated. To reflect this Fireguard sought to reclaim the VAT incurred on the renovation in respect of the VAT accounting period ending 31 December 2016 on its VAT return. HMRC contended that the property had not been vacant for ten years prior to disposal and therefore that the supply was exempt meaning recovery of input VAT should be restricted.

 

The FTT found in favour of HMRC who submitted PAYE records and electoral role entries to support its position that the property had not been vacant for ten years prior to the refurbishment and disposal. As the property was found not to have been empty for ten years immediately prior to its sale the disposal was exempt and directly attributable input VAT was therefore irrecoverable.

 

CVC Comment: In cases where a business is seeking to benefit from a reduced or zero-rate of VAT it is essential to ensure that all material facts are known. The rules around when the reduced and zero-rates of VAT apply are complex and before taking on any significant or high value land or property related projects it is safest to seek professional advice.

 

 

CVC VAT Newsletter for Charities – May 2018

29th May 2018

Thank you for ‘opting in’ to receive our VAT & Charities newsletter. Following the recent changes surrounding personal data we are grateful for your continued interest in our circulation. We will continue to report on interesting cases, changes in HMRC policy and other topics that we hope are informative.

Please do not hesitate to contact us at any time should you wish to discuss any VAT matters. 

This VAT & Charities newsletter comments on the following:

  1. Input VAT recovery: VAT incurred in relation to investment activity
  2. Zero-rating the construction of a relevant charitable purpose building
  3. Printed matter: zero-rated goods or standard rated service?
  4. Whether local authority received services from its wholly owned not-for-profit company
  5. Application of penalties by HMRC
  6. Permission to appeal out of time 

Court of Appeal 

1. Input VAT recovery: VAT incurred in relation to investment activity 

The Court of Appeal has referred matters raised in The Chancellor, Master and Scholars of the University of Cambridge case to the CJEU for guidance. The Court of Appeal proposes to ask the CJEU for guidance on the following:

  • Where management fees are incurred in relation to a non-taxable investment activity is it possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income?
  • The Court of Appeal also seeks confirmation that its reading of the Sveda decision is correct and that no distinction is to be made between exempt and non-taxable transactions for deciding whether input tax is deductible.

CVC comment: the First Tier and Upper Tribunal previously ruled that VAT incurred in relation to investment management fees could be treated as residual input tax and recoverable to the extent that income derived supports taxable business activities. This is consistent with HMRC’s previously adopted policy and CVC’s experience. If you would like to discuss the recovery if VAT incurred by your organisation please do not hesitate to contact CVC. 

2. Zero-rating the construction of a relevant charitable purpose building

Wakefield College, a charity, appealed against the Upper Tribunal’s decision that construction services provided to it in the course of constructing a new building were not zero-rated for VAT purposes. The supply in the course of construction of a building intended for use for a relevant charitable purpose may be zero-rated. HMRC accept that up to 5% use of the building may be used for purposes other than relevant charitable (i.e. for business activities).

The issue in this case was whether subsidised fees charged to students prevents the zero-rate from applying because the subsidised income represents a business activity.

The Court of Appeal found that the supply of courses by Wakefield College to students paying subsidised fees is a business activity. The Court of Appeal provided the following reasons for its decisions:

  • The sole activity of the College is the provision of educational courses, this is not an ancillary activity.
  • The provision of courses to students paying subsidised fees is significant.
  • The fees paid by subsidised students are significant in amount.
  • The subsidised fees made a significant contribution to the cost of providing courses.
  • The level of course fees was fixed by reference to the cost of the courses.
  • The fees were not fixed by reference to the means of the student.

The College’s appeal was dismissed. 

CVC comment: Wakefield College previously won its case before the First Tier Tribunal; however, HMRC succeeded in appealing the FTT’s decision before the Upper Tribunal. This decision provides further clarification and indicators of ‘non-business’ activities for VAT purposes. The Court of Appeal considered the CJEU decisions in Borsele and Finland, as well as the decision in Longridge on the Thames.

First Tier Tribunal

3. Printed matter: Zero-rated goods or standard rated service?

The Tribunal had to decide if supplies by Paragon Customer Communications Limited (Paragon) to Direct Line Insurance Services (DLIS) amounted to, as Paragon contended, a single supply of booklets comprising of predominantly zero-rated matter or, as HMRC contended, a supply of services of which booklets were not a predominant element. It is also asserted by HMRC that some of the booklets supplied as zero-rated were in fact not supplies of printed matter and so should have been standard-rated.

Paragon supplied various items of printed matter in relation to insurance documents for DLIS including advertising, standard Terms and Conditions, appraisals and reminders. The question came before the Tribunal as a result of a VAT assessment on Paragon who HMRC contended was making a single, standard-rated supply of services based on the preparation and packaging involved in the process of supplying the products, the envelopes used and separate documents which were not part of the main supply i.e. the appraisals and terms and conditions documents. Paragon appealed this assessment by HMRC on the grounds that the supplies made were one composite supply of zero-rated booklets. This was, in essence, a question of single or multiple supply.

Whilst the Tribunal considered various cases, including the single supply criteria in Card Protection Plan and issues of divisibility considered in Levob Verzekeringen BV, the conclusion of the Tribunal was relatively clear; Paragon is successful in its appeal against the assessment. It is held that packaging and delivery of the disputed documents is, in this instance, considered to be a single, zero-rated supply of booklets.  

CVC Comment: this decision may have a wider implication, in particular for charities. Many charities cannot recover VAT incurred because of their non-business and/or VAT exempt activities. HMRC changed its policy some years ago with respect to the VAT liability of direct mailing services (standard rated). This decision may call into questions HMRC’s policy. It will be interesting to see if this decision is appealed by HMRC to the Upper Tribunal.

Court of Justice of European Union (CJEU) 

4. Whether local authority received services from its wholly owned not-for-profit company

A recent Hungarian case (Nagyszénás Településszolgáltatási Nonprofit Kft., C-182/17) before the CJEU concerned supplies between a local government (municipality) and its wholly owned non-profit making organisation (NFP). The NFP, under contract with the municipality, undertook to carry out certain public tasks such as management of housing and other property, management of local public roads etc. The NFP did not issue invoices to the municipality for the services nor did it charge VAT. The NFP argued that the contract did not constitute a contract for the provision of services. The NFP also argued it was a “body governed by public law” and, as such, if it is supplying services those services are VAT exempt.

The CJEU found that where a company performs public tasks under a contract with a municipality this constitutes a taxable supply of services subject to VAT. In addition, the NFP did not meet the conditions to be classified as a “body governed by public law”, it has none of the rights and powers of a local authority. The services supplied do not fall within the VAT exemption for bodies governed by public law. 

CVC comment: many local authorities sub-contract various responsibilities to charities and not-for profit organisations. Increasingly, charities enter into service agreements as opposed to receiving grant funding. It is important to consider the VAT implications of such contracts and agreements. If your organisation is entering into similar arrangements and the VAT treatment is not clear please do not hesitate to contact CVC.

First Tier Tribunal 

5. Application of penalties by HMRC 

Over recent years we have seen a growing trend by HMRC to apply penalties to VAT errors made by taxpayers. In the case of Curtises Limited we saw the interaction of the rarely used annual accounting scheme and the leveraging of a penalty by HMRC.

Curtises Limited was required to submit its VAT return covering the period 1 January to 31 December 2016 no later than 28 February 2017. It failed to do so and, as is usual practice for payment traders (those usually paying VAT to HMRC in each VAT accounting period) HMRC raised a central assessment on 17 March 2017. The central assessment issued was in the sum £35,578. The taxpayer’s payments on account during the year totaled £32,499. However, on 5 April 2017 Curtises Limited made a payment of £46,131.

HMRC contacted the company in May 2017 requesting submission of the VAT return. This was duly submitted (and paid) the following month with a net liability of £215,233.43 owing to HMRC.

HMRC treated the receipt of the VAT return as prompted disclosure i.e. the taxpayer did not submit its VAT return by the due date. It only did so following receipt of a centrally generated assessment by HMRC. HMRC issued a penalty calculated at 15% of the potential lost revenue. This was calculated as follows:

  • Actual net VAT liability owing to HMRC: £215,233
  • HMRC central assessment: £35,578
  • Difference £179,655 x 15% = £26,948.25

The taxpayer lost its appeal. It explained that the business had expanded rapidly and it had found the growth difficult to deal with. It had a good tax compliance record generally; however, the judge found in favour of HMRC. The judge did comment that the quantum of the penalty for “a fairly minor mistake” did appear “harsh” but the law had been correctly applied.

CVC comment: this case deals not just with penalties but annual accounting and HMRC’s issuing of central assessments. Our recommendation is where a charity has a problem in submitting accurate VAT returns that the matter is pro-actively managed and dialogue entered into as soon as possible. In this case, the penalty may have been mitigated in full, or in part, if the taxpayer had contacted HMRC sooner.

First Tier Tribunal 

6. Permission to appeal out of time

Newcastle Under Lyme College (NULC) applied to the Tribunal for permission to bring a late appeal against a decision of HMRC to deny that construction supplies received during 2009 and 2010 should be treated as zero-rated.

NULC seeks to appeal HMRC’s decision dated 23 September 2014. NULC’s notice of appeal was filed on 6 February 2017, over two years out of time. NULC contends that a portion of the construction services supplied and received should be zero-rated on the basis that a portion of the building was intended for use solely for a relevant charitable purpose (RCP), namely, use by a charity otherwise than in the course or furtherance of business. This is on the basis that income received from ‘part-funded’ students is a non-business activity. There is litigation pending in this area in a number of cases, including Wakefield College which is the subject of an appeal to the Court of Appeal. Both NULC and HMRC agree that the case will be unarguable if the Court of Appeal upholds the Upper Tribunal’s decision in Wakefield College.

The Tribunal took into account the amount of VAT at stake in this appeal, why the delay in appealing occurred, as well as the fact that NULC has not presented a consistent case. The Tribunal made the point that permission to appeal out of time should only be granted exceptionally and it should not be granted routinely. Nevertheless, the Tribunal granted permission to NULC to bring a late appeal. The Tribunal considered this appropriate in order to deal justly with this case.

CVC comment: as the Tribunal has granted permission to bring a late appeal, NULC’s appeal will be stood behind the Court of Appeal’s judgment in Wakefield College. Wakefield College has lost its appeal before the Court of Appeal. Therefore, it seems likely NULC’s appeal will also fail. Nevertheless, this case presents an interesting insight into the matters the Tribunal consider in granting permission to appeal out of time. Any appeal lodged must be done so within strict time limits.

 

 

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 Beckett or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@ukvatadvice.com, laura.beckett@ukvatadvice.com and  sophie.cox@ukvatadvice.com.  Alternatively, please visit our website at www.ukvatadvice.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 CVC 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. CVC 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.

CVC VAT Focus 08 March 2018

8th March 2018

PARTIAL EXEMPTION

It is around this time of year that those businesses that are partially exempt are required to calculate their annual adjustment.  This adjustment must be made in the VAT return period ending June/July or August but can be made in the prior period (March/April/May) if a business wishes.  CVC is able to calculate or check these annual adjustments for businesses if required.

 

HMRC NEWS

 

VAT Notice 706/2: Capital Goods Scheme

Paragraph 4.12 of this Notice has been updated for styling purposes. There have been no factual changes.

 

VAT: Fulfilment Business Approval Regulations

HMRC has issued this Tax Information and Impact Note is about fulfilment and storage businesses that handle imported goods on behalf of third parties located outside the EU.

 

Genuine HMRC contact and recognising phishing emails and texts

HMRC has updated its guidance on how to recognise when a contact from HMRC is genuine, and how to recognise phishing or bogus emails and text messages.

 

CVC BLOG

 

Sale of donated goods by a charity – an opportunity to reclaim VAT incurred

In CVC’s latest blog Stewart Henry considers sales of donated goods by charities.

 

CASE REVIEW

 

Court of Justice of European Union (CJEU)

1. Whether local authority received services from its wholly owned not-for-profit company

 

A recent Hungarian case (Nagyszénás Településszolgáltatási Nonprofit Kft., C-182/17) before the CJEU concerned supplies between a local government (municipality) and its wholly owned non-profit making organisation (NFP). The NFP, under contract with the municipality, undertook to carry out certain public tasks such as management of housing and other property, management of local public roads etc. The NFP did not issue invoices to the municipality for the services nor did it charge VAT. The NFP argued that the contract did not constitute a contract for the provision of services; furthermore, the NFP argued it was a “body governed by public law” and as such if it is supplying services those services are VAT exempt.

 

The CJEU found that where a company performs public tasks under a contract with a municipality this constitutes a taxable supply of services subject to VAT. In addition, the NFP did not meet the conditions to be classified as a “body governed by public law”, it has none of the rights and powers of local authority and therefore the services provided do not fall within the VAT exemption for bodies governed by public law.

 

CVC comment: many local authorities sub-contract various responsibilities to charities and not-for profit organisations. Increasingly, charities enter into service agreements as oppose to receiving grant funding. It is important to consider the VAT implications of such contracts and agreements.

 

Upper Tribunal

 

2. VAT liability of timeshare

 

Fortyseven Park Street Limited (FPS) acquired a property, formerly a hotel, and refurbished it in 2002. The property now contains 49 self-contained apartments. FPS sold fractional interests in the property. The agreement under which fractional interests are sold is the Membership Agreement. Members are granted certain occupancy rights and access to exchange programmes. There are three types of occupancy rights: primary use time (up to 21 days in a calendar year) for no rental fee, extended occupancy time (once primary use time has been used, the member can occupy a residence for up to 14 days for a fee), and space available programme.

 

FPS argued that it supplied VAT exempt licences to occupy land. HMRC argued that members did not acquire the right to occupy property as owner, therefore VAT exemption did not apply. If HMRC failed on its first argument, it contended that the services provided went beyond a licence to occupy land and were therefore standard rated for VAT purposes.

 

The UT found that the grant of the fractional interest was the grant of a right to occupy a residence and to exclude others from enjoying such a right with no significant added value; therefore, the grant was VAT exempt. The UT also considered whether the licences to occupy were akin to hotel accommodation and standard rated. The UT set aside the FTT’s decision, finding that FPS did not supply accommodation similar to a hotel. FPS’ appeal was allowed.

 

CVC comment: the UT found that the FTT had erred in law. The FTT focused on the length of the stays, concluding that FPS’ supply was similar to a hotel, rather than on the nature of the right acquired by the members.

 

 

First Tier Tribunal

 

3. Permission to appeal out of time

 

Newcastle Under Lyme College (NULC) applied to the Tribunal for permission to bring a late appeal against a decision of HMRC to deny that construction supplies received during 2009 and 2010 should be treated as zero-rated.

 

NULC seeks to appeal HMRC’s decision dated 23 September 2014. NULC’s notice of appeal was filed on 6 February 2017, over two years out of time. NULC contends that a portion of the construction services supplied and received should be zero-rated on the basis that a portion of the building was intended for use solely for a relevant charitable purpose (RCP), namely, use by a charity otherwise than in the course or furtherance of business. This is on the basis that income received from ‘part-funded’ students is a non-business activity. There is litigation pending in this area in a number of cases, including Wakefield College which is the subject of an appeal to the Court of Appeal. Both NULC and HMRC agree that the case will be unarguable if the Court of Appeal upholds the Upper Tribunal’s decision in Wakefield College.

 

The Tribunal took into account the amount of VAT at stake in this appeal, why the delay in appealing occurred, as well as the fact that NULC has not presented a consistent case. The Tribunal made the point that permission to appeal out of time should only be granted exceptionally and it should not be granted routinely. Nevertheless, the Tribunal granted permission to NULC to bring a late appeal. The Tribunal considered this appropriate in order to deal justly with this case.

 

CVC comment: as the Tribunal has granted permission to bring a late appeal, NULC’s appeal will be stood behind the Court of Appeal’s judgment in Wakefield College. We will keep subscribers updated on the progress of this case.

 

 

4. Whether partial exemption special method fair and reasonable

 

Dynamic People Limited (DPL) provides domiciliary care to patients in their own home (VAT exempt welfare service) and training (subject to VAT at the standard rate). In 2011 DPL incurred costs associated with the purchase and refurbishment of two properties (Unit 1 and Unit 3). In 2012 DPL applied to HMRC for a Partial Exemption Special Method (PESM). The proposed method was a sectorised method which provided that the VAT recovery of costs associated with Unit 1 and Unit 3 be determined by reference to floor area. The VAT recovery of general (residual) costs would be recoverable according to a turnover calculation akin to the standard partial exemption method. Following a visit to the properties HMRC approved this method as giving rise to a fair and reasonable input VAT recovery.

 

With effect from 1 April 2014 DPL formed a VAT group registration. The other companies in the VAT group being non-trading companies which did not use Units 1 and 3. DPL, as representative member of the VAT group, was required to submit a new PESM proposal. HMRC rejected the proposed method on the basis that the method must be auditable by HMRC. DPL must be able to evidence the use of the various areas of the property.

 

The Tribunal found that VAT grouping with non-trading businesses did not result in the method not being fair and reasonable in this case. In addition, the Tribunal considered the proposed PESM to provide a fairer outcome than the standard partial exemption method (despite HMRC’s perceived difficulties in auditing the method).

 

CVC comment: the Tribunal accepted that the operation and audit of a PESM is relevant to the fairness and reasonableness of the method; however, the Tribunal commented that as the new method was identical to the method accepted by HMRC in 2012 to conclude that VAT grouping with non-trading entities that do not use the properties renders the method unfair and unreasonable is perverse.

 

 

5. Essex International College – VAT liability of supplies to students

 

Essex International College appeals an assessment for VAT in the sum of £275k. The College is a private limited company that provides tertiary level education courses accredited by Edexcel. The supplies made by the College to students included tuition and books. Students are charged a single fee. The College treated two-thirds of the fees charged to students as standard rated and one-third as attributed to the zero-rated supply of books. HMRC argued that the supplies made by the College constituted a single standard rated supply for VAT purposes.

 

The Tribunal felt there was insufficient evidence presented before it to reach a firm conclusion. However, based on the fact that students are charged a single fee and there is no opportunity for the student to receive one part of the supply and not the other, the Tribunal found in favour of HMRC that the College made a single taxable supply.

 

The College put forward additional grounds of appeal. First, that the College’s supplies are VAT exempt on the basis that the College is a university. Second, if the College’s supplies are not exempt under UK law they are exempt under EU law. Finally, the introduction of VAT in 1972 was a breach of the UK’s obligation to provide free education. The Tribunal dismissed all grounds of appeal.

 

CVC comment: the burden of proof was on the College to provide evidence that it made separate supplies of tuition and books. The College did not provide the Tribunal with evidence of the supplies it made or any marketing materials. The Tribunal was therefore unable to fully consider the issue of whether the College made single or separate supplies. Based on the agreed facts the FTT could only conclude that the College made a single supply.

 

 

  

We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email laura.beckett@ukvatadvice.com. If you wish to subscribe to the VAT & Charities newsletter please email sophie.cox@ukvatadvice.com.