Tag Archives: VAT

VAT and partial exemption post Brexit

News

4th February 2020

Leaving the European Union has implications for partial exemption special methods (PESMs) that incorporate provisions relating to VAT recovery in relation to non-EU transactions, since the pre –Brexit legislation would have allowed recovery of VAT on UK transactions that became ‘non EU’ when the UK left the European Union. To mitigate this problem a new regulation 102(2A) has been inserted into the VAT Regulations 1995.

The new regulation enables the current VAT recovery position – exempt from VAT and with no recovery available – for UK to UK supplies of financial services to be maintained within all PESMs. This removes the need for PESMs to be redrafted by the business and reapproved by HMRC with the associated administrative burden this would have created. No action by business is necessary as a result of these regulations as they retain the status quo.

The new regulation can be found here SI 2019513

Constable VAT Focus 13 June 2019

13th June 2019

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

HMRC NEWS

Changes to the VAT MOSS rate for other countries

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

Domestic reverse charge for building and construction services

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

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

CONSTABLE VAT NEWS

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

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

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

CASE UPDATE

Upper Tribunal

1. Leasing of Cars Under a Salary Sacrifice Scheme

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

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

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

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

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

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

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

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

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

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

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

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

First-Tier Tribunal

3. Welfare Exemption: Supplies Closely Connected

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

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

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

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

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

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

Constable VAT: VAT & Charities Newsletter

7th June 2019

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

This issue of the Constable VAT & Charities Newsletter covers;

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 30 May 2019

30th 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 liability of the provision of fuel cards to subsidiaries, the exemption for the leasing of immovable property and the VAT liability of non-refundable overpayments.

HMRC NEWS

Notice 742A: Opting to Tax Land and Buildings

HMRC has updated the list of authorised signatories in section 7 to include corporate bodies, overseas entities and powers of attorney.

Notice 701/41: Sponsorship

HMRC has updated this notice with clarification on the treatment of mixed sponsorship and donations.

Help and Support for VAT

HMRC has updated its selection of webinars and online courses.

Making Tax Digital for VAT

The list of software packages which are compatible with Making Tax Digital for VAT has been updated. Make sure you remember your obligations under the new MTD regime. Making Tax Digital is now obligatory for most businesses on monthly VAT returns or calendar quarterly returns VAT returns should be preparing to be MTD ready for submission of the June 2019 VAT returns, unless they have been notified by HMRC that they will benefit from a delayed start of 1 October 2019.

CONSTABLE VAT NEWS

HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result a reverse charge for building work is due to be introduced, to combat fraud. We have a new blog covering some of the important issues, which can be read here.

The rules will come into place on 1 October 2019, are you ready? If you feel like you will be impacted and require assistance in ensuring compliance from day one of the new rules being in place, do not hesitate to contact Constable VAT.

CASE REVIEW

CJEU

1. The Provision of Fuel Cards: Exempt Supply of Credit

This Polish referral concerned a Polish subsidiary of Vega International (VI), a company which provides transportation services for commercial vehicles, taking them from the factory and delivering them to the customer. To perform these services, VI operated various subsidiaries in different countries including Vega Poland (VP).

VI provides the subsidiaries with fuel cards issued by fuel suppliers, the subsidiaries provide these to drivers in order to get fuel to make the deliveries. The purchases are dealt with centrally by VI who invoice the subsidiaries for their fuel costs with a 2% surcharge for the service.

The question which arose before the Court was whether the service being provided by VI was an exempt provision of credit or a more complex transaction, the main objective of which was the supply of fuel; a supply of standard rated goods.

The Court considered a previous case, Auto Lease Holland in which similar fuel provision agreements had been discussed. The conclusion in this case was that such a fuel management agreement concluded between a leasing company and a lessee is not a contract for the supply of goods but a contract for the lessor to finance fuel purchases; at no point does fuel ownership really pass to the lessor as they do not interact with or choose the use of the fuel.

In concluding, the Court considered that by applying the surcharge, VI was receiving payment for the services provided to VP. These services were described as “financing in advance the purchase of fuel” and it was observed that VI was acting as a credit institute or bank would. The Court therefore held that the supplies by VI to VP were exempt.

Constable Comment: Given the decision in the Auto Lease Holland case, this outcome was not a surprise. Whilst the result does not entirely fit with the way in which fuel management contracts usually operate it provides a more plausible solution to the issue that assuming that VI bought and then resupplied fuel in a complex chain of goods when, in reality, they merely pay up front for fuel and charge for this service.

Court of Appeal

2. The Exemption for the Letting of Immovable Property

This case concerned the VAT liability of supplies of residences made by Fortyseven Park Street Limited (FSPL). FSPL argued their supplies were exempt and HMRC argued they were taxable.

In essence, individuals could purchase a “share” in the property in exchange for the ability to use the rooms and other facilities offered by FSPL; this is referred to as “fractional ownership”. The ownership of such a share confers on the owner the right to occupy the property for 21 nights of Primary Use Time and 14 nights of Extended Occupancy Time. In order to occupy a residence on a particular date the “member” (owner of a fractional share) must reserve a space in advance.

FSPL contended that their supplies were exempt as the letting of immovable property, HMRC sought to argue against this on two grounds; the first that the members were not entitled to occupy the property as if they were the owner and they were not entitled to exclude others, the second being that FPSL were adding significant value to the supplies of hotel-like services and were, therefore, supplying more than merely leases over immovable property.

The Court considered, in relation to the first point, that the underlying supply is of a license to occupy the property; the condition that a reservation is made is not an impediment to access or use a residence but facilitative as a mechanism for exercising the right provided by the licence to occupy. On this point they held in favour of FSPL.

With regard to the second issue, the Court considered the nature of the supplies offered by FSPL. It was observed that the letting of immovable property is a “passive” activity, whereas there was much more active involvement from FSPL. It was stated that significant value is added to the supplies by “hotel-like services” which go beyond the mere leasing of property.

With this in mind it was held that the fractional interest purchased by members was to be seen as a prepayment for such hotel-like services, to be received over a number of years. Therefore the Court held in favour of HMRC; the supplies made by FSPL were taxable at the standard rate.

Constable Comment: This decision overturns the Upper Tribunal which ruled that the supply was an exempt lease of immovable property. It highlights the importance of seeking the highest degree of clarity when seeking to apply a VAT exemption. Exemptions are applied very strictly and in any case, especially where large amounts are involved, it is advisable to seek advice for clarity.

3. No Change Given: Treatment of Excess Payment for Parking

This appeal concerned the VAT treatment of overpayments made by people wishing to park in an NCP car park; HMRC argued they were taxable and NCP contended the excess payment to be outside the scope as an ex gratia payment.

NCP operates pay & display car parks, to make use of one of the spaces a motorist must find a ticket machine and use change to pay, in accordance with the advertised prices, by the hour for parking. The machines state that overpayments are accepted but no change will be given. In essence, the advertised rates are the minimum payment which can be made to park for the corresponding amount of hours. For example, if one hour’s parking is £1.40 and 3 hours are £2.10, a payment of £2.09 will entitle the customer to one hour’s parking and no change; there is an overpayment of 69p.

NCP had accounted for VAT on these overpayments as part of the consideration for a standard rated supply of parking facilities. However, it later sought to recover these amounts as the overpayments were not, it contended, consideration for a supply but payments freely given.

The Court considered the nature of the contracts entered into by NCP and the customer each time a ticket is printed. It was observed that the customer was made aware of the price payable and was warned that no change would be given. The Court suggested that, taken together, the advertised rates and the warning that no change would be given indicated that NCP was willing to grant an hour’s parking for at least the advertised amount. It follows that the prices paid by customers will vary somewhat but ultimately that the money paid by the customer and received by the supplier represents the consideration for that supply.

Therefore the Court held in favour of HMRC and regarded the entire amount received by NCP as consideration for a taxable supply of parking facilities.

Constable Comment: This case was ultimately decided on what counted as consideration for a supply. It serves to highlight that what appears to be a simple, fundamental concept can actually generate complex questions around the nature of individual supplies. The contention that overpayments were ex gratia payments may have been a reach but there are certainly analogies to be drawn with other circumstances.

Are you ready for the new Construction Industry Reverse Charge?

16th May 2019

Background

HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result a reverse charge for building work is to be introduced, to combat fraud. This was originally due to be introduced on 1 October 2019, but its implementation has been delayed several times. Once implemented the new legislation will mean, essentially, that building contractors will not pay VAT to their sub-contractors, but will account for it themselves. It is important that all affected parties familiarise themselves with the new rules before they are introduced on 1 March 2021.

Reverse charge accounting already exists in other areas seen as susceptible to fraud, notably mobile phones and computer chips. The reverse charge also applies (for reasons not associated with combating avoidance) to some goods and services, including building work, received from outside the UK. The proposed construction reverse charge mechanism is therefore sometimes referred to specifically as the ‘domestic reverse charge’, or DRC.

How will the new reverse charge work in practice?

The reverse charge will apply to VAT-registered building contractors engaging VAT-registered sub-contractors and, similarly, to sub-contractors engaging others through the supply chain. A final customer for building work, such as an occupier or a developer, will not have to apply the reverse charge, and will continue to incur VAT in the same way as now.

The reverse charge is aligned with the Construction Industry Scheme (CIS), and will only apply to supplies that are within the scope of the CIS but with some notable differences.

Not all supplies within the CIS will be subject to the reverse charge. There will be various exclusions which will be particularly relevant to ‘deemed contractors’.
The reverse charge will not apply to zero-rated supplies.
The reverse charge will extend to building materials included within a supply of building work.
Deductions under the CIS do not affect the amount of VAT.

Contractors and sub-contractors include anyone who is acting in that capacity by making a supply of building work, whether or not this is their normal activity. HMRC have confirmed that staff agencies acting as such are not seen as supplying building work, so that their services are outside the scope of the reverse charge.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due. If VAT is charged incorrectly it will not be recoverable as input tax. This is particularly important because when HMRC disallows a VAT refund claim, the customer will need to seek a recovery of overcharged VAT from the supplier which may be straightforward but can be difficult or impossible, for example, if the supplier is no longer trading. In this context it is important to note that, despite CJEU judgments to the effect that customers who cannot obtain rebates from suppliers should have available a mechanism to obtain a refund from HMRC, HMRC has, at time of writing, refused to accommodate this and whilst accepting claims may be possible it has adopted a policy of requiring businesses to make claims via the High Court, an expensive and uncertain approach. In essence HMRC is only too pleased to accept windfalls, collecting VAT from suppliers that have charged it incorrectly whilst refusing to offer any practical solution to reclaiming that VAT other than via the supplier.

There are various situations, set out in the relevant legislation, where the reverse charge will not apply, otherwise, the presumption is that the reverse charge does apply. In particular, there will be no de minimis threshold.

The supplier should not charge VAT unless:

The payment is outside the scope of the CIS;
The customer is not (and is not required to be) VAT-registered; or
The customer is treated as or like an ‘end user’ or is not acting in a business capacity.

Additionally the supplier should not charge VAT if the supply is zero-rated, or if it is not VAT registered or required to be registered.

Accounting for the reverse charge

If the reverse charge does apply, its actual application may be relatively straightforward, at least once accounting systems have been adapted to deal with it.

The customer needs to declare as output tax whatever VAT the supplier would have charged, without the reverse charge, and to do so in the period when the tax point arises.

If a supplier charges VAT, the customer needs to be satisfied that it is actually due: if not, it will not be recoverable as input tax. Otherwise, the customer can treat the same amount of VAT as input tax, in the same period. It will normally be directly attributable to an onward supply of building work, and recoverable in full. If so, the reverse charge has no net effect.

Impact of the reverse charge

The reverse charge may have some significant commercial implications, particularly for small sub-contractors. There will be an impact on cash flow where businesses have used VAT collected to finance their business. Additionally if a business is in a repayment position as a consequence of no longer having to pay VAT to HMRC they will have to wait for the refund to be processed by HMRC rather than offsetting input VAT against output VAT on a VAT return. Businesses that expect to be regularly in a repayment position may wish to switch to monthly VAT returns.

Contracts for building work will need to accommodate the new regime and in cases of uncertainty professional advice should be sought. This blog is intended to give an overview and where there is uncertainty Constable VAT would be happy to assist further. It may also be helpful to consider HMRC’s guidance.

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.

Making Tax Digital Update

News

13th February 2019

New Information Regarding Enrollment

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

It is important to note that HMRC guidelines state that:

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

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

Stagger Group 1

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

Stagger Group 2

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

Stagger Group 3

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

Monthly VAT Returns

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

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

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

Post Brexit VAT Recovery -Specified Supplies

News

6th February 2019

We have received an update on Specified Supplies. New legislation was laid before Parliament on 5th February 2019 and the link is as follows.

https://www.legislation.gov.uk/uksi/2019/175/contents/made

Just to recap, this is the legislation which deals with VAT recovery on respect of certain types of transactions specified in law. The supplies of services currently specified in the Value Added Tax (Input Tax) (Specified Supplies) Order 1999 (SI 1999/3121) are:

3.Services–

(a) which are supplied to a person who belongs outside the member States;

(b) which are directly linked to the export of goods to a place outside the member States; or

(c) which consist of the provision of intermediary services within the meaning of item 4 of Group 2, or item 5 of Group 5, of Schedule 9 to the Value Added Tax Act 1994 in relation to any transaction specified in paragraph (a) or (b) above,

provided the supply is exempt, or would have been exempt if made in the United Kingdom, by virtue of any item of Group 2, or any of items 1 to 6 and item 8 of Group 5, of Schedule 9 to the Value Added Tax Act 1994.

The new legislation seems to maintain the status quo and continues to deny VAT recovery in respect of specified supplies to UK and EU customers. It does so by the following amendments:

in paragraph (a) “the member States” is substituted by “the United Kingdom and the member States”; and
in paragraph (b) “the export of goods to a place outside the member States” is substituted by “the export of goods from the United Kingdom or a member State to a place outside the United Kingdom and the member States”.

HMRC has advised that:

“As Brexit decisions affecting the regulatory treatment of financial services, are still to be made, the government is keeping the issue of a post Brexit VAT effective zero-rate for exports of financial services to the EU under review. Announcements on any such changes would be made in due course.”

There is also a comment in the Explanatory Memorandum to the effect that:

“This legislation will be kept under review through communication with key stakeholder groups including the Joint VAT Consultative Committee“.

Dean Carey of Constable VAT represents the ACCA as a member of the JVCC and will be involved in those discussions if businesses have issues that they wish raised.

For the moment, businesses making specified supplies are likely to retain their current VAT recovery rights. It remains to be seen if anyone will challenge this new legislation on the basis that it is discriminatory. If there is any uncertainty on future VAT recovery of any of your clients please contact Constable VAT.

We will continue to keep our website updated as and when we receive updates.

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.

Post-Brexit VAT accounting legislation

News

23rd January 2019

New legislation has been laid before parliament in preparation for the UK’s exit from the EU. This takes the form of statutory instruments including 2019/59 and 2019/60.

The changes that these new Regulations will introduce will have effect once the Treasury brings them into force when the UK leaves the EU.

2019/59

The commentary to the SI states that the Regulations are made to address failures of retained EU law to operate effectively, and other deficiencies arising from the withdrawal of the United Kingdom from the European Union.

The Regulations:

amend secondary legislation relating to VAT to reflect the fact that the United Kingdom will no longer be a member State of the EU and that EU member States are now treated in the same way as the rest of the world vis-à-vis the United Kingdom. Amendments are made as a consequence of the abolition of acquisition VAT and extension of import VAT to EU member States and to reflect the new definition of importation and other new terminology.
Amend the Value Added Tax (Payments on Account) Order take account of new accounting procedures for import VAT introduced 2019/60
revoke legislation relating to VAT which is inoperable as a result of the abolition of acquisition VAT by, and introduction of new customs procedures under, the Taxation (Cross-border Trade) Act 2018 (TCTA) . It also revokes legislation relating to VAT which is spent as a result of these revocations.

2019/60

These Regulations make provision in relation to accounting and payment for import VAT on the importation of goods by persons registered for VAT following the UK’s withdrawal from the European Union.

Among other things, the Regulations include provisions:

that will allow a person registered for VAT and liable to pay import VAT on relevant imported goods to have any such goods delivered or removed without payment of import VAT where that person accounts for the import VAT under the Regulations.
that provide that a person registered for VAT and choosing to account for import VAT under these Regulations may do so on the return that person is required to make for a prescribed accounting period.

CVC will be issuing a detailed commentary on these provision and other matters relating to Brexit planning in the next few days.

Constable VAT Focus 29 November 2018

29th November 2018

HMRC NEWS

Declaration on Future EU/UK Relationship

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

HMRC has released its monthly exchange rates for 2018

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

Help and support for VAT

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

MAKING TAX DIGITAL UPDATE

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

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

CASE REVIEW

CJEU

1. The Right to Deduct Input Tax

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

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

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

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

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

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

2. Calculating Taxable Turnover by Extrapolation

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

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

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

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

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

Upper Tribunal

3. Unjust Enrichment of HMRC

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

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

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

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

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

4. Legitimate Expectation – Judicial Review

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

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

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

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

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

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

CVC VAT Focus 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 9 August 2018

9th August 2018

HMRC News

VAT Notices

HMRC has updated the following VAT Notices:

Health professionals and pharmaceutical products (VAT Notice 701/57)
Physiotherapist and podiatrist independent prescribers have been added to the list of relevant practitioners.

Postage stamps and philatelic supplies (VAT Notice 701/8)
The VAT calculation for imported collector’s items has been updated in order to maintain the effective rate of 5%.

The single market (VAT Notice 725)
Improved guidance on amending VAT return periods to coincide with EC Sales List submission.

Joint and several liability for unpaid VAT (VAT Notice 726)
Updated with information on how to spot missing trader VAT fraud.

Cost Sharing Exemption

HMRC has published Revenue and Customs Brief 10 (2018): VAT – cost share exemption. HMRC has changed its policy following CJEU judgments and amended the test for “directly necessary” services which enables cost sharing groups to ignore certain non-qualifying supplies for the cost sharing exemption.

Overseas business selling goods in the UK

HMRC guidance has been updated to include information about online marketplaces.

Businesses selling goods in the UK using online marketplaces

HMRC guidance concerning VAT registration has been updated.

Case Review

Court of Justice of the European Union

VAT exemption for transactions concerning payments and transfers

DPAS Limited designs, implements and manages dental plans in the UK. These plans are provided to dentists. Patients make monthly payments to DPAS’s bank account in return for dental care provided by their dentist and insurance cover. The monthly payment includes the amount due from the patient to the dentist, the amount due from the patient to the insurer and the amount due from the patient to DPAS. Each month, DPAS pays to the dentists the aggregate amount payable to them in respect of all of their patients who have paid the agreed monthly amount less an amount retained by DPAS as a charge for its services.

Until 2012 HMRC took the view that the services DPAS provided to the dentists was exempt from VAT. Following the decision of the CJEU in AXA UK which concerned the VAT liability of Denplan Limited’s services (a competitor of DPAS) that found that Denplan provided debt collection services which are subject to VAT at the standard rate, DPAS restructured its contracts so that it contracted with patients as well as dentists.

HMRC contend that the services DPAS supply to dentists and patients are subject to VAT at the standard rate. DPAS appealed this decision before the FTT. The FTT found that DPAS supplied its services to patients and those services were exempt from VAT. HMRC appealed the FTT’s decision before the UT. The UT referred questions to the CJEU.

The CJEU found that VAT exemption for transactions concerning payments and transfers does not apply to the services provided by DPAS. DPAS’ services consist of requesting from the relevant financial institutions money to be transferred from the patient’s bank account to DPAS’ bank account and, following a deduction for DPAS’ services, the remaining balance to be transferred to the patient’s dentist and insurer.

CVC comment: this judgement is the latest in a long line of cases concerning the extent of the VAT exemption for transactions concerning payments and transfers. Other notable cases include Bookit Limited and National Exhibition Centre (NEC). In those cases the CJEU found that booking fees are subject to VAT at the standard rate.

Supreme Court

Requirement to pay VAT assessments in advance of appeal

Businesses wishing to appeal a VAT assessment must pay the VAT assessment in advance of the appeal, unless the business can demonstrate that paying the VAT assessment would cause hardship. Totel Limited seeks to appeal a number of VAT assessments. Totel has been unable to demonstrate it would suffer hardship if it were to pay the VAT assessments in advance its appeals. Totel has argued that the requirement to pay the disputed VAT as a pre-condition for an appeal infringes the EU law principle of equivalence, which requires that the rules regulating the right to recover taxes levied in breach of EU law must be no less favourable than those governing similar domestic actions.

The Supreme Court commented in its Press Release that none of the domestic taxes are comparable with VAT. A business seeking to appeal a VAT assessment is in a different position from a taxpayer seeking to appeal an assessment to any other domestic tax. The economic burden of VAT falls to the consumer, not the business. The business collects VAT and passes this onto HMRC. In respect of other domestic taxes the economic burden is on the business.

The Supreme Court dismissed Totel’s appeal.

CVC comment: if a taxpayer can evidence that payment of a VAT assessment would cause financial hardship the appeal may proceed without the disputed VAT being paid to HMRC. In some instances it may be possible to persuade HMRC that the economic burden is in the business, for example when the business has treated a supply as VAT exempt and has not collected VAT from the consumer.

Court of Appeal

The value of supplies for VAT purposes – employment bureaux supplying temporary staff

Adecco UK Limited supplies its clients with temporary staff (temps). The First Tier Tribunal (FTT) and Upper Tribunal (UT) have previously found that the full fees received by Adecco from its clients are subject to VAT. Adecco argues that VAT is not payable on the full fee received from its clients. VAT is only payable on the element attributable to the introduction and ancillary services supplied by Adecco (the majority of the fee relates to payment of the temps’ services).

The Court of Appeal agreed with the FTT and UT. The full fees received by Adecco from its clients are subject to VAT. Important points to note: the temps did not have a contract with the Adecco’s clients, the contract between Adecco and the temps referred to the temps providing services to the client “through Adecco”, Adecco paid the temps on its own behalf (not as an agent of the client), and Adecco charged a single sum for each hour a temp worked (it did not split the fee between remuneration for the temps’ service and commission for itself).

CVC comment: this case highlights the importance of contractual terms in determining correct VAT liabilities particularly where an ‘agent’ is involved.

Upper Tribunal

Whether certain supplies of emergency ambulance services qualify for zero-rating

Jigsaw Medical Services Limited supplies ambulance services. The supply of transport services for sick or injured persons in vehicles specially designed for that purpose is exempt from VAT. It is common ground that the ambulance services provided by Jigsaw are exempt. The issue before the Upper Tribunal was whether “emergency ambulance services” by Jigsaw qualified for zero-rating. If a supply can qualify for both exemption and zero-rating, zero-rating takes precedence. The benefit of zero-rating is that such supplies generate a right to VAT recovery. It was accepted that “patient transport ambulance services” provided by Jigsaw are both exempt and zero-rated (with zero-rating taking precedence).

Zero-rating applies to the transport of passengers in a vehicle designed or adapted to carry not less than 10 persons. Zero-rating also applies to a vehicle designed or adapted to carry a person(s) in a wheelchair that, if it had not be so designed or adapted, would be capable of carrying 10 persons or more. Jigsaw’s emergency transport vehicles were capable of carrying 7 or 8 persons. No seats were taken out of Jigsaw’s emergency transport vehicles in order to adapt the vehicle for wheelchair use. The First Tier Tribunal (FTT) considered that because additional seats could be added so that the vehicle could carry 10 persons meant that Jigsaw’s supplies of emergency transport were zero-rated; however, the Upper Tribunal disagreed and adopted a narrow interpretation of the law. HMRC’s appeal against the FTT decision was allowed. Jigsaw’s supplies of emergency transport ambulance services are exempt.

CVC comment: this decision demonstrates that VAT reliefs (such as exemption or zero-rating) are only available subject to strict conditions. Businesses and charities applying VAT reliefs to their supplies should ensure all conditions are met. We recommend reviewing activities frequently to ensure VAT treatments remain correct.

Application to admit new evidence

Kyriakos Karoulla, trading as Brockley’s Rock, appealed against the decision of the FTT to uphold a ‘best judgement’ assessment by HMRC for under-declared VAT in respect of takings from its fish and chip shop. Karoulla’s application for permission to appeal the FTT’s decision was twice refused by the UT. Upon applying for permission to appeal for a third time, the judge granted permission to appeal in one respect only. This appeal relates to the extent credit card transactions were reflected in HMRC’s best judgement assessment.

Following a VAT inspection and several test purchases by HMRC in 2015 HMRC concluded that card sales after 8pm were not being entered on the till. The business used daily till records to prepare its VAT return. HMRC issued a VAT assessment in the sum £28,323.00 and an associated penalty of £26,913.18.

Karoulla sought to admit new evidence, originals of tills rolls and records relating to card purchases. These documents were only returned by HMRC to Karoulla shortly before the hearing of Karoulla’s application for permission to appeal.

The UT reviewed correspondence between Karoulla’s representatives and HMRC. Karoulla requested the return of the original documents numerous times in advance of the FTT hearing. HMRC either ignored or refused such requests. The UT commented that the only attempted justification given at any stage by HMRC for their refusal was that HMRC was under no obligation to assist Karoulla with its case. The UT said in its decision:

“That was a totally inappropriate response to a proper request from the taxpayer for the return of documents which he himself had provided to HMRC during the course of its enquiries and which the taxpayer plainly required in order to answer HMRC’s case. To this day, HMRC have provided no explanation as to why they believe that such a response was appropriate. The observation of the FTT at [27] of the Decision, as set out at [14] above that the failure to produce the till rolls was “unfortunate” was a gross understatement.

HMRC cannot hide behind the absence of any tribunal order for disclosure to argue that the evidence “could have been obtained with reasonable due diligence”. The many repeated requests by Karoulla for HMRC to return the documents are due diligence enough without the needless expense and use of resource generated by requiring an order for disclosure.”

Karoulla accepts that some suppression of card purchases did occur. The UT considered the new evidence which covered around a dozen days. For reasons unknown, HMRC chose only to take account of three days when calculating the VAT assessments. The new evidence showed that the suppression of card sales was inconsistent, it was not the case that card payments were being omitted from the till every day after 8pm.

The UT found that the decision of the FTT should be set aside and a fresh hearing should take place.

CVC comment: HMRC’s refusal to provide original documents to the taxpayer was clearly unacceptable. In another example the recent decision in Sandpiper Car Hire Limited saw the Tribunal criticise HMRC’s approach to dealing with disabled people, see CVC’s commentary here. Taxpayers have several options they can pursue if they have difficulties with HMRC such as the complaints procedure or dispute resolution.

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.

HMRC NEWS

CONSTABLE VAT NEWS

CASE UPDATE

Upper Tribunal

1. Leasing of Cars Under a Salary Sacrifice Scheme

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

First-Tier Tribunal

3. Welfare Exemption: Supplies Closely Connected

1. VAT and the Supporting People Programme

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

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

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

5. Update to Notice 317

6. Update to Notice 701/1

HMRC NEWS

CONSTABLE VAT NEWS

CASE REVIEW

CJEU

1. The Provision of Fuel Cards: Exempt Supply of Credit

Court of Appeal

2. The Exemption for the Letting of Immovable Property

3. No Change Given: Treatment of Excess Payment for Parking

Background

How will the new reverse charge work in practice?

Accounting for the reverse charge

Impact of the reverse charge

HMRC NEWS

CASE REVIEW

CJEU

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

2. Fictitious Transactions: A Right to Deduct?

3. The Exemption for Private Tuition

4. Incorrectly Charged VAT: Recoverable?

5. Restrictions on Recovery of Input VAT

HMRC NEWS

CASE UPDATE

CJEU

1. Exemption for Letting Immovable Property

Supreme Court

2. Education Exemption: Meaning of “eligible body”

Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

4. Default Surcharge: Reasonable Excuse

New Information Regarding Enrollment

HMRC NEWS

CASE REVIEW

CJEU

1. The Deductibility of Input Tax Incurred by Branches

Upper Tribunal

2. Welfare Services Exemption

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

HMRC NEWS

MAKING TAX DIGITAL UPDATE

CASE REVIEW

CJEU

1. The Right to Deduct Input Tax

2. Calculating Taxable Turnover by Extrapolation

Upper Tribunal

3. Unjust Enrichment of HMRC

4. Legitimate Expectation – Judicial Review

HMRC NEWS

CVC MAKING TAX DIGITAL UPDATE

CASE REVIEW

First Tier Tribunal

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

2. Golden Cube – Whether output tax was understated

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

HMRC News

VAT Notices

Cost Sharing Exemption

Overseas business selling goods in the UK

Businesses selling goods in the UK using online marketplaces

Case Review

Court of Justice of the European Union

VAT exemption for transactions concerning payments and transfers

Supreme Court

Requirement to pay VAT assessments in advance of appeal

Court of Appeal

The value of supplies for VAT purposes – employment bureaux supplying temporary staff