Tag Archives: VAT newsletter

CVC VAT Focus 26 July 2018

26th July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

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

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

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

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

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

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

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

Help and support for VAT

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

CASE REVIEW

CJEU

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

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

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

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

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

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

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

2. Right to deduct: Transactions did not take place

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

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

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

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

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

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

Supreme Court

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

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

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

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

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

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

UTT

4. Direct and immediate link with main economic activity

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

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

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

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

5. Place of supply rules

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

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

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

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

6. Business/non-business apportionment

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

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

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

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

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

CVC VAT Focus 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.

First-Tier Tribunal comments on HMRC’s treatment of disabled people

3rd July 2018

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.

The facts can be summarised as follows:

Sandpiper appealed the decision of HMRC to issue VAT default surcharge liability notices in respect of VAT accounting periods 01/11 to 10/15. The surcharges totalled £9,643.81.

Sandpiper believed it had a reasonable excuse for its defaults and failure to pay VAT owed to HMRC by due dates.

Sandpiper evidenced the following facts in support of its position.

The 70 year old sole director of the business has suffered with Meniere’s disease for 20 years and finds it extremely difficult to hear.

The director was diagnosed with cancer. When removing a tumour the surgeon damaged a major nerve to the director’s spine which required a number of further operations.

Due to a combination of significant pain and severe mobility issues the director was prone to lengthy, frequent and unpredictable absences from the business. Further surgery nearly resulted in the director’s death.

Managers employed to run the business were unreliable. One set up a competitor business whilst employed by Sandpiper. Another defrauded the business out of thousands of pounds. The offence was reported to the Fraud Squad.

VAT payments made by the business to HMRC had been credited to the company’s PAYE account by HMRC in error.

The director wrote to HMRC numerous times advising he was deaf and unable to communicate via the phone. HMRC responded each time with a letter giving a contact telephone number to call to discuss the matter.

The director’s wife called the number given by HMRC; however, this was unobtainable. She traced another telephone number but HMRC refused to discuss the matter with her because she was not an officer of the company.

A letter to HMRC from the director dated 20 April 2017 was treated as a complaint by HMRC. On 12 May 2017 HMRC’s Complaints Team wrote to the director giving a telephone number to call. HMRC also denied that it “had not considered your illness and constant hospital appointments” when pursuing default surcharges.

Incredibly, HMRC’s litigator commented in Tribunal that the taxpayer “has not provided anything to the Commissioners to the effect that the health of the director prevented the company from making payment of VAT by the due date”. When pushed on this point by the Tribunal HMRC’s litigator responded that the director should have “made alternative arrangements”.

The Tribunal considered whether the director’s actions were reasonable. He suffered with a debilitating illness, was diagnosed with life-threatening cancer and an operation to remove a tumour resulted in unexpected and significant spinal damage. The director put in place arrangements he believed would ensure the company met its VAT obligations. Unfortunately, the company was subject to an £80k fraud (reported to the police) which resulted in the company defaulting on its VAT obligations.

The Tribunal referred to the Court of Appeal decision in Steptoe. Lack of funds does not give taxpayers a reasonable excuse for non-payment of VAT; however, the cause of insufficiency of funds could provide a reasonable excuse. The Tribunal commented “we have no hesitation in finding that the company has a reasonable excuse for its VAT defaults”.

The Tribunal gave its decision orally at the end of the hearing. The Tribunal suggested a short decision might be sensible. This is common in dealing with default surcharge appeals in respect of which a full written decision is unusual. The director of Sandpiper agreed; however, HMRC refused and requested a full decision in case HMRC wishes to apply to lodge an appeal with the Upper-Tier Tribunal.

Given the position, the fact that HMRC even took the case let alone considered that it might then lodge an appeal might be viewed as surprising. In issuing a full decision the Tribunal took the opportunity to comment on HMRC’s approach to dealing with taxpayers suffering serious medical conditions.

Although the director of Sandpiper advised HMRC in writing on numerous occasions that he had severe difficulty hearing and could not hold a telephone conversation, HMRC continually told him to call them. It seems clear that the director has a number of long-term health conditions defined by the Equality Act. HMRC Debt Management and Banking Manual guidance at DMBM585185 instructs HMRC officers to take account “in all cases” the “possible detrimental effect on the debtor” of taking recovery action. Officers should also consider “the possibility of unreasonable distress” and “the likelihood of adverse publicity” if unsuitable action is taken. The Tribunal also commented that, in this case, the director could (or should) have been referred to a HMRC Needs Extra Support (NES) Team. The Tribunal decision concludes as follows. “The Tribunal has no jurisdiction over how HMRC treats its disabled customers, and no jurisdiction over the collection of VAT debts or the allocation of tax payments. Nevertheless, we hope that HMRC will take into account our comments”.

This case and HMRC’s behaviour, would probably not have been widely circulated and be in the public domain had HMRC’s litigator accepted a short decision. HMRC’s insistence on a full decision gave the Tribunal an opportunity to lay out what, in our opinion, should be viewed as an embarrassing sequence of HMRC actions. Nevertheless, this illustrates how HMRC behaves in certain cases. It is hard to imagine the stress and anxiety caused to the taxpayer in this case by HMRC. In his letter of 8 June 2017 to HMRC the director of the business concluded “…firstly, you discriminate against me because of my disability and secondly you hound me with daily texts/letters from Debt Management and I am the person who has had to fight to sort out your errors going back 2 years”.

It will be interesting to see if HMRC applies to the Upper-Tier to appeal this decision. What is surprising is that at no point does HMRC express any sympathy for its treatment of the taxpayer or offer an apology for its actions. HMRC has a difficult job to do and, in our view, it undermines the public support it needs to do that job when it shows such a total lack of empathy. It would be interesting to know just how much taxpayer money HMRC invested in pursuing the £9,643.81 of surcharge assessments; however the reality that anyone dealing with this fact pattern thought that this was in the public interest and a good use of taxpayer’s money is mystifying to us.

CVC VAT Focus 21 June 2018

21st June 2018

HMRC NEWS

Help and support for Making Tax Digital

Watch webinars and videos for help with using software to send Income Tax updates and VAT Reports to HMRC if you are an agent or a business.

Revenue and Customs Brief 5 (2018): VAT liability on goods supplied on approval

HMRC has reviewed the guidance in this area, this brief should be read by mail order retailers and anyone supplying goods delivered on approval.

Insolvency and VAT (Notice 700/56)

Find out how to account for VAT and who to contact if you are an insolvency practitioner and you are appointed over insolvent VAT-registered businesses.

Cancelling your VAT registration

The VAT7 PDF has been replaced with a print and post iForm.

OTHER VAT NEWS

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

CASE REVIEW

CJEU

1. Right to deduct: Supply never made

The CJEU has responded to the requests from German courts to rule on whether the deduction of input tax on a payment made on account is blocked where the ultimate supply is not made. In the two combined cases in question (Kroloβ and Wirtl), both companies ordered combined heat and power stations from G-GmbH (GA) and agreed to make payments on account to cover the cost, including the VAT element of the purchase. Ultimately GA became insolvent and delivery of the units never took place.

Both Kroloβ and Wirtl sought a deduction of input VAT incurred on these payments on account only to have the claims rejected. After successfully appealing these decisions, the German court asks whether the requirement as to the certainty that a supply will take place, as a condition of the deduction of input tax on a payment on account, is to be determined purely objectively or from the point of view of the person making the payment. It was also asked if the competent tax office must refund VAT to that person where it cannot be recovered from the recipient of that payment.

The CJEU concluded that a potential buyer may not be refused the right to deduct VAT in situations such as those in the main proceedings where all the relevant information concerning the future supply was known or should have been known by the buyer and the supply appeared to be certain.

CVC Comment: It is important to make sure before agreeing to a purchase that customers are aware of the position of the supplier and the likelihood of their insolvency or failure to carry out the order. The Court stressed that a potential buyer may not be refused the right to deduct VAT relating to a payment on account only when, at the time the payment was made, all the relevant information concerning the future supply could be regarded as known by the buyer and the future supply appears to be certain.

Upper Tribunal

2. Energy saving materials or a new roof?

This case concerned the classification for VAT purposes of a product offered by Wetheralds Construction Limited (Wetheralds) which is designed for conservatory insulation. The First Tier Tribunal (FTT) agreed with Wetheralds on its assertion that the supply being made was a single supply of the installation of energy saving materials and therefore attracted the reduced rate of 5%. HMRC disputed this decision, claiming that the installation amounted to more than energy saving materials and should be regarded as a supply of a new roof as new tiles were put down, meaning the supply was standard rated as more than merely insulating material was supplied.

The case before the Upper Tribunal (UT) in this instance is whether the FTT erred in its application of relevant case law and principles.

The UT concluded that the FTT had failed to consider, in enough detail, the extent to which the supply was a roof rather than an addition of energy saving materials to the pre-existing roof. In this vein it was also considered how customers interpreted the supply being made to them, the UT deciding that the supply would be taken by consumers to be an energy efficient replacement roof rather than insulation. A replacement roof is not an energy saving material, it is a roof and thus the supply should have been standard rated. It is stated that what should have been considered by the FTT is whether or not the supply was confined to a supply of energy saving materials, not whether it included a supply of this nature.

The UT agreed with HMRC and set aside the decision of the FTT, allowing HMRC’s appeal.

CVC Comment: When making supplies which could benefit from the reduced or zero rates of VAT, it is essential to know how to categorise the goods or services in order to prevent mistakes. If incorrectly applied to supplies, the reduced rate or zero-rate could leave businesses owing HMRC substantial amounts in respect of retrospective sales. HMRC may also apply penalties in respect of VAT accounting errors. HMRC can charge a 30% penalty of the VAT due for a failure to take reasonable care.

3. Services of agreeing discounts: taxable supplies?

The Upper Tribunal heard an appeal by Redwood Birkhill Limited (Redwood) which owns and manages public houses and hotels. In the course of this business it negotiates discounts with brewers by combining the buying force of Redwood and a number of publicans.

Paid back to Redwood as a rebate, the discounts were passed on to each publican in proportion in accordance with their agreement with Redwood. Redwood retained a proportion of the rebates paid over to it, amounts of which neither the publicans nor the brewers were aware. The issue before the UT in this scenario was whether the amounts retained by Redwood were consideration for supplies made to the publicans. HMRC had contended that taxable supplies were taking place, a position with which the FTT agreed. Redwood sought to argue that no supply was made and that the economic reality of the situation was that the publicans agreed to transfer their right to claim a discount to Redwood in exchange for the payments made to them by Redwood.

The UT disagreed with this, stating that the economic and commercial reality of the circumstances dictated that the supply should be characterised as a supply of services consisting of negotiating and administrating an arrangement with the Brewers. The purchases made by Publicans were aggregated with the effect of achieving higher discounts.

CVC Comment: When carrying on any business activity it is important to ensure that you are aware of any activity carried on which may be constituted as a taxable supply. Arranging rebates or discounts and acting as a ‘middle-man’ receiving commissions can be particularly complicated. Any businesses using this style of model should be aware of the potential VAT implications.

CVC VAT Focus 31 May 2018

31st May 2018

HMRC NEWS

Imports and VAT (Notice 702)

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

OTHER VAT NEWS

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

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

CASE REVIEW

CJEU

1. Retrospective application of VAT exemption schemes

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

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

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

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

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

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

2. Divergent criminal thresholds for taxation

Mauro Scialdone

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

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

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

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

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

Upper Tribunal

3.Student Accommodation: Zero-rating Certificate

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

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

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

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

First Tier Tribunal

4. Adjustments, agreements and time limits

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

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

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

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

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

5. Appeal by post: letter not received by Tribunal

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

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

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

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

CVC VAT Focus 17 May 2018

17th May 2018

HMRC NEWS

VAT on antiques or art from historic houses (Notice 701/12)

This explains which disposals of assets from historic houses are within the scope of VAT.

HMRC and online marketplaces agreement to promote VAT compliance

HMRC has committed to working with online marketplaces to set out a cooperation agreement to promote VAT compliance.

VAT: missing trader fraud

Find out how to spot VAT missing trader fraud and how to protect yourself or your business from organised criminals.

Revoke an option to tax after 20 years have passed

Form VAT1614J has been updated.

OTHER VAT NEWS

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

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

CASE REVIEW

CJEU

1. Right of deduction after a tax inspection

This request for a preliminary ruling concerns the interpretation of EU law and the principles of fiscal neutrality, effectiveness and proportionality. In the main proceedings, Zabrus Siret filed VAT returns following tax inspections requesting repayment of VAT. The national tax authorities refused to reimburse this tax as the amounts being claimed related to a tax period which had already been subject to an inspection by the domestic tax authority. Zabrus Siret appealed this decision.

There were two questions before the court in this instance, amounting to one main question, being whether EU law precluded national legislation which the right to reclaim VAT in respect of a tax period which had previously been subject to a tax inspection.

As the Court has held previously, the right of deduction is an integral part of the VAT system and may not, in general, be limited. The right to deduct VAT in Romania is subject to a five year limitation period which is shortened in the event of a tax inspection. The effect of this is that the taxpayer cannot correct VAT returns for tax periods which have been subject to an inspection. Whilst the Romanian authorities argued that this was a legitimate practice, the Court held that the EU law principles does preclude national legislation which prevent, in circumstances such as those in the main proceedings, a taxable person from claiming his right of deduction following a tax inspection.

CVC Comment: The right of deduction is fundamental and can only be limited in very specific circumstances. This ruling demonstrates that even where domestic laws seem to preclude this right in line with EU law, the CJEU are prepared to rule in favour of the taxpayer in matters such as those at hand. In practice this decision will have no impact on UK taxpayers as the UK rule preventing recovery of VAT once a VAT period is more than four years old is considered proportionate to the needs of the State to have certainty on its fiscal position.

2. Deductibility of VAT in a failed takeover

This case concerns Ryanair’s bid to take over Aer Lingus. Despite failing with its bid, Ryanair incurred significant VAT costs. Ryanair claimed a deduction of this VAT, which was denied by the Irish tax authorities on the grounds that acquisition and holding of shares does not constitute an economic activity within EU law.

Two questions are before the CJEU in this instance; whether an intention to provide management services to a takeover target is sufficient to establish that the acquirer is involved in an economic activity and if there can be a direct and immediate link between professional services rendered in the context of such a potential takeover and the potential provision of management services.

The Court has yet to issue a judgment but the Advocate General has issued a preliminary opinion, that input tax recovery was justified by Ryanair, not as a holding company, but because it was seeking to take over Aer Lingus in order to extend an operating business.

CVC Comment: We await a CJEU decision but if this follows the AG’s opinion then this would suggest that HMRC’s policies on input tax recovery are, in some cases, too restrictive.

Court of Appeal

3. VAT recovery: VAT incurred in relation to investment activity

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

Where management fees are incurred in relation to a non-taxable investment activity is it possible to make the necessary link between those costs and the economic activities which are subsidised with the investment income.

The Court of Appeal also seeks confirmation that its reading of the Sveda decision is correct and that no distinction is to be made between exempt and non-taxable transactions for deciding whether input tax is deductible.

CVC comment: the First Tier and Upper Tribunal previously ruled that the input tax incurred in relation to investment management fees could be treated as residual input tax and is recoverable to the extent that income derived supports taxable business activities. Taxpayers must hope that the CJEU agree.

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

Wakefield College, a charity, appealed against the Upper Tribunal’s decision that construction services provided to it in the course of constructing a new building were not zero-rated for VAT purposes. The supply in the course of construction of a building intended for use for a relevant charitable purpose i.e. a non-business activity, may be zero-rated.

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

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

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

The College’s appeal was dismissed.

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

Upper Tribunal

5. Third party consideration in a points reward scheme

This appeal by Marriot Rewards LLC & Whitbread Group PLC concerned whether payments made by Marriot Rewards (MR) to hotels participating in the loyalty scheme were consideration as a supply to MR or, alternatively, represented third party consideration paid by MR for supplies to customers redeeming points earned on the scheme, the reward being a “free” stay in a hotel. MR had submitted a reclaim of input VAT on the basis that payments made to participating hotels were consideration for services supplied.

A further issue arose; if payments were not third party consideration then were they payments for services relating to immovable property or advertising. This was relevant to the issue of where the supplies arose under VAT place of supply rules.

Upholding the decision of the FTT, the UT held that payments made by MR to hotels participating in the scheme were for supplies of services to MR. As regards the question of whether the supplies were related to land (immovable property) or advertising, the UT held that the supplies fell into neither description. This was relevant because for periods prior to 2010 Whitbread had sought to recover overpaid output VAT on the basis that it was, as a participating hotel operator, supplying services that fell outside the scope of VAT. Conversely, for periods after 2010, HMRC argued that the supplies should not have attracted VAT under the general place of supply rule, such that MR was ineligible to reclaim that VAT under the 13^th Directive (MR wanted the services to be land related such that UK VAT charged could be reclaimed.

CVC Comment: This was a complex case involving three parties with different interests in the outcome. However, as far as the fundamental question of who redeems supplied services to it further undermines HMRC’s attempts to view the beneficiary of business promotion schemes as the recipient of supplies, a preferred analysis if HMRC in seeking to block VAT refunds. Whilst there are aspects of this case and appeal which are unique, those operating points rewards schemes should consider and clarify the VAT position in relation to any supplies made between parent groups and “redeeming” participating parties. It is also important to consider carefully exactly what supplies are being made and where they are being made for tax purposes.

First Tier Tribunal

6. Requirement to provide security for VAT

This appeal concerns a requirement to provide security to HMRC in respect of, amongst other taxes, VAT. Owing to historic non-compliance by the appellant and on-going non-compliance following entering into a “Time to Pay” arrangement with HMRC for substantial arrears, HMRC served a Notice to Derby Access Scaffolding (DAS), the appellant, requiring security for future VAT.

It was submitted by the appellant that the Notices requiring security to be provided were flawed and unreasonable. HMRC had failed to enter into dialogue with the appellant and had therefore made unreasonable projections of profit for DAS. It was also submitted that HMRC’s internal reviews could not be fair as they were internal and that the principle that decisions be made in a fair and reasonable manner had not been followed in this case. HMRC contended that it was reasonable to require security in the given circumstances, especially when considering historic non-compliance.

The Tribunal gave very little consideration to the notion that HMRC’s internal reviews were not partial. It also held that there is no obligation on HMRC to enter into dialogue with those to whom it serves notices of requirement of security and that for the purposes of protection of the revenue the amounts required in security were not unreasonable. Ultimately DAS failed to satisfy the Tribunal on any aspect of its appeal and the appeal was therefore dismissed.

CVC Comment: In cases of serious non-compliance, HMRC will seek security against not only VAT but all other taxes. This case illustrates that when the obstacles to challenging such a judgment are exceedingly high and the Tribunal has shown no enthusiasm for involving itself in matters of detail and respects HMRC’s discretion.

CVC VAT Focus 26 April 2018

26th April 2018

HMRC NEWS

HMRC has updated guidance on its website as follows:

Register for VAT if you own land with another person

Find out if you need to register for VAT jointly or as an individual when you buy, let or develop land with another taxable person.

VAT registration for groups, divisions and joint ventures

Link to VAT registration for people who own land with another person added to ‘Joint ventures and VAT’ section.

Tell HMRC about an option to tax land and buildings

Notification of an option to tax land and or buildings (VAT1614A) form has been updated.

VAT MOSS exchange rates for 2018

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

OTHER VAT NEWS

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

CASE REVIEW

CJEU

1. Time limits on right of deduction of input tax: Portugal

In Biosafe, there were taxable supplies made in 2011 from one VAT registered trader to another (Flexipiso), in the course of business, with appropriate supporting documentation. Under EU VAT law, this gives rise to a right of deduction of the input tax incurred by the purchaser in the relevant VAT period on purchases which relate to those taxable supplies. Flexipiso recovered the relevant input VAT, charged at the reduced rate of 5%, incurred on purchases from Biosafe. Several years later, Biosafe were subject to a tax inspection which revealed that the reduced rate of 5% had been incorrectly charged. The Portugese authorities assessed that the supplies were subject to the standard rate of VAT of 21% (Portugal) and Biosafe paid over the monies assessed.

Biosafe sought reimbursement from Flexipiso who refused to pay on the grounds that, under domestic law, their right to deduction of input VAT expired four years after the original supply was made. This brought two questions before the CJEU. The first being, does EU law preclude domestic legislation which prevents the four year period during which a right to deduction arises beginning again on the date assessment documents are issued to the supplier. The second being, if the answer to the first question is no, does the EU law preclude domestic legislation which, in the current situation, makes it legitimate for the purchaser to refuse to pay VAT when it is impossible to deduct that additional tax?

In response to the first question, it was held that the Directive does preclude domestic legislation where the right to deduct input tax is refused on the ground that the time limit for that right started to run from the date of the initial invoice. In the light of this response, the Court held that the second question did not require an answer as it follows logically from the first that a taxable person may not be denied the right to recover input tax by domestic time limits.

CVC Comment: This case confirms that where input tax has been deducted at an incorrect rate, the right to recovery by the business incurring the incorrect expense cannot be precluded by domestic time limits on the right to recovery.

2. Interpretation of EU Law on deduction adjustment

This case concerning SEB Bankas AB (SEB) was related to a supply made to SEB by VKK Investicija (VKK) of building land. Initially the parties had agreed that the transaction was subject to VAT. Some years later VKK decided that the supply was VAT exempt and raised a credit note to SEB to reflect this. This left SEB owing the authorities the input VAT originally deducted on the transaction. A fine was raised on SEB by the authorities as well as the assessment to tax. After progressing through domestic courts, questions came before the CJEU regarding the interpretation of the EU law on VAT adjustments.

The key questions before the court were; whether the obligation to adjust undue VAT deductions applies where the initial recovery could not have been made lawfully as the transaction was exempt and, if so, whether the mechanism for doing so applies in situations such as those in the main proceedings. The Court held that the EU law does require the adjustments of VAT deductions which should not have arisen because VAT was charged unlawfully.

As regards the date on which the adjustment should be made, the CJEU held that this is for national courts to decide, taking account of the principles of legitimate expectation and legal certainty and that a taxpayer’s deduction of VAT cannot, applying the principle of legal certainty, be open to challenge for an indefinite period.

CVC Comment: Where a deduction of tax has been, mistakenly, unlawfully made in relation to an exempt supply, then there is a duty on the person making the deduction to make an adjustment when this is discovered. Whether or not the obligation arises immediately is a matter which has been left open to domestic interpretation. It appears that UK policies are already in line with this decision insofar as in most cases, after four years, VAT periods are no longer open for a mandatory adjustment.

3. Triangulation and EC Sales Lists

Firma Hans Bühler, a limited partnership established and VAT registered in Germany and also identified in Austria for VAT purposes, bought products from suppliers established in Germany. Those products were sold to a VAT registered customer in Czech Republic. The products were dispatched directly from the German supplier to the customer in Czech Republic. The German supplier provided its German VAT registration number and Firma Hans Bühler’s used its Austrian VAT registration number on its invoices provided to the Czech Republic customer. The triangulation simplification was used; as such, the final customer in the Czech Republic accounted for VAT due in the Czech Republic.

The Austrian tax authorities found that Firma Hans Bühler’s supplies were ‘abortive triangular transactions’ because the reference to triangular transactions did not appear on Firma Hans Bühler’s EC Sales List.

The CJEU stated that the triangulation simplification cannot be refused because the EC Sales List has been submitted late. In addition, it is not relevant that Firma Hans Bühler’s Austrian VAT registration number was no longer valid on the date it submitted its EC Sales List (it is relevant that the VAT number is valid at the time of the supply). If the failure to submit correct EC Sales Lists on time meant that the taxpayers could not evidence the conditions for triangulation had been met, the triangulation could not apply.

The CJEU also commented that the benefit of the triangulation simplification cannot be refused on the basis that the intermediate supplier is VAT registered in the member state of dispatch.

CVC comment: the judgment confirms that the triangulation simplification can apply even if the taxpayers EC Sales Lists are not compliant provided the taxpayers can evidence that all of the conditions for simplification are met.

First Tier Tribunal

4. Sufficiently Self-contained?

This appeal by Colin James Mitchell and Kim Louise Mitchell concerned the recovery of input VAT under the DIY Builders Scheme in respect of the construction of a building in their garden. HMRC had initially refused the recovery on the grounds that not only was the building was not “self-contained living accommodation” but also that the planning consent prohibited the separate use of the building from the house; conditions necessary for a claim under the DIY Builders Scheme.

In order for a refund to be successful the building must be self-contained living accommodation and a key issue between the appellants and HMRC in this case was the absence of a kitchen in the new building. HMRC contended that this meant the building was incapable of being self-contained. The Tribunal agreed, on this point, with the appellant who argued that the ability to install and use a microwave was sufficient for the building to be constituted as self-contained.

The second prong of HMRC’s contention was the prohibition of separate use of the building in the planning permission, “…shall not be used as a separate residential unit at any time” amounts to a prohibition on separate use. They also add that the planning permission for a “garage” cannot be construed as a “dwelling”.

The Tribunal agreed with HMRC on the second point and dismissed the appeal.

CVC Comment: In cases where planning permission specifically forbids separate residential use of a construction then the Tribunal are unlikely to find in favour of the applicant. Prior to any expenditure on development it is vital that the tax implications be considered and this involves detailed analysis of the proposal and planning permission granted.

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

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

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

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

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

VAT recovery, supplying insurance and the benefits of customer location

20th April 2018

Introduction

Normally the terms insurance and VAT recovery do not go hand in hand. Insurance is VAT exempt under Schedule 9, Group 1 of the VAT Act 1994. Exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to VAT recovery may be ‘specified’ to do so when the customer is located outside the EU.

Supplies of insurance that allow VAT recovery

The Specified Supplies Order 1999/3121 gives a VAT recovery right in relation to supplies of insurance intermediary services such as brokers when the customer is based outside the EU. Additionally, in relation to intermediaries, a right to reclaim VAT on business costs exists when they arrange a supply of insurance to a non-EU person. In practical terms, this means that many UK based insurers and agents and brokers with an international aspect to their customer base do have the right to partial recovery.

If such supplies are made the VAT recovery position should be considered, particularly where these form a material portion of the business’ supplies.

Are my customers outside the EU?

It is easy to overlook that some European locations are not part of the European Union. Supplies of insurance or insurance intermediation services could still provide a VAT recovery right. For example:

• Jersey
• Guernsey
• The Canary Islands
• Gibraltar
• Norway
• Iceland

It is worth reviewing customer location or the location of underlying supplies if they involve these locations as a potential VAT recovery benefit might not be recognised.

Insurance for export of goods to outside the EU

Supplies of insurance related to export of goods from the EU may also allow VAT recovery. Where:

• goods are being exported by the recipient of the insurance;
• insurance is directly linked to the specific goods being exported, and
• the insurance covers the risks of the person who owns the goods or is responsible for their export.

This would also be a supply of insurance specified to allow a right to VAT recovery.

Assistance

VAT recovery and customer location may provide significant opportunities to companies offering insurance. The interaction of location and the partial exemption rules adds complexity and this may be when professional expertise becomes invaluable in realising an opportunity. CVC has assisted many businesses in this sector to improve their position in relation to VAT whilst also ensuring that this is within a compliant, logical and workable framework.

If you would like to discuss this area please contact Dean Carey or Robert Thorpe on 01206 321029.

CVC VAT Focus 12 April 2018

12th April 2018

PARTIAL EXEMPTION

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

HMRC NEWS

VAT: road fuel scale charge tables

VAT Updated Valuation Table: Road Fuel Scale Charges effective from 1 May 2018 added to the page.

VAT Notice 700/11: cancelling your registration

This notice tells you when and how to cancel your VAT registration.

VAT Notice 700/1: should I be registered for VAT?

This notice cancels and replaces Notice 700/1 September 2016.

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

Page updated with link to new application service and further information what information needed to apply to register.

CVC BLOG

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

Where certain conditions are satisfied, the sale of donated goods by a charity is zero-rated for VAT purposes. This can be beneficial because no output VAT is due on the income generated by these sales but a right to input VAT recovery on associated costs arises.

CASE REVIEW

First Tier Tribunal

1. Reasonable Excuses?

In this instance the Tribunal heard an appeal from an individual, Mr. Phillip Ashley Legg against HMRC’s decision to impose various surcharges ranging from VAT accounting periods 12/05 to 12/14.
During this period, Mr Legg only made two payments from 14 September 2006 and 29 June 2012. Mr Legg sought to contend that he had a reasonable excuse for his behaviour in that he had contacted HMRC to establish a payment plan for the surcharges and by 2014 he had cleared all actual VAT arrears. Mr Legg relied heavily on the fact that his profits took a large drop in the period in question, owing to a rapid decline in his area of business.
Whilst the Tribunal accepted a sharp decline in the business had taken place, it still held that this was not a reasonable excuse as the down-turn took place over a number of years and Mr. Legg should have, as a prudent businessman, made adaptations to evolve and fortify himself against changing market conditions. The Tribunal were more sympathetic towards Mr Legg’s catastrophic hard drive errors which led to a severe loss of data. They also took into account that during the period in question, Mr Legg’s father was ill and Mr Legg played a large role in his care.
The important test in relation to a ‘reasonable excuse’ relates to whether or not the taxpayer has behaved reasonably in his or her circumstances. Whilst the Tribunal confirmed that a down-turn in business could not constitute a reasonable excuse, the death of a close relative and fatal computer crashes losing to loss of accounts can. For these reasons, the Tribunal allowed the appeal in half, cancelling a selection of those surcharges not relating to the decline in business activity.

2. Supply or unsolicited delivery

This appeal related to whether the applicant, Quality Engines Direct Ltd (QEDL), supplied silver ingots to Microring, a potential purchaser of the company. Whilst in the process of dealing with a transfer of his business, the proprietor (Mr. Rafiq) engaged with a purchaser (Mr. Healey) who immediately began treating the business as his own; making deposits and withdrawals and using the business address. HMRC questioned two invoices relating to the sale of silver from Mr. Rafiq to Mr. Healey which took place before the transfer of QEDL. The veracity of these invoices was denied by Mr. Rafiq, who denied any supply of silver was made to Microring or to Mr. Healey, or that QEDL makes supplies of silver at all, and that he owes no VAT on this alleged supply. He contended that the invoices raised by Microring are not genuine and there had been no silver trade activity with Microring at all.

Mr. Rafiq claimed that delivery of the silver to his business address was not sanctioned, the packages remained unopened as they were unsolicited and he informed Mr. Healey to remove the packages, which he did.

The Tribunal agreed on appeal with Mr. Rafiq that the delivery of silver was unsolicited, the invoices had been recreated by Mr. Healey on behalf of Microring. The Tribunal found that as the packages of silver were unsolicited, unopened and removed as a matter of urgency, that QEDL had not made a supply to Microring and Mr. Healey had in fact made the order.

3. Omitted sales and disallowed input tax

In this case, Mr. Paul Shore, trading as “DP Contractors” disputed a decision by HMRC in relation to his 04/11 VAT return. Mr Shore submitted that in this period of trading he was owed a £3,025.60 VAT repayment. HMRC submitted that due to under-declared output VAT of £16,599.40 and over-declared input VAT, Mr. Shore in fact owed £14,605.52 to HMRC.

Mr. Shore traded as DP Contractors which he claimed HMRC had confused with D&P Contractors, a separate firm to which he was a partner alongside Mr. David MacMillan. D&P Contractors had tendered for a contract with Southern Electrical Contracting Limited (SEC) using Mr Macmillan’s VAT registration number as Mr. Shore was not, himself, registered for VAT. Whilst Mr Macmillan was taken ill, Mr. Shore continued to trade using the VAT number of D&P Contractors whilst establishing himself as a sole proprietor “DP Contractors”.

Mr MacMillan played no role in the business being done for SEC by Mr. Shore and ceased to trade with D&P Contractors owing to injury and received no payment from Mr. Shore for on-going work. D&P Contractors issued over 190 invoices to SEC without declaring these on VAT returns and could offer no reasonable explanation for this. Mr. Shore attempted to highlight some discrepancy between the names of the firms but, as the Tribunal found, the same VAT registration number and bank account were used in continuing the trade by Mr. Shore and that the suppressed sales were correctly assessed on Mr. Shore, despite his pleas that Mr. Macmillan was jointly responsible.

Irrecoverable input tax which had also been deducted by Mr. Shore for items such as power showers were also disallowed and a forgery was uncovered for the purchase of a lorry. The Tribunal dismissed all appeals by Mr. Shore and upholds the assessments in full in relation to the suppressed sales.

CVC VAT Focus 22 March 2018

22nd March 2018

PARTIAL EXEMPTION

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

HMRC NEWS

Revenue & Customs Brief 3 (2018): Changes to the VAT exemption for cost sharing groups.
This brief and the related VAT information sheet explain the immediate changes that are taking place in HMRC’s policy following recent judgments

VAT Notes 2018 Issue 1
HMRC has published its 2018 VAT Notes Issue 1.

VAT: businesses that sell goods in the UK using online marketplaces
Updated with changes announced in the Autumn 2017 Budget for sellers that use online marketplaces.

VAT returns and EC Sales Lists Online: VAT
How to use the test service: 4.1 guidance has been updated with version 4.2.

Draft legislation: The Value Added Tax (Amendment) Regulations 2018
Response to consultation has been published.

CVC BLOG

Spring Statement 2018 and VAT

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT. Please see our news item for further information.

CASE REVIEW

Upper Tribunal

1.Planning Permission Post-Sale

Cavendish Green Limited (Cavendish) appealed against a previous decision that the sale of a building did not qualify for zero-rating as the structure present at the point of transfer did not have automatic statutory planning permission and had not received planning permission from elsewhere. In the absence of the necessary planning permission, the sale should have been treated as VAT exempt and Cavendish should not be able to claim back input VAT relating to the project.

The First Tier Tribunal made it clear that planning permission must be sufficient at the time of supply in order for the sale of a building to benefit from zero-rating. In the Upper Tribunal, Cavendish sought to introduce new evidence to show that the structure in question did in fact have statutory planning permission at the time of sale and was thus able to benefit from the zero-rate. The Tribunal refused to admit this evidence as it found the behaviour of Cavendish to be “most unsatisfactory” as it failed to make a formal written application with evidence to support its claims and the addition of new evidence would not be fair and just.

The appeal was dismissed as the taxpayer had no proof to demonstrate that the structure met the conditions for automatic statutory planning permission, this case may have had a different outcome had Cavendish approached the Tribunal differently.

First Tier Tribunal

2. Sales of properties; TOGCs?

In this case the Tribunal considered whether the sale of four properties by Clark Hill Limited satisfied the necessary criteria to be treated as transfers of going concerns and, therefore, be outside the scope of VAT as neither a supply of goods nor services. The main issue between the parties is the interpretation of “relevant date” in the VAT law.

The Tribunal issued four decisions, relating to one property each. In three from the four transactions before the court, the transfer was held not to be a TOGC as HMRC had not been informed of the exercising of the option to tax by the “relevant date” which is held to be the date on which the deposit is received by the seller’s solicitors. The fourth property transaction presented its own unique circumstances which led to a different conclusion. The deposit was paid to the auctioneers of the property on the 3^rd of December, the seller’s solicitors received the funds on the 16^th. The point on which this question turns is the capacity in which the auctioneers held the deposit; agent or stakeholder.

HMRC contend that the funds were held by the auctioneers as an agent for the seller and therefore that Clark Hill should be treated as having received the deposit when the auctioneers did, on the 3^rd December. Clark Hill refuted this, claiming that there is no evidence to support the claim that the auctioneers were agents. The Tribunal agreed and this transaction was treated as a TOGC.

3. Appealing an assessment out of time

In Homechoice Flooring Limited (HFL), the appellant’s director, Mr. Singh, sought permission to make a late appeal in respect of a VAT assessment. Mr. Singh was over two years late in making this appeal, his explanation being that he believed he had in fact, through his former accountants, lodged an appeal already. He sought to contend that as he believed HFL’s accountants were dealing with the appeal, he had no cause to believe any further action was required on his or HFL’s behalf.

In response, HMRC looked to whether or not there was a reasonable excuse for the delay, arguing that HFL’s contention that an appeal had been made is not supported by any documents and there is no record of an appeal at HMRC in relation to this matter. It was also put forward that as Mr. Singh had changed accountants twice since the assessment, he could reasonably have been expected to make enquiries into the status of the appeal he believed to be ongoing.

As Mr. Singh made no effort to check on the status of HFL’s appeal, the Tribunal found that his excuse could not be seen as reasonable and therefore dismissed his appeal. They also stated that poor trading results do not amount to a reasonable excuse.

4. Bridge between buildings: does it make an annexe?

St Brendan’s Sixth Form College (St. Brendan’s) appealed against a decision made by HMRC that certain construction works carried out for St Brendan’s were liable for VAT at the standard rate, not zero-rated as St Brendan’s believed. A new block was built in order to provide extra space for teaching, a café and a staff room. The question is whether the new building qualified for zero-rating under Item 2, Group 5, Schedule 8 Value Added Tax Act 1994.

HMRC argued that the new building was not a separate building because of a link bridge between the new building and a pre-existing building. It was also contended that as the activities that will take place in the building are similar to those already taking place on the site in other buildings, the new building is actually an extension of the existing buildings. To refute this, St Brendan’s contended that the building is a separate building with its own access and facilities and is a different type of building and constructed of different materials, and serving different purposes.

After considering all points and taking into account the relevant case law, the appeal was allowed on the grounds that the new building was a new building and was not merely an extension of, or annexe to, the pre-existing buildings on site.

5. Zero rating hot food

Pegasus (Manchester) Limited (Pegasus) appealed against a VAT assessment relating to food sales which HMRC deemed to be hot and therefore standard rated. The appellant sold takeaway food in spill-proof containers which were not intended to retain heat. Pegasus contend that the food served is not intended to be hot at all but is served warm as a result of storage at 56C in a bain-marie, in order to comply with the food safety and hygiene regulations 2013. Before being placed in the bain-marie the food is cooled to 19-20C which is below the ambient temperature of the restaurant which is claimed to be 28-30C.

HMRC submitted that as the cooked food is kept in a bain marie with a temperature of 56C, the food is hot as it is above the ambient temperature; “hot” does not need to mean piping hot. It is also submitted that the main purpose of the bain marie is to sell hot food and moreover that compliance the food safety and hygiene regulations 2013 is only required where food is to be sold as hot. The provision by the appellant of napkins and cutlery to customers imply that the food is to be consumed as it is sold and it is sold as hot food.

The Tribunal found in favour of HMRC in this instance as the food is kept hot before being served and is hot as defined in the relevant legislation when it is supplied. The supply should therefore be standard rated.

6. Default surcharge direct debit not taken

Crown Blinds Limited appeal against a VAT default surcharge relating to late payment of VAT. The appellant does not dispute that the VAT for the relevant time period was paid late but submits that he had a reasonable excuse as he had a direct debit instruction in place for the payment of VAT but HMRC had failed to process this.

The appellant had cancelled the direct debit and reinstated it several times between September 2016 and March 2017 and HMRC had contacted the appellant on each of these occasions to state that if payment of VAT is to be taken by direct debit then a new instruction must be set up online or by sending paper instruction. Despite an email from the appellant’s bank manager stating that the direct debit had been reinstated on 5^th June 2017, the payment was not processed as the instruction was not reinstated on HMRC’s systems. HMRC had already advised that a new mandate would be required in correspondence in March 2017 and submit that a prudent trader would have acknowledged the correspondence and used an alternative method to make payment for the relevant periods.

The Tribunal found in favour of HMRC, stating that the appellant should have paid closer attention to the correspondence from HMRC which made clear that the direct debit was not being processed. The appellant cannot be said to have a reasonable excuse so the penalties were confirmed in full.

2018 Spring Statement and VAT

News

15th March 2018

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT.

VAT threshold

One of the conclusions of a recent Office of Tax Simplification (OTS) report regarding UK VAT was that the relatively high VAT registration threshold has a distortionary impact on business growth. The OTS recommended that the ‘government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism’. As a result the government has now published a call for evidence.

This call for evidence is split into three chapters.

the first explores in more detail how the threshold might currently affect business growth
the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
the third considers possible policy solutions, based on international and domestic examples

Responses to the questions raised by the consultation should be submitted by 11:59pm on 5 June 2018

Split Payment Method of VAT collection

HMRC is also consulting on an alternative method of VAT collection to help combat VAT losses arising as a result of the expansion of e-commerce. A split payment method would see VAT separated and paid at the time of the transaction, rather than on a periodic basis via the VAT return process. Through this consultation, HMRC are asking for views on potential options for a split payment mechanism, whilst also further assessing the overall viability of split payment by seeking the views of a wider range of stakeholders.

Responses to the questions raised by the consultation should be submitted by 11:45pm on 29 June 2018

CVC VAT Focus 08 March 2018

8th March 2018

PARTIAL EXEMPTION

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

HMRC NEWS

VAT Notice 706/2: Capital Goods Scheme

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

VAT: Fulfilment Business Approval Regulations

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

Genuine HMRC contact and recognising phishing emails and texts

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

CVC BLOG

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

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

CASE REVIEW

Court of Justice of European Union (CJEU)

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

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

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

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

Upper Tribunal

2. VAT liability of timeshare

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

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

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

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

First Tier Tribunal

3. Permission to appeal out of time

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

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

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

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

4. Whether partial exemption special method fair and reasonable

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

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

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

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

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

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

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

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

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

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

CVC VAT Focus 22 February 2018

22nd February 2018

HMRC NEWS

‘Reasonable care’ guidance

HMRC has issued guidance on what it considers to be ‘reasonable care’. If a taxpayer fails to take reasonable care HMRC can and will issue penalties.

CVC BLOG

CVC client wins case before Tribunal – construction of clubhouse for community use is zero-rated

In CVC’s latest blog Stewart Henry is pleased to report that CVC’s client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT).

CASE REVIEW

First Tier Tribunal

1. Construction of clubhouse is zero-rated

In 2010 Greenisland Football Club (GFC) commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community. In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test.

The First Tier Tribunal allowed GFC’s appeal. The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate.

Stewart Henry considers this decision in detail in his blog.

CVC comment: for a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

If you are involved with a charitable or not-for-profit sports club or association (or any other charity) and are in dispute with HMRC over a technical VAT matter or interpretation of VAT law please do not hesitate to contact CVC. We would be pleased to help.

Upper Tribunal

2. Banana and strawberry flavoured Nesquik held to be standard rated (HMRC accept that chocolate Nesquik is zero-rated)

Nestle UK Limited appealed the FTT’s decision that its banana and strawberry flavoured Nesquik is standard rated for VAT purposes. HMRC accept that chocolate Nesquik should be zero-rated (as a preparation of cocoa).

Beverages and products for the preparation of beverages are specifically excluded from the zero-rate for food (subject to certain exceptions including milk). Nestlé presented two arguments before the UT. First, Nestlé argued that the legislation should be read purposively so that the meaning of the legislation was to remove milk and preparations thereof from the concept of beverage. Milk is zero-rated for a defined social reason. The supply of a ready-mixed milk drink flavoured with Nesquik would be zero-rated. Nestlé contended that Parliament could not sensibly have intended that an ingredient to be added to a zero-rated drink to create a drink that if sold in its pre-prepared form would be zero-rated, should be subject to VAT at the standard rate. The UT could see no indication of any wider purpose or intent to zero-rate the separate supply of powders that are added to milk.

Nestlé’s second argument was that unless the powder created a new or different beverage, the powder could not be for the “preparation of beverages” and therefore did not fall within exceptions to the zero-rate. The UT also dismissed this argument. The only use to which Nesquik is intended to be put is in the preparation of flavoured milk drinks.

CVC comment: this case serves as a reminder as to the difficulty of interpreting the VAT legislation regarding the application of the zero-rate to food.

3. Supercar driving experience – VAT liability of collision damage waiver payments

The Tribunal considered the VAT treatment of collision damage waivers offered by Supercar Drive Days Limited (SDDL) in connection with its main business of providing supercar driving experiences. The issue before the Tribunal was whether the waivers qualified for VAT exemption as supplies of insurance. HMRC ruled that the waivers were taxable at the standard rate.

SDDL’s customers are liable to pay for any damage to a vehicle up to a value of £2,500. If the customer chooses to pay a fee for a collision damage waiver the £2,500 liability would not arise. SDDL argued that the waivers are supplies of insurance. SDDL does not hold the relevant authorisation to permit it to underwrite insurance.

The Tribunal found that the waivers were not insurance. The waiver simply varies the potential liability of the customer under the contract.

CVC comment: suppliers that offer waivers for additional payment may need to consider the VAT treatment of such payments in light of this case.

4. Branches found to be independent for VAT purposes

The National Federation of Occupational Pensioners (NFOP) challenges a decision by HMRC that branch rebates collected by NFOP form part of the taxable consideration received by NFOP for VAT purposes. There were two issues before the Tribunal: (1) whether NFOP’s branches are separate taxable persons for VAT purposes, and (2) whether the branch rebate should be included in the membership subscriptions paid to NFOP for VAT purposes, or should be treated as an amount collected on behalf of branches and belonging to them.

The Tribunal found that the branches are separate entities from NFOP for VAT purposes. NFOP’s role is more support, guidance and coordination, rather than direction or control. The existing branches were all established before NFOP was incorporated. There are significant variations between the individual branches which supports the finding that the branches are independent. In reality a branch decides how it conducts its activities and spends its money.

However, despite succeeding on the first issue, NFOP was unable to demonstrate that the branch rebates are collected on behalf of branches. Therefore, branch rebates received form part of NFOP’s taxable income for VAT purposes.

CVC comment: the Tribunal’s decision regarding branches may have wider implications. It is possible this case will be heard before the Tribunals again as there appear to remain unresolved issues.

5. Whether HMRC assessment made to best judgment

HMRC raised an assessment in the sum of £29,539 following a visit to Southgates UK’s premises. HMRC took the view that Southgate UK’s losses were unsustainable. It was not conceivable that someone would be able to continue to trade in such circumstances. HMRC found it impossible to reconcile VAT returns submitted with the business’ underlying records and invoices. HMRC’s assessment was based on “capital introduced” or “deficits” in SAGE accounts. HMRC assumed that these figures were under-declared sales.

Southgates UK’s accountant explained that there had been problems with the business. Due to a decline in business, the appellant’s son had left in 2010. The appellant struggled to maintain records while running the business and dealing with ill-health. There was also an ongoing problem with a spare parts supplier which resulted in court action.

The accountant could not explain why his analysis of the records of the business produced a lower sales figure than those in the submitted VAT returns. The accountant did explain that the “capital introduced” transactions in SAGE were to ‘true up’ the accounts and zero out losses.

The Tribunal found the appellant to be a credible witness. HMRC’s assessment was based on one set of figures. The Tribunal therefore found that the VAT assessment was not made to best judgment. HMRC did not use other information in its possession to confirm whether or not it was reasonable to base the assessment on a single accounts entry. The Tribunal directed that the VAT assessments should be reviewed by HMRC.

CVC comment: taxpayers should always ensure any VAT assessments HMRC issue are made to best judgment. This is particularly important where the matter is ambiguous and not straightforward.

6. Supply of lift passes for main ski slope – whether reduced rated transport

Snow Factor Limited (SFL) operates an indoor snow sport resort. The appeal before the Tribunal relates to the VAT liability of lift passes for the main ski slope. SFL argues that the lift passes are subject to VAT at the reduced rate (5%) as a cable suspended passenger transport system. HMRC disagreed and raised two VAT assessments in the sum of £156,160 plus interest and £138,555 plus interest.

The Tribunal found that SFL’s supplies are excluded from the reduced rate because the legislation provides that the reduced rate does not apply to the transport of passengers within a place of entertainment, recreation or amusement by the person who supplied a right of admission to, or a right to use the facilities at, such a place.

CVC comment: This case demonstrates the importance of determining the correct VAT liability of supplies made. SFL has received VAT assessments totalling £294,000 (including interest) in the three years to 29 February 2016. An HMRC enquiry arose in this case because SFL submitted an Error Correction Notice to HMRC to recover output VAT it believed it believed incorrectly declared in the VAT accounting period ending 31 May 2013.

CVC client wins case before Tribunal – construction of clubhouse is zero-rated

13th February 2018

Constable VAT Consultancy LLP (CVC) is pleased to report that our client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT). GFC and CVC would like to thank Tim Brown of Temple Tax Chambers who represented the charity at the hearing in Belfast.

1. Background

In 2010 GFC commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community.

In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

GFC fulfilled its original intention. Since its construction the building has been enjoyed by various community groups and local people.
HMRC carried out a targeted and proactive campaign in 2014 when it wrote to numerous charitable sports clubs. HMRC sent a standard seven question letter to a range of sporting clubs in the UK. HMRC clearly feels that many sports organisations have benefitted from zero-rating when they should not have done. Some clubs are not registered with the Charity Commission which may be problematic for such organisations when seeking zero-rating.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test. The decision to raise the penalty assessment was upheld on review by HMRC in 2015 and the charity appealed HMRC’s decision.

The case was originally listed to be heard on 8 January 2016. A few weeks before the hearing HMRC applied for the case to be stood over pending the decision in Caithness Rugby Football Club (Caithness) which was under appeal to the Upper Tribunal (UT). HMRC subsequently lost Caithness but then applied for GFC’s case to be stood over behind HMRC’s preferred new lead case. Due to the amount of time GFC’s appeal had been taken to be heard, and the uncertainty impacting adversely on GFC’s charitable activities, GFC opposed HMRC’s request. The Tribunal refused HMRC’s application. This allowed GFC to proceed to Tribunal last month.

2. GFC’s position

The charity’s position is as follows:

GFC is a registered charity recorded on the charity register.
The building it constructed is not a village hall but it is similar to a village hall and used as such.
The charity’s intention prior to construction was that the building would be a facility which would be used by the wider community and not just GFC.
The charity’s original intention has been demonstrably fulfilled. The facility has been used by a range of community groups giving the local population access to a wide range of activities they would not previously have had an opportunity to partake in.
The building is available for use on a ‘first come first served’ basis.

3. HMRC’s position

Sports clubhouses are ‘dual purpose buildings’ and are not used ‘similarly’ to a village hall because such facilities are used by a) the club and b) the local community.
Only use by the community qualifies for RCP use and this does not include use by a local sports club, even though a local sports club is inevitably part of that local community.
If a decision on hire and bookings is at the club’s discretion the facility cannot be said to be ‘similar’ to a village hall (i.e. ‘first come first served’) because use is not at the direction of the local community but GFC.
The term ‘similarly’ means similar to the way a village hall operates i.e. the trustees or committee of a village hall would be made up of individuals from various local groups and clubs.
The renting out of a facility to a variety of local groups or members of the community by a charity, or the provision of social and recreational facilities by a charity, does not necessarily mean that zero-rating applies to the construction of a new facility.
HMRC also suggested GFC was using the clubhouse for business purposes because it charges adult members a subscription and the parents of junior members pay fees to cover costs such as purchasing equipment.

4. Decision

The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate. The appeal lodged covered both issues. This, the reasonable excuse point, is something which we would recommend any club involved in a dispute with HMRC considers. GFC had read HMRC’s VAT public notices and discussed the matter with professional advisors.

5. Overview

For a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

HMRC appears to have a two pronged strategy in attacking zero-rating in GFC and similar cases.
Firstly, the management of the building should be vested in a committee that represents a number of community groups. This approach has not been supported by the UT.

Secondly, HMRC believes there is a difference between a charitable sports club’s use of a facility and the community’s use of that same building. This ‘dual purpose’ argument means a distinction should be drawn because the two uses are different and are not both RCP. The use by the club, according to HMRC, is not RCP. This seems an unreasonable argument when considering that members of local sports clubs are very likely to come from their local community. It is difficult to view amateur sport as anything other than a recreational activity, as contemplated by the zero-rate provisions.

Viewing the Hansard entries dated 12 July 1989 (Value Added Tax: Buildings and Land Volume 156 1036-63) Peter Lilley, the then economic advisor to the treasury, is recorded as saying in Parliament when referring to this matter “the amendment therefore seeks to reinstate for the construction of charitable community buildings the zero-rate which was abolished on 1 April as a consequence of last year’s court judgment”.

Mr Lilley went on to say “the amendment is confined to buildings run by charities. It covers church halls, village halls and other community buildings providing similar social and recreational facilities for a local area. It also extends to buildings such as cricket pavilions and changing rooms, constructed for charitable playing fields and recreation ground associations”.

When Mr Lilley was questioned on the application of the zero-rate he responded as follows: “The Honourable Member for Wrexham (Dr Marek) asked me to clarify the definition further and asked in particular whether it would include sports halls. For those sports halls that are both charities and run for the benefit of the local community, the answer is yes, they will be included, as they come under the general heading of providing recreational facilities”.

It is disappointing that HMRC is actively pursuing voluntary organisations whose members and supporters devote so much free time and effort to help their local communities. This not only seems at odds with VAT law but also what Parliament intended that law to include. The majority of people volunteering do their very best to satisfy all of the many regulatory requirements necessary when operating a not-for-profit sports club, including VAT. Such organisations are usually very small with a low turnover in terms of income generated. The activities of these clubs may mean that committee members or Trustees take personal financial risks in return for their endeavours. HMRC seems to consider that it is justified in investing large sums of taxpayer’s money trying to prevent such organisations benefitting from a relief that is quite clearly intended to apply.

CVC VAT Newsletter for Charities – February 2018

9th February 2018

This VAT & Charities newsletter comments on the following:

Local Healthwatch organisations campaign by HMRC
VAT & crowdfunding
VAT exemption for welfare services
Whether the construction of a cricket pavilion was zero-rated?
Whether free admission to events run by a charity are non-business activities and the VAT recovery implications
Supplies of membership services – single or multiple supply

1. Local Healthwatch Organisations campaign by HMRC

Readers may recall the recent First Tier Tribunal (FTT) case concerning Healthwatch Hampshire C.I.C where it was concluded that its supplies to Hampshire County Council are taxable for VAT purposes. It appears HMRC have been reviewing turnover generated by similar organisations from such services using the Charity Commission’s website. Local Healthwatch Organisations were approached by HMRC questioning the VAT liability of their supplies. HMRC has now confirmed that it does not agree with the FTT decision; however, it has not appealed this decision to the Upper Tribunal (UT).

CVC comment: It is interesting to note that HMRC has dramatically decreased the number of Briefs issued in recent years. Revenue & Customs Briefs are used by the Commissioners to communicate any changes in policy and to comment on decisions of the Tribunals and Courts. HMRC has not formally commented on the Tribunal’s decision in Healthwatch Hampshire. In that case HMRC argued that supplies to the Council were outside the scope of VAT and current guidance reflects this. Why HMRC did not issue a Brief on this occasion is not clear. This would have been a more efficient approach for all parties rather than put Local Healwatch Organisations to the expense of dealing with written enquiries.

2. Are funds raised via Kickstarter payment for services in advance?

Lunar Missions Ltd raised funds through crowdfunding platform, Kickstarter, which amounted to £672,447 and were paid on 6 January 2015. Lunar Missions’ plan was to send an unmanned robotic landing module to the moon. A £60 pledge will reserve backers a digital memory box that will be buried on the moon during the mission.

The issues in this case were whether the sums received were prepayments of consideration or consideration for supplies of face-value vouchers. If they are prepayments then the tax point is the date of receipt. If they are face-value vouchers, the tax point will depend on whether the vouchers are ‘single purpose vouchers’ (SPV). Whilst the default position for vouchers is that the tax point is the date of redemption, for SPVs, the tax point is the date consideration is received on issue of the vouchers.

The Tribunal considered the terms and conditions on Kickstarter’s website and the benefits associated with pledges. The Tribunal held that backers are supplied with face-value vouchers which are redeemable for one type of service, namely space in a time capsule. As such, the vouchers supplied were SPVs and taxable at the time of issue. The Tribunal upheld HMRC’s decision to VAT register Lunar Missions with effect from 16 December 2014.

CVC comment: With crowdfunding sites proving increasingly popular for charities, this case highlights the need for charities to consider the VAT implications of the receipt of such funding.

3.VAT exemption for welfare services

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

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

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

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

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

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

The Tribunal found that the Club was not established for charitable purposes at the relevant time (it was not registered with the Charity Commission)therefore, the Club’s appeal failed.

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

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

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

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

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

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

6.Supplies of membership services – single or multiple supply

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

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

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

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

CVC comment: this decision provides interesting commentary regarding the distinction between single and multiple supplies for VAT purposes. This is particularly relevant to charities which make supplies to members or offer a range of benefits for which supporters pay a subscription.

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

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

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

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