Tag Archives: overpaid VAT

Constable VAT: VAT & Charities Newsletter

7th June 2019

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

This issue of the Constable VAT & Charities Newsletter covers;

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

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

1. VAT and the Supporting People Programme

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

5. Update to Notice 317

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

6. Update to Notice 701/1

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

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

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

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

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

Constable VAT Focus 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

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.

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 13 September 2018

13th September 2018

HMRC NEWS

HMRC and online marketplaces agreement to promote VAT compliance

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

Claim a VAT refund as an organisation not registered for VAT

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

Software suppliers supporting Making Tax Digital

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

Cash accounting scheme (VAT Notice 731)

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

CVC MAKING TAX DIGITAL UPDATE

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

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

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

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

CASE REVIEW

First Tier Tribunal

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

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

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

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

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

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

2. Golden Cube – Whether output tax was understated

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

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

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

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

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

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

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

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

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

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

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

CVC VAT Focus 26 July 2018

26th July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

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

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

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

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

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

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

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

Help and support for VAT

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

CASE REVIEW

CJEU

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

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

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

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

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

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

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

2. Right to deduct: Transactions did not take place

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

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

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

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

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

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

Supreme Court

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

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

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

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

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

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

UTT

4. Direct and immediate link with main economic activity

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

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

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

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

5. Place of supply rules

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

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

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

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

6. Business/non-business apportionment

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

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

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

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

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

CVC VAT Focus 31 May 2018

31st May 2018

HMRC NEWS

Imports and VAT (Notice 702)

One must now report imports that are over £873 in value on a Single Administrative Document.

OTHER VAT NEWS

We understand that HMRC has begun to contact firms directly regarding the VAT treatment of electronic searches following the Brabners LLP VAT case summarised on our website. The Law Society has issued guidance which can be viewed here.

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

VAT exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to input VAT recovery may be ‘specified’ to do so when the customer is located outside the EU. Follow the link to read our most recent blog, by Robert Thorpe, which explains this further.

CASE REVIEW

CJEU

1. Retrospective application of VAT exemption schemes

In this matter, the domestic Courts of Hungary ask whether EU law precludes national legislation prohibiting retroactive application of a special VAT exemption scheme for small traders to an eligible, taxable person but who did not declare the commencement of his taxable activities and did not, therefore, opt for the application of that scheme.

In the main proceedings, Mr. Dávid Vámos had made taxable supplies from 2007 until January 2014 seeking to support his usual income. However, he failed to register this activity with the tax authorities, also failing to raise invoices and keep receipts. Following an investigation into his tax affairs, Mr Vámos registered for VAT on 22 January 2014 and opted for application of the exemption. A secondary investigation by the domestic tax authorities revealed a VAT debt. The tax authority took the view that national law did not allow retrospective application of the option to be exempt from VAT and so imposed the relevant penalties.

The question before the Court is whether national legislation preventing the retrospective application of a VAT exemption scheme is contrary to EU law. Mr Vámos contended that he should have been asked if he wished to retrospectively exercise the option when he registered as he was eligible for the scheme.

The Opinion of the Court in this instance is that, given exemption can lead to mixed results for businesses, it cannot be assumed that all taxable persons entitled to an exemption intend to opt for it. Taking into account the effect retrospective application of the exemption would have on previous transactions and other businesses, the Court held it reasonable that the domestic tax authorities require taxable persons to make an express choice of the VAT regime they wish to have applied if it is different to the default regime.

The Court also agreed with Hungarian tax authorities that allowing taxable persons who failed to declare the commencement of their activities to retrospectively exercise that option would give an unfair advantage, distorting competition in their favour, breaking the principle of fiscal neutrality. Concluding, it is asserted that EU law does not preclude national legislation prohibiting retrospective application of special exemption schemes, even in cases where the taxable person fulfils all the material conditions for using the scheme.

CVC Comment: This case should serve as a reminder of the importance of considering tax and legal obligations before, as opposed to after, beginning to carry on what is or could be considered to be a trade.

2. Divergent criminal thresholds for taxation

Mauro Scialdone

This request for a preliminary ruling concerned interpretation of the EU law relating to criminal penalties for failing to pay VAT within the time limit prescribed by domestic (Italian) law. The General Provisions of the PFI Convention provide that in cases of serious fraud involving more than €50,000, penalties including imprisonment must be available to Member States.

Italian law provided for the penalty of imprisonment in cases where the taxpayer failed to pay, within the relevant time limits, any VAT owed over €50,000. The same penalties applied to other taxes such as income tax. Subsequent updates to Italian law saw the threshold for imprisonment increase for failure to pay VAT to €250,000.00 and for income tax to €150,000.00.

Whilst much consideration was given to other issues, the questions relating to VAT before the CJEU concerned whether EU law precludes domestic legislation from prescribing different thresholds for criminalising failure to pay VAT and income tax. Consideration was given to the principles of effectiveness and equivalence. The Italian authorities contended that as the two taxes have different collection and administrative regimes and differing degrees of identifiability of fraud, the distinction in penalties was justified.

It was held that neither principle precludes domestic legislation such as that in the main proceedings which provides that failure to pay, within the given time limit, the VAT resulting from the annual tax return constitutes a criminal offence only when the amount of unpaid VAT exceeds €250,000.00 whereas a threshold of €150,000.00 applies to failure to pay income tax.

CVC Comment: This case makes clear that seriously non-compliant taxpayers can face custodial sentences as well as fines. It highlights some of the differences between direct and indirect tax regimes and the judgment reflects an understanding of this.

Upper Tribunal

3.Student Accommodation: Zero-rating Certificate

This appeal concerned the liability of supplies made by Summit Electrical Installations Limited (Summit) as a sub-contractor to a development of student accommodation. Create Construction (Create) had appointed Summit after receiving a zero-rating certificate from the developer stating that the development was for a relevant residential purpose (RRP). As the certificate stated RRP, HMRC contended that only supplies by Create to the developer could be zero-rated and Summit’s supplies should be standard rated as they were sub-contractors. Summit refuted this stating that they could rely on zero-rating provisions as the supplies were made in the course of the construction of a building designed as a number of dwellings.

The FTT agreed with Summit, also considering an issue of planning conditions which HMRC contended prohibited zero-rating; as the buildings must be let to students of certain Universities, there was a prohibition of separate use or disposal of the flats. The FTT dismissed this as the flats could be sold separately so long as students lived in them.

HMRC appealed to the Upper Tribunal (UT) against the decision in relation to the prohibition of separate use or disposal, asserting that the development failed to qualify as “dwellings” due to the alleged prohibition on separate use or disposal. The UT found that, in accordance with case law, for there to be a prohibition on separate use for the purposes at hand there must be a prohibition on the use of the premises separate from the use of some other specific land, a connection to the Universities mentioned in the planning consent was not sufficient. The UT upheld the decision of the FTT and dismissed HMRC’s appeal, allowing Summit’s supplies to be zero-rated as in the course of construction of a building to be used as a number of dwellings.

CVC Comment: This is a positive result for Summit as well as, potentially, for other sub-contractors appointed by Create. This judgment shows the importance of planning before taking on any development projects. Had the Tribunal found differently, Summit and other contractors may have been burdened with a VAT debt.

First Tier Tribunal

4. Adjustments, agreements and time limits

HMRC sought here to strike out an appeal by Buckingham Bingo Limited (BBL) on the grounds that BBL were appealing against a letter from HMRC which did not contain any appealable decision. In 2012, BBL submitted a VAT return which included a reclaim for £1,616,384.44 overpaid output VAT. HMRC promptly issued a decision denying this reclaim and BBL did not appeal on the basis of costs.

Following developments in case law (KE Entertainments Ltd) BBL wrote to HMRC seeking to recover the original amount. HMRC replied on 5 January 2017 stating that they had already ruled on this matter and that BBL had decided not to appeal. It was also noted that there are time limits on adjustments to VAT returns, out of which BBL found itself.

The FTT agreed with HMRC that the time limits relating to adjustments applied and that the letter dated 5 January 2017 did not contain an appealable decision but more reaffirmed an earlier one. BBL argued that it would be unfair if it were not allowed to make an adjustment in the same way as Carlton Clubs and KE Entertainment Limited and so should be granted an extension to make an appeal. The Tribunal dismissed this, placing great weight on the need for finality in decisions and stressing that BBL had already stated in 2012 that it would not appeal the original decision based on costs.

The Tribunal agreed with HMRC, on all grounds, and BBL’s appeal was struck out. It is not granted any extension to amend its notice of appeal.

CVC Comment: It is essential to be aware of all relevant time limits when it comes to making adjustments to VAT returns. This case shows that the Tribunal takes due process seriously and will not agree with the taxpayer because their position might seem unfair. It is also a useful reminder to make sure all communications should be carefully and appropriately worded to prevent interpretive issues arising.

5. Appeal by post: letter not received by Tribunal

This decision relates to an appeal made by Porter & Co (Porter) challenging VAT surcharge liability for VAT periods 05/13 and 11/13, of which it was informed on 4 March 2014. Porter was originally given the right to appeal the surcharge notices within 30 days of receipt.

Porter apparently responded with a notice of appeal on 2 April 2014, however the Tribunal has no record of having received this letter. Indeed, a notice was received but on 31 July 2017. As well as relevant case law, legislation dictates that when “serving” something by post, the service takes place at the time of postage so long as the postage is done correctly. Whilst the appeal was not sent tracked or special delivery, this is not a legal requirement. On the balance of probabilities, the Tribunal found in favour of Porter but in determining when this would have been received, it was concluded that the appeal, had it arrived, would have arrived a day out of time anyway.

The Tribunal needed to consider, therefore, whether permission should be given for the notice of appeal to be given late. As it was only one day out of time and in the interest of not offering prejudice to HMRC, the Tribunal were inclined to give permission for the late notice and held in favour of Porter.

CVC Comment: The Tribunal gave this ruling a caveat that, had they not found the original notice for appeal was only one day out of time, it would not have been inclined to give permission. Had the Tribunal ruled it received the notice on 31 July 2017 then it would have been three years late and this would have been too long. This is a demonstration that the Tribunal will take timing and intention into account when dealing with taxpayers.

CVC VAT Focus 11 January 2018

11th January 2018

We would like to wish our regular readers and subscribers a happy and prosperous 2018.

HMRC NEWS

HMRC were busy during the last couple of weeks of 2017. The following documents were published or updated on the gov.uk website:

CVC BLOG

In CVC’s latest blog Helen Carey considers HMRC’s policy on VAT zero-rating and new buildings further to the recent Information Sheet 07/17 issued by HMRC.

CASE REVIEW

Court of Justice of European Union (CJEU)

1. Special derogating measures – Avon Cosmetics

Avon Cosmetics Limited sells products through independent representatives. Most of these representatives are not VAT registered. Avon sells products to the representatives at a price below the retail price Avon envisage will be achieved. Sales to representatives are subject to VAT. The sales made by the representatives are not subject to VAT. The effect of this business model is that VAT is not accounted for on the difference between Avon’s selling price and the representative’s selling price. To remedy this situation the UK obtained a derogation from the EU to deviate from the standard rule that VAT is charged on the actual sales price. As a result Avon calculates output VAT due based on the representative’s expected selling price. Two adjustments are made to this calculation to take account of the fact that some products are purchased by the representatives for their personal use and some products are sold by the representatives at a discount.

Avon claimed a refund of overpaid VAT in the sum of £14million on the basis that the special derogation does not take account of the VAT incurred by the representatives on demonstration products. According to Avon, these purchases amount to business expenditure and the VAT relating to those purchases would be recoverable if they were VAT registered.

The matter was referred to the EU on the question of whether the derogation and its implementation infringed the EU principles of fiscal neutrality. The CJEU found that the measures implemented as part of the derogation do not infringe the EU principles and the UK is not required to take account of VAT incurred on purchases used for the purposes of the representatives’ economic activity.

CVC comment: this is an interesting case before the CJEU which considered whether a UK derogation infringed the EU principles of fiscal neutrality.

Upper Tribunal

2. VAT exemption for welfare services

HMRC appealed against the First Tier Tribunal’s (FTT) decision that the UK law was incompatible with the Principal VAT Directive by recognising supplies made by charities as exempt from VAT but not those made by LIFE Services Limited. LIFE is a profit making private organisation which provides day care services for adults with a range of disabilities. Gloucestershire County Council monitors and inspects LIFE’s services which are provided under a formal care plan agreed with the social services department of the Council.

The Upper Tribunal considered that the FTT erred in its decision. The UK has adopted two criteria for determining which non-public law bodies should be entitled to the VAT exemption for welfare services. The first is that the body is regulated. The second is that the body is a charity. To be able to successfully argue UK law breaches the principles of fiscal neutrality LIFE must be able to demonstrate that it falls within the same class as one of the criteria.

The UT found that LIFE cannot equate itself with regulated bodies because, for LIFE, regulation is optional. Similarly, LIFE cannot say it fall within the same class as a charity because it is not subject to the same constraints and regulation as a charity, and it does not operate for the public benefit. HMRC’s appeal was therefore allowed.

CVC comment: this decision by the Upper Tribunal appears to confirm that UK legislation is compatible with the Principal VAT Directive. This decision will be disappointing for private welfare providers that do not fall within the criteria set by the UK for determining which bodies should be entitled to the VAT exemption for welfare services. LIFE is stood behind another case, The Learning Centre (Romford) Limited (TLC), in respect of another issue. TLC have argued that the UK welfare exemption breaches the principles of fiscal neutrality in that bodies making supplies in Scotland and Northern Ireland making identical supplies are granted exemption.

First Tier Tribunal

3. Whether the construction of a cricket pavilion was zero-rated

Eynsham Cricket Club is a community amateur sports club (CASC). The Club appealed against the decision of HMRC that services supplied to the club in the course of constructing a new pavilion were standard rated for VAT purposes. The club argued that the services were zero-rated because the pavilion was used for a “relevant charitable purpose” (RCP). For the purposes of the VAT zero-rate, RCP use means use by a charity either otherwise than in the course of a business; or, as a village hall or similar.

The Tribunal found that the Club was not established for charitable purposes at the relevant time; therefore, the Club’s appeal failed.

This decision is considered in more detail in our VAT & Charities Newsletter.

CVC comment: this was a revised decision by the Tribunal following review. This case provides an interesting commentary regarding all of the conditions which must be met in order to obtain zero-rating for RCP use.

4. Whether free admission to events run by a charity are non-business activities and the VAT recovery implications

The Yorkshire Agricultural Society, a charity, carries out a range of activities which include holding events and hiring out facilities. In total there are approximately 700 events each year. No admission fee is charged in respect of two of the charity’s events. HMRC considers that these two events are non-business activities and, as such, disallowed input tax incurred that directly related to these events. The charity appealed this decision.

HMRC’s policy is that the free supply of services by a charity is a non-business activity. VAT incurred which directly relates to non-business activities cannot be recovered.

The charity argued that the events generated taxable income from catering. A third party provides catering services on the site. The charity receives a share of the income generated by the third party. The Tribunal found that there was no direct link between the free events and the charity’s share of catering income. The charity also argued that there are links between the free events and the Great Yorkshire Show (an admission fee is charged). However, the Tribunal was not satisfied that there were sufficient direct and immediate links between the free events and the Show. The costs relating to the free events could not be said to be cost components of the Show or the charity’s other economic activities. The charity’s appeal was dismissed.

CVC comment: the Tribunal did not consider whether input tax incurred on general overheads that could not be directly attributed to any particular activity of the charity could only be partially recovered.

5. Membership – single or multiple supply

Owners of Harley-Davidson motorcycles may join the Harley Owners Group (HOG). HOG is a business unit of Harley-Davidson Europe Limited (HDE). HDE appealed against HMRC’s decision that supplies made by it to members of HOG in consideration for membership subscriptions constitute a single, standard rated, supply for VAT purposes. HDE contends that it makes a number of distinct supplies to each member and the VAT treatment of each benefit must be determined separately.

Under HMRC’s approach VAT is chargeable on all membership subscriptions regardless of where the members belong. Under HDE’s approach no VAT is chargeable on supplies to members outside the EU (being zero-rated supplies of goods and/or services); and, a substantial proportion of the membership fee paid by EU members relates to zero-rated printed matter.

Benefits received by HOG members include a magazine, patches and pins, maps, e-magazine, museum entry, events and online access.

HMRC’s primary argument was that there was a single principal supply of membership and all other benefits were not ends in themselves but a means of better enjoying the principal element; however, the Tribunal found that members do not join HOG simply for the status of being a member. The typical member wants the individual benefits. In addition, while the Tribunal Judge did consider it relevant that a single price was charged and members did not have the ability to choose what benefits are supplied (suggesting a single supply), it is clear from case law that this is not determinative. The Tribunal concluded that the individual benefits provided are too significant to allow the supply to be characterised as a single supply of membership rather than a number of independent supplies. HDE’s appeal was allowed.

CVC comment: this decision provides interesting commentary regarding the distinction between single and multiple supplies for VAT purposes. This topic has been considered a number of times before the Tribunals and Courts.

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.