Tag Archives: VAT

A to Z of VAT for Charities

11th January 2018

This A to Z of VAT for Charities guide is intended for use as a point of reference and to flag possible VAT issues. It may be that by reading this guide and referring to HMRC guidance charities can identify VAT risks and VAT opportunities present in certain circumstances; however, if VAT support is needed on specific transactions or if you have a general VAT enquiry CVC would be very pleased to help.

VAT case law and HMRC policy is ever evolving and this should be taken into account when using this VAT information guide for reference.

If you have any VAT queries please contact charity specialist Stewart Henry, Laura Beckett or Sophie Cox using the following contact details:

email: stewart.henry@ukvatadvice.com
direct dial: 01206 890798

email: laura.beckett@ukvatadvice.com
direct dial: 01206 890799

email: sophie.cox@ukvatadvice.com
direct dial: 01206 890797

CVC VAT Focus 14 December 2017

News

14th December 2017

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.

Christmas Greetings

This is the last CVC VAT Focus of 2017. We will be closing on the afternoon of Friday 22 December and will reopen on Tuesday 2 January 2017 at 9am. If you have any urgent queries during this time please contact your usual CVC partner by email and they will respond to you as soon as possible.

We would like to take this opportunity to wish all our clients and regular readers a Merry Christmas and a happy and prosperous New Year.

CVC will not be sending Christmas cards this year; instead we have made donations to our local Food Bank.

HMRC NEWS

VAT Information Sheet 07/17: construction services and zero-rated relief
HMRC has published an information sheet concerning how VAT is applied to the construction of buildings that keep, or make use of, parts of a building that previously stood on, or were adjacent to, the site where the works of a new construction (dwelling or building to be used solely for a relevant residential or relevant charitable purpose) are taking place.

HMRC’s position following the Supreme Court’s judgment in Littlewoods
Revenue & Customs Brief 05/17 sets out HMRC’s position following the Supreme Court’s ruling that statutory interest is sufficient to comply with the EU law right to adequate indemnity and that it is not necessary for compound interest to be paid. This litigation is now final. HMRC will invite claimants to withdraw their claims. There are a number of claims where the underlying tax litigation is not yet final and those underlying issues should now proceed.

VAT Notice 700/60: payments on account
This VAT notice has been updated about how to pay VAT by debit or credit.

VAT appeal updates
HMRC has updated its list of ongoing VAT appeals that may have implications for other businesses.

Compliance checks: unannounced visits for inspections
HMRC’s factsheet explains the checks on tax affairs when HMRC conduct an unannounced inspection.

CVC BLOG

Christmas parties, gifts & VAT
In CVC’s latest blog Helen Carey considers the VAT recovery implications of staff parties, client entertaining and gifts.

CASE REVIEW

Court of Appeal

1. Fraudulent evasion of VAT – whether the director knew, or should have known

CCA Distribution Limited (CCA) is a case relating to Missing Trader Fraud (MTIC fraud). In this particular case the point at issue was whether CCA “knew or should have known” about the fraudulent evasion of VAT relating to its business transactions. HMRC was successful in its appeal against the decision of the FTT in favour of the taxpayer.

CVC comment: this decision highlights the due diligence that taxpayers must undertake when engaging new customers and suppliers.

2. Whether appeal is time-barred

Iveco Limited is the representative member of a VAT group that includes companies that sell commercial vehicles. The issue before the CoA relates to promotional payments (or rebates) that the companies appear to have made to customers between 1978 and 1989. Iveco contend that these payments reduced the taxable value of the vehicles but Iveco did not make any VAT adjustments in respect of them. On this basis Iveco claims it is entitled to a VAT repayment of £73,361,865.

The CoA outlined the history concerning time limits for claims in circumstances such as Iveco’s. The UK failed to introduce legislation to give effect to European law concerning VAT due following a price reduction until 1 January 1990. With effect from 1 January 1990 a claim for repayment could be made within six years of the original payment. In 1997 the relevant legislation (Section 80 of VAT Act 1994) was amended to set a three year time limit for claims. This legislation was amended again by Finance Act 2008 to set a four year time limit for claims. Following the Fleming case, Section 80 could not apply to claims made before 1 April 2009.

The CoA found that Iveco’s claim must be time-barred in its entirety. The claim had to be brought by, at the very latest, the end of the Fleming window in 2009 and all of Iveco’s claims relating to price reductions occurring before the beginning of January 1984 were time-barred by 1 January 1990. Iveco’s appeal was dismissed.

CVC comment: there is no indication in HMRC’s latest ‘VAT appeal update’ document as to whether this case will be pursued further by Iveco.

Upper Tribunal

3. Evidence to support input tax claim – purchase of Apple iPhones without receiving VAT invoice

Scandico Ltd is a phone trader specialising in acquiring newly released iPhones in the UK and selling them to customers in other countries where that model has yet to be released. The phones command a considerable premium. Apple’s policy is to prevent the sale of phones to traders who might sell them on in this way. Apple therefore only allows a person to purchase two phones. Scandico employs ‘runners’ who visit Apple stores to purchase two phones on as many occasions as they can manage. Initially HMRC accepted Scandico’s input tax claim; however, in January and February 2011 approximately 7,000 iPhones were purchased and in light of this increased turnover HMRC conducted an extended verification.

HMRC reduced Scandico’s input tax claim by £297,874 on the basis that Scandico did not hold sufficient evidence to support its input tax claim. Scandico held only till receipts. Till receipts do not constitute proper VAT invoices, each iPhone costs more than £250 plus VAT which is the limit for which a simplified VAT invoice can be issued in relation to a claim for input tax deduction. The UT commented that Scandico asked Apple to issue VAT invoices but this request was refused.

At issue before the UT was whether the FTT was correct in concluding that the decision of HMRC was reasonable. The UT found that the FTT has applied the correct test and that the analysis of the FTT was fair and unimpeachable. Scandico’s appeal was dismissed.

CVC comment: the UT commented that Scandico should have realised from the outset that they were not going to receive VAT invoices from Apple because their business model depended on Apple not knowing the ultimate destination of the iPhones. HMRC had not set an impossibly high standard for Scandico to meet in order to claim input tax. Scandico could have set up its business in a way that enabled it to provide clear and unequivocal information supporting their input tax claim.

First Tier Tribunal

4. Is a powdered food supplement zero-rated?

Carol Pannett appealed against the Director of Border Revenue’s decision to impose VAT on the import of Cellect unflavoured powder kit and Cellect unflavoured powder from the US. Ms Pannett has a terminal diagnosis of cancer and believes that Cellect could have a beneficial impact on her health. Ms Pannett uses Cellect as an ingredient in smoothies. Ms Pannett argued that Cellect is zero-rated under the VAT relief for certain supplies to disabled persons for personal use. The FTT examined the VAT legislation and found that Cellect did not fall within any of the items covered by the zero-rate. Ms Pannett also argued that Cellect is zero-rated as a food of a kind used for human consumption. The FTT considered the legislation and relevant case law and reached the conclusion that Cellect is not food. The appeal was dismissed. The FTT also considered customs duty which we have not commented on here.

CVC comment: the FTT considered several cases regarding the definition of ‘food’ for VAT purposes in reaching its decision.

5. Default surcharge appeal allowed

The FTT found that Mezzanine Floors (Hull) Limited (the Company) had a reasonable excuse for paying its VAT return for the period 11/16 three days late. The Company telephoned HMRC on 6 January 2017 (the day payment was due, as the deadline of the 7 January 2017 was a Saturday) to explain that the Company was expecting to receive approximately £60k payment under an invoice factoring arrangement that day; however, their accounts clerk did not work Fridays and therefore the payment would not be processed until Monday. HMRC told the Company, “not to worry, just ensure payment is made as soon as you can.”

The Company’s grounds of appeal were that the Company would have asked for time to pay (which given the circumstances would likely have been agreed) had the Company not been misled by the person at HMRC. The FTT therefore concluded that the Company had a reasonable excuse for the late payment and the default surcharge was discharged.

CVC comment: it is important to note that if the VAT return payment deadline falls on a weekend, payment is due on the Friday before the due date.

6. Two payments under a single contract – meaning of “consideration” for VAT purposes

Lloyds Banking Group (LBG) appealed against two VAT assessments raised totalling £5,640,025. The case before the FTT concerned the VAT treatment payments in respect of redundancy costs (Redundancy Payments) made by Bank of Scotland (BOS), a member of the LBG VAT group registration, to Certus (an Irish company). HMRC issued the VAT assessments on the basis that the Redundancy Payments were additional consideration for the services provided by Certus and that BOS should have accounted for VAT on those payments under the reverse charge provisions.

The FTT considered several cases in reaching its decision. The leading European case, Tolsma, provides the criteria to apply in determining whether a payment constitutes consideration for VAT purposes. Essentially, a direct link must exist between the services provided and the consideration received. The FTT surmised, the Redundancy Payments would only form part of the taxable amount for VAT purposes if they were paid by BOS in return for administrative services provided by Certus.

Following examination of the Service Agreements the FTT found that these were not artificial and Redundancy Payments were part of a separate, stand-alone obligation arising out of negotiation with the employees’ union. As there was no ‘direct link’ between the Redundancy Payments and the services provided by Certus, the Redundancy Payments were not consideration for VAT purposes. LBG’s appeal was allowed.

CVC comment: this decision considers in detail the preceding case law concerning “consideration” for VAT purposes. Tolsma remains the leading decision on such matters and the key question to ask is whether there is a “direct link” between payment and supply. The commercial and economic reality must also be considered alongside contractual arrangements to ensure the contracts are not artificial.

Christmas parties, gifts & VAT

1st December 2017

Often, at this time of year, businesses will take the opportunity to reward staff with a gift or a Christmas party. They may also offer gifts to customers to show appreciation of their custom and promote the business. It is important to consider the implications of the rules for recovering VAT on this expenditure to avoid any unpleasant VAT bills in the New Year.

Staff Parties

HMRC accepts that where an employer provides entertainment solely for the benefit of its employees it does so wholly for business purposes. As a result VAT incurred is not blocked from recovery under the business entertainment rules. However, VAT cannot be recovered if the party is only for directors, partners or sole proprietors of a business.

What about guests?

Where employees are allowed to bring guests VAT can only be recovered on the cost of entertaining the employees and only a proportion of VAT on the expenditure can be recovered. The tribunal held in the case of Ernest Young that if a charge is made for guests attending the party VAT can be recovered even where the charge is less than the cost. This additional complexity is probably only worth considering if the costs involved are large.

Gifts

VAT on business gifts can be recovered so long as the total cost of all gifts to the same person does not exceed £50 (excluding VAT) in any 12 month period. If the value of gifts exceeds this amount VAT must be accounted for on the cost value of the gift, thus any VAT recovery will be affected by the VAT on the “deemed sale”.

If gifts are given for personal purposes, to a relative or friend perhaps, VAT cannot be recovered on the purchase of the gift as there is no business purpose.

Entertaining customers

If you entertain customers over Christmas the VAT incurred on the cost of entertaining prospective or current UK customers cannot be recovered. Where the customer is an overseas customer VAT can be recovered if it is ‘reasonable in scale and character’. However, a private use charge on which VAT must be declared is likely to arise where there is more than very basic provision of food such as sandwiches and soft drinks at a meeting. HMRC are likely to view hospitality following a meeting or at a restaurant as leading to a private use charge and again any VAT recovery in relation to overseas customers is likely to be offset by a corresponding output VAT liability.

CVC VAT Focus 30 November 2017

30th November 2017

HMRC NEWS

Autumn Budget 2017
The Chancellor delivered his budget last week. Please see CVC’s VAT Focus – Autumn Budget 2017 for the VAT highlights.

HMRC’s Help and Support for VAT
The latest webinars about what to do after you’ve registered for VAT and VAT on motoring expenses have been published online.

Policy Paper: VAT threshold maintained for two years
This tax information and impact note confirms the VAT registration and deregistration thresholds announced at Autumn Budget 2017.

Extending joint and several liability for online marketplaces and displaying VAT numbers online
This tax information and impact note deals with the extension of joint and several liability for online marketplaces announced at Autumn Budget 2017. This guidance note has also been published which explains the measure.

Policy Paper: Refunds to combined authorities, fire and rescue authorities
This tax information and impact note deals with refunds to combined authorities announced at Autumn Budget 2017.

Government Information and National Health Trusts (GIANT) online service
Government department, NHS trust or Royal Household can now use the online service to file forms VAT21 and VAT 100.

CASE REVIEW

Court of Justice of European Union (CJEU)

1. Bad debt relief

The recent CJEU case of Mr Di Maura considered whether the Italian authorities were acting lawfully in only allowing a taxpayer to reclaim VAT under Bad Debt rules where its customer was declared insolvent and it was established beyond doubt that a debt would not be paid. The Italian situation differs from the UK position, where it is possible to reclaim VAT paid on unpaid supplies after 6 months, subject to certain conditions.

The CJEU held that current Italian rules breached the fundamental principles of neutrality and proportionality in leading to a position where a taxpayer has paid the authorities VAT that it has not received and is not allowed to correct the position for an unreasonable period of time (insolvency proceedings in Italy can take up to ten years).

CVC comment: the current conditions attached to bad debt relief claims in Italy put businesses in Italy at a cash flow disadvantage compared to businesses trading elsewhere in the EU. This ruling may also impact other Member States that apply similar rules to Italy. The UK’s implementation of the bad debt relief rules appear to be compliant in light of this decision.

2. Content of VAT invoices

The CJEU recently ruled, in the joined cases Finanzamt News (C-374/16) and Igor Butin (C-375/16), that the supplier’s address shown on a VAT invoice does not need to be the address where it carries out its economic activity. In the cases at issue the suppliers had used their postal address on its invoices. The CJEU considered that the purpose of including the supplier’s name, address and VAT registration number is to allow the tax authorities to check whether VAT has been declared and paid. It is implied in the decision that these checks can be done regardless of which of the supplier’s addresses is included on the VAT invoice.

CVC comment: we have not experienced a case where HMRC has refused an input tax claim because the supplier’s address was not the place where their economic activity was carried out; however, if you have had an input tax claim refused on this basis you may wish to re-visit this.

3. Sale of holiday homes

Three partners; Cussens, Jennings and Kingston, have lost a long running challenge by the Irish Revenue that they set up a scheme to avoid paying VAT on the sale of holiday homes.

The partners jointly owned a development site on which they constructed 15 holiday homes for sale. Before making the sales, they entered into lease and lease back agreements with an associated company, Shamrock Estates Limited. The leases were extinguished by mutual surrender and the partners acquired full ownership of the properties. The properties were then sold to third parties. VAT was not charged on the sale to third parties on the basis that properties had been subject to a first supply (to Shamrock Estates) on which VAT was chargeable when the long lease was granted.

The Irish Revenue contended that the lease and lease back arrangements constituted a first supply artificially created in order to avoid VAT on the subsequent sales to third parties and should be disregarded. The case was appealed to the Supreme Court which decided to stay the proceedings and refer a number of questions to the CJEU. The CJEU considered the judgment in Halifax and held that the principles of abuse of rights must be interpreted as applying to this case.

CVC comment: although this is not a UK case it acts as a reminder that if HMRC sees arrangements as contrived and for the primary purpose of reducing VAT costs then they might try to reinstate the position that should have applied, the so called “Halifax” or “abuse of rights” anti-avoidance principle.

First Tier Tribunal

4. Default surcharge appeal allowed

Stylographics Limited (SL) appealed against a default surcharge on the basis it had a reasonable excuse for making a late payment in respect of its VAT return for the quarter ended 31 December 2016. The amount payable to HMRC was much larger than SL was used to. The payment was processed by SL on the due date at 4pm; however, the bank did not process the payment because there was a transaction limit on the account of £250,000 which could not be uplifted in time. The bank recommended that SL split the payment over two amounts, which SL did; however, this was done at 5.55pm on the due date for payment and the bank’s cut off time for processing same day payments is 5.45pm.

The Tribunal found that there was a series of unforeseen unfortunate events outside of the taxpayer’s control which prevented payment from reaching HMRC by the due date. The appeal was allowed and the default surcharge discharged.

CVC comment: it is unusual for default surcharge appeals to be allowed. This case demonstrates an example of a ‘reasonable excuse’.

5. eBay trader – penalty for failure to notify liability to be VAT registered

Ms Parminder Kaur sold goods on eBay in the period June 2010 to July 2011. In February 2015 HMRC commenced an investigation into Ms Kaur’s tax affairs. Ms Kaur stated in a letter to HMRC dated 3 October 2015 “…I had made no profit no money from the venture. I did not know or was aware that I had to keep any paperwork or accounts, as I did not, so I do not know what my liability will be as I made nothing from it.”

HMRC analysed a sample of 3,983 feedback postings on Ms Kaur’s eBay account to estimate the turnover of the business. Ms Kaur objected to the sampling methodology so HMRC calculated the sales on all 20,574 feedback postings. The turnover in the period was approximately £278,000 with sales in Sterling, Euros, US Dollars and Australian Dollars. HMRC concluded that Ms Kaur was liable to be registered for VAT from 1 December 2010 and ceased trading on 17 July 2011. The VAT liability was assessed at £27,632.98 and a failure to notify penalty of £14,507.31 was applied. Following formal review HMRC reduced the penalty to £6,908.24.

The Tribunal found that the VAT liability calculation by HMRC was performed to HMRC’s best judgement and agreed with HMRC’s penalty calculation. The taxpayer’s appeal was dismissed.

CVC comment: the penalty regime is based on the taxpayer’s behaviour. Penalties may be mitigated if the taxpayer tells HMRC about the error, gives HMRC reasonable help to resolve the matter and allow HMRC access to records where necessary. We would always encourage pro-active behaviour. HMRC is paying particular attention at the moment to transactions taking place on online marketplaces such as eBay and Amazon.

6. Zero-rating and input tax denied

C F Booth (CFB) is in the business of metal recycling and metal ingot manufacturing in Rotherham. HMRC denied a claim (in the sum of £160,281.50) by CFB to zero-rate eight supplies of metal to a Belgium registered trader on the basis of CFB’s failure to produce satisfactory export evidence. HMRC also denied input tax in the sum of £2,607,776 on the basis that 655 purchases of various metals were connected to the fraudulent evasion of VAT and that CFB knew or should have known the connections. CFB appealed both decisions and these were heard together before the Tribunal.

A vast amount of information was put before the Tribunal. Documentary evidence was contained in 23 lever arch files and evidence was heard from 19 witnesses. The Tribunal dismissed the appeal holding that CFB cannot have either acted in good faith or taken every reasonable measure not to become a participant in any fraud. Therefore, even if export evidence had been satisfactory, HMRC would have been entitled to deny zero-rating. Additionally, given its standing and history in the sector, its experience and financial strength (taking account of CFB’s £21 million overdraft facility) CFB must have known of the connection to fraudulent evasion of VAT.

CVC comment: This case highlights that it is not enough for businesses to obtain satisfactory evidence to support a particular VAT treatment. Businesses must take reasonable steps to ensure that it does not become a participant in VAT fraud.

CVC VAT Focus – Autumn Budget 2017

22nd November 2017

Phillip Hammond has today delivered his Autumn Budget. Here we look at the key VAT measures which have been announced.

VAT registration threshold

The VAT registration threshold will be maintained at £85,000 for two years from April 2018. There had been speculation that the Government may seek to lower the threshold in line with other European countries following the recent report by the Office of Tax Simplification (OTS). In response to the report the Government will consult on whether changes could be made to better incentivise business growth.

Fraud in the provision of labour in the construction sector

We reported in our Spring Budget VAT Focus that the government would consult on a range of policy options to combat supply chain fraud within the construction sector. Following the consultation, the government will introduce a VAT domestic reverse. This will shift responsibility for paying VAT along the supply chain to remove the opportunity for it to be stolen. Changes will have effect from 1 October 2019.

Online VAT fraud

The government has announced a number of measures to tackle online VAT fraud by strengthening and extending existing powers that make online marketplaces responsible for the unpaid VAT of their sellers. These measures will come into force as part of Finance Bill 2017/18 and will include:

Legislation to extend HMRC’s powers to hold online marketplaces jointly and severally liable for the unpaid VAT of overseas traders on their platforms to include all traders (including UK traders), as well as any VAT that a non-UK business selling goods on these platforms fails to account for, where the business was not registered for VAT in the UK and that online marketplace knew or should have known that the business should be registered for VAT in the UK.

Legislation to require online marketplaces to ensure that VAT numbers displayed for businesses operating on their website are valid.

We reported in our Spring Budget VAT Focus that the government would launch a call for evidence on and consider a new VAT collection mechanism that will harness technology to allow VAT to be extracted directly by the Exchequer from online transactions at the point of purchase. This is often referred to as a ‘Split Payment’ model. Following the call for evidence, the government will publish a response in December.

VAT refunds

The government will amend legislation in Finance Bill 2017/18 to ensure UK Combined Authorities and certain fire services in England and Wales will be eligible for VAT refunds. Grant funding will also be provided under the Accident Rescue Charities Grant Scheme to help accident rescue charities meet the cost of VAT which would be irrecoverable.

Northern Ireland

The government will publish a call for evidence in early 2018 to consider the impact of VAT on tourism in Northern Ireland. This will be reported in the 2018 Budget.

Vouchers

The government will consult on plans to legislate in Finance Bill 2018/19 to ensure that when customers pay with vouchers, businesses account for the same amount of VAT as when other means of payment are used. This will align the UK with similar changes being made across the EU.

Should you wish to discuss any of the VAT announcements made in the Autumn Budget 2017 please contact us.

CVC VAT Focus 17 November 2017

17th November 2017

HMRC NEWS

Autumn Budget 2017
The Chancellor will be presenting his Autumn Budget on Wednesday 22 November 2017. CVC will update readers on any VAT announcements in its CVC Budget VAT Focus.

Fulfilment House Due Diligence Scheme
HMRC has issued guidance on the Fulfilment House Due Diligence Scheme. If you store goods in the UK for sellers established outside the EU, you may need to apply for the Scheme.

EU VAT Refunds: service availability and issues
The latest updates on the availability and any issues affecting the EU VAT Refunds online service have been published.

VAT Notice 700/62: self billing
This Notice has been updated and guidance added to paragraphs 3.1, to clarify the requirements for self-billing agreements and 6.4 to confirm the self-billee is responsible for accounting for output tax.

CVC BLOG

Pension Fund update
In CVC’s latest blog Helen Carey considers the latest updates to VAT and pension schemes.

Office of Tax Simplification – Proposals for simplifying VAT
CVC has also commented on the Office of Tax Simplification (OTS) review of VAT and its proposals for simplifying VAT.

CASE REVIEW

Upper Tribunal

1. Distance learning courses

We have previously reported in the case of Metropolitan International Schools Limited, which found that supplies of distance learning services to customers should be treated as a single zero-rated supply of books (“the principal issue”).

Following an agreement between HMRC and the School in 1999, the supplies made by the School to its customers were treated as two separate supplies: one of books (zero-rated); and one of educational services (standard rated). In 2009, following a repayment claim relating to 2006 HMRC withdrew its agreement on the grounds that supplies made by the School should be treated as a single supply of standard rated services. HMRC initially sought to withdraw the agreement retrospectively, although HMRC later conceded that point.

During the FTT hearing the FTT also set out views on two issues that would be relevant if the School’s appeal had failed on the principal issue. Firstly, that the School had a legitimate expectation in respect of the withdrawn agreement with HMRC and secondly, the School was entitled to repayment supplement in relation to payments of VAT for periods prior to 2009 that had been withheld (following HMRC’s initial decision that the agreed method should be withdrawn retrospectively.

HMRC appealed against the FTT decision on the principal issue. If HMRC was successful in this appeal, the School cross appealed against the two later issues.

The UT found that the provision of manuals, as part of a distance learning package, was a single standard-rated supply and dismissed the School’s cross appeals.

CVC comment: It is important to ensure agreements in place with HMRC are reviewed and refreshed where necessary.

First Tier Tribunal

2. Deduction of VAT as input tax

MG & ND Storer were in business as partnership operating a seafood takeaway, Gee White Kiosk. The building owned by Mr MG Storer was used as business premises not only for the Kiosk but also Quay Desserts, operated by Mr Storer’s son, and Quay Hole, operated by Mr Storer’s partner.

The building was completely demolished and rebuilt. The rebuilt building again housed all three businesses. Following a repayment verification query, HMRC raised assessments for VAT claimed in relation to refurbishment costs and on the purchase of alcohol. HMRC contended that the VAT was not input tax proper to the Partnership on the basis that the true recipient of the supplies of refurbishment was Mr Storer in his capacity as owner and the true recipient of the supplies of alcohol was Quay Hole.

The Tribunal concluded that input tax incurred on supplies of alcohol to the Partnership was recoverable (subject to the corresponding output tax on supplies to Quay Hole) and with regards to the refurbishment costs, only one third of the input tax is deductible.

CVC comment: The tribunal noted that deduction of input tax should relieve a taxable person entirely of the burden of VAT paid in the course of making supplies which are themselves subject to VAT. It is from this fundamental premise that the Tribunal viewed this case. Businesses should ensure that VAT incurred satisfies all of the conditions to be claimed as input tax.

3. Whether inaccuracy was ‘deliberate’

Mehaffey Ltd received a penalty in the sum of £156,162.72 in respect of VAT returns for the periods 12/09 to 09/13. Mehaffey Ltd sells furniture and the penalty related to sales of goods to customers in another EU member state which had been incorrectly treated as zero-rated.

HMRC contended that the inaccuracies were as a result of deliberate behaviour and Mehaffey knew that it did not have (nor could obtain) valid evidence to support zero-rating. The Tribunal considered a number of submissions from Mehaffey but concluded on a balance of probabilities that the inaccuracy was deliberate.

CVC comment: Whilst the onus is on HMRC to establish a penalty has been applied correctly, the Tribunal emphasised that as a general principle it is the responsibility of every trader to keep appropriate records to evidence its tax position.

4. Disapplication of the option to tax

PGPH Limited was formed to carry on a property business in the healthcare sector. It acquired a property for use in that business and exercised the option to tax. PGPH granted a right to use the property to Smart Medical Clinics Limited (SMCL) following which PGPH incurred expenditure on refurbishment works.

HMRC contended that the option to tax did not apply to the grant to SMCL under paragraphs 12 to 17 of Schedule 10 VATA 1994 due to the financing arrangements for the works being via a ‘relevant person’ occupying the property other than for the purpose of making taxable supplies. As a result, HMRC denied input claimed by PGPH in respect of the refurbishment. The Tribunal considered whether PGPH intended or expected the land to be a ‘relevant capital item’ at the date of the grant and whether SMCL would be defined as a ‘relevant person’ for the purposes of the legislation. The Tribunal concluded this was the case and dismissed the appeal.

CVC comment: This case highlights the importance of considering the VAT implications of transactions from the outset.

5. DCM (Optical Holdings) Limited

DCM (Optical Holdings) Limited (“DCM”) is an optical business, specialising in the sale of dispensed spectacles and the provision of refractive eye surgery, operating from 151 stores in four countries.

A tribunal hearing was arranged in respect of six appeals by DCM, all arising from output tax related issues connected to the operation by DCM of its stores. The appeals have a long history and have been subject to extensive case management. Although the six appeals were heard together they were not consolidated.

The Tribunal dismissed all six appeals; however, the full case is lengthy covering an array of output tax issues. The decision makes for an interesting read for businesses operating in this sector.

CVC VAT Focus 2 November 2017

2nd November 2017

HMRC NEWS

VAT Notice 707: Personal Export Scheme
This Notice has updated the telephone and fax numbers for the Personal Transport Unit

VAT Notice 714: Zero-rating young children’s clothing and footwear
The guidance in paragraph 4.2.1. has been changed to clarify that both bullet points need to be met for zero rate to apply where measurements are exceeded.

VAT Notice 747: VAT Notices having the force of the law
This notice updates and replaces the June 2003 edition. The contact information for comments and suggestions has been updated.

VAT Notice 998: refund scheme for museums and galleries
The list of museums and galleries eligible for VAT refunds has been updated due to an amendment to the VAT (Refund of Tax to Museums and Galleries) Order 2001

VAT Notice 741A: place of supply of services
This notice has been updated to reflect legislative changes coming into force on 1 November 2017.

CVC BLOG

Amazon and eBay traders may be targeted by HMRC

In CVC’s latest blog Helen Carey considers recent reports that MPs on the Public Accounts Committee (PAC) have criticised HMRC for being ‘too cautious’ in pursuing tax lost because a large number of third party sellers on Amazon and eBay are allegedly not charging VAT on sales they make in the UK.

CASE REVIEW

Supreme Court

1. The Supreme Court dismisses Littlewoods’ claim for compound interest

The Supreme Court has ruled in favour of HMRC confirming that it should not have to pay Littlewoods’ compound interest worth £1.25 billion on overpaid VAT. In the period 1973 to 2005 Littlewoods overpaid £204 million in VAT to HMRC. HMRC repaid this sum, plus simple interest of £268 million. Littlewoods sought the additional interest calculated on a compound basis.

The Court of Appeal had previously upheld an earlier decision of the High Court in finding that simple interest is not adequate indemnity for losses incurred by incorrect over payments of VAT. However, the Supreme Court has held that the payment of simple interest “cannot realistically be regarded as having deprived Littlewoods of an adequate indemnity”.

CVC comment: This was the lead case on the issue of compound interest. A further 5,000 claims for compound interest in connection with VAT and other taxes were stayed pending the resolution of this claim. The total amount involved in relation to VAT claim is estimated by HMRC at £17 billion.

Court of Justice of European Union (CJEU)

2. Exemption for supplies of services closely linked to sport – definition of sport

In the case of The English Bridge Union Limited the CJEU has found that ‘Duplicate Bridge’ (a card game) is not covered by the concept of ‘sport’ for the purposes of the VAT exemption for supplies of services closely linked to sport.

CVC comment: the CJEU said that the concept of ‘sport’ must be determined by considering its usual meaning in everyday language. The Advocate General observed that ‘sport’ in everyday language refers to an activity of a physical nature. VAT exemptions must be interpreted strictly.

Upper Tribunal

3. Sale and lease back – Is this a disposal?

We previously reported the FTT decision in the case of Balhousie Holdings Limited (Balhousie). Balhousie operates 25 care homes and forms part of a VAT group registration with Balhousie Care (BC) and three other subsidiaries.

The issue was whether Balhousie was liable to account for VAT on a self-supply that arose as a consequence of BC’s sale of the Huntly care home to a third party Target and the immediate leaseback from Target to BC. Huntly care home had been acquired by BC from a subsidiary of Balhousie not forming part of the BC VAT group. This purchase by BC had been treated as a VAT zero-rated first grant of a major interest in a relevant residential property. BC had entered into the sale and leaseback arrangement as a means of raising finance and HMRC considered that the onward sale had triggered a liability to a self-supply charge to VAT as a result of the change of use. BC argued that the transaction had not involved a disposal of its entire interest in the property and as such there was no VAT charge due.

The UT held that the FTT erred in law in its application of the relevant statutory provisions to the facts and a change of use VAT charge was triggered as a result of the sale and leaseback.

CVC comment: Whilst the FTT had decided that the sale and leaseback had not impacted on the actual use of the building, the UT concluded that this was not the case. BC no longer enjoys any rights flowing from the original zero-rated supply. BC may have a right of occupation but this flows from the lease not the original disposition.

Amazon and eBay traders may be targeted by HMRC

30th October 2017

It has recently been reported in the press that MPs on the Public Accounts Committee (PAC) have criticised HMRC for being ‘too cautious’ in pursuing tax lost because third party sellers on Amazon and eBay are not charging VAT on sales they make in the UK. It is estimated that the tax lost is around £1.5bn.

The tax loss arises because firms based outside the UK and selling goods via online marketplaces keep some stock in UK warehouses in order to provide next day delivery. Since the goods are dispatched in the UK the sellers should be registered for UK VAT, but many do not do so.

HMRC has already introduced rules to hold online marketplaces jointly liable for lost VAT. However, the PAC’s report concludes that further action is required and it is likely that HMRC will introduce further measures.

It is therefore important that all overseas businesses supplying goods from UK warehouses take action to comply with UK VAT law as soon as possible. There is no VAT registration threshold for overseas businesses and making any supplies in the UK will give rise to the need to register for UK VAT. CVC is able to assist overseas businesses meeting their UK VAT obligations and can assist in the VAT registration process.

It should be noted that where businesses have been making sales in the UK but have not VAT registered HMRC will be able to seek back payment of VAT due on these sales and it may be very difficult to recover this VAT from customers.

*Budget Update* HMRC announced anti-avoidance measures in this are in the Autumn 2017 Budget more details can be viewed here

VAT Treatment of Disbursements

3rd October 2017

A recent First Tier Tax Tribunal (FTT) decision has highlighted a risk in relation to the VAT treatment of disbursements.

“HMRC guidance states that to treat a payment as a disbursement all of the following must apply:

you paid the supplier on your customer’s behalf and acted as the agent of your customer
your customer received, used or had the benefit of the goods or services you paid for on their behalf
it was your customer’s responsibility to pay for the goods or services, not yours
you had permission from your customer to make the payment
your customer knew that the goods or services were from another supplier, not from you
you show the costs separately on your invoice
you pass on the exact amount of each cost to your customer when you invoice them
the goods and services you paid for are in addition to the cost of your own services”

Traditionally, for professional services firms such as solicitors this has meant that expenses such as printing, postage, travel etc are incorporated into the fee charged to clients and VAT is added to this cost, whereas the recharge of expenses such as local authority searches are itemised separately and VAT is not added to the cost.

The recent case was concerned with charges made by a conveyancing firm, Brabners LLP, which offered conveyancing services and often obtained local authority and local land charge ‘searches’ on behalf of its clients. The majority of the searches were carried out by a specialist online search agency, Searchflow. Brabners treated the fees paid to Searchflow as disbursements and invoiced its clients without VAT. HMRC assessed Brabners for £67,776 together with interest, contending that these fees formed part of the charges for Brabners’ services as the information within the search results was used by Brabners to give advice to its clients. The Tribunal agreed with HMRC and dismissed the appeal, this was regardless of whether or not Brabners prepared a separate report on the search results.

Although FTT cases are not binding on anyone other than the parties involved, the outcome of this case is a concern and solicitors and other professional service firms who pass through VAT free disbursements should take note. If there is doubt as to the VAT treatment of disbursements further advice should be sought.

CVC Blog: VAT for staff agencies in the nursing and care sector

18th August 2017

The VAT treatment of supplies made by staffing agencies has presented those businesses with ongoing difficulties for many years. The withdrawal of the staff hire concession in 2009 impacted on agencies generally with the full value of charges for staff becoming a supply from the staffing agency to the employer of staff hire rather than the margin being treated as commission. Prior to this it had been accepted that staff agencies need only consider ‘commission’ i.e. the difference between the amount charged to the employer and the amount paid to the temp, for VAT purposes, effectively acting as intermediaries. The recent case Adecco [UK UT 0113] refocussed employment businesses on this area but unfortunately arguments that VAT should be accounted for on ‘commission’ rather than staff charges were unsuccessful.

In addition, nursing and care agencies have a number of complexities around whether supplies are VAT exempt or standard-rated and it is fair to say that the approach taken regarding VAT accounting has varied quite considerably (it is also fair to say that historically, very different local approaches have been taken by HMRC).

VAT exempt or standard rate?
The first point to address is that, a supply of nursing or care staff by an agency is a supply of staff rather than a supply of medical care or welfare, the result being that a staff supply is not in itself VAT exempt. However, there are two potential paths to VAT exemption:

A supply of nursing staff by an agency under the nursing agencies concession. This may be to a hospital or care home institution as long as the individual supplied is providing medical care and certain other criteria are met. This concession allows the agency the option to look through to the end supply where otherwise this would simply be a standard-rate supply of staff.
A supply of general domestic care services (welfare) or medical care, generally to an end user in their own home.

Both the areas above have their own complexities and there are a number of requirements for VAT exemption to apply. Additional considerations may be present such as whether it is desirable to apply the nursing agencies concession. Where a customer is able to recover VAT charged, making a supply of staff subject to VAT may improve an agency’s VAT recovery position under the partial exemption rules.

The supply of general care staff to nursing homes e.g. homes for the elderly, has probably been the area most misunderstood historically. The supply of general care by the care home to its residents will normally be VAT exempt. This means the care home will not be able to recover VAT on costs directly related to this such as VAT on staffing costs. The supply by the agency to the care home is a standard-rate supply of staff where those staff will be under the control and direction of the care home, producing an irrecoverable VAT cost for the home.

Umbrella organisations
Umbrella organisations may provide some efficiencies for tax purposes but can be problematic for VAT and nursing agencies in particular. It is doubtful that the nursing agencies concession would cover the supply from an umbrella organisation to a nursing staff agency (HMRC guidance does not cover the point). The wording of the nursing agencies concession and experience suggests that umbrella organisations are not covered by the concession.

This may lead to a position where VAT should be charged by an umbrella organisation supplying staff to a nursing agency but, if that nursing agency is choosing to use the nursing agencies concession for its onward supply of nursing staff, it is likely it will have no right to recover the VAT charged due to its VAT exempt supplies.

Again, confusion around the nursing agencies concession, the chargeability of VAT and the contractual agreements in place have produced a risk scenario that may equally affect both the umbrella organisation and the nursing staff agencies. If HMRC view VAT as due from the umbrella organisation and its contract allows the collection of VAT in addition to any fee, the umbrella organisation’s mistake may become the nursing agencies problem if contractually the agency can be charged VAT.

Locum doctors
Similar principles affect doctors working through locum agencies. This is potentially higher risk from a VAT perspective as there is no equivalent to the nursing agencies concession for doctors. Where a doctor is supplied to a hospital or GP surgery by an agency and will be under the control and direction of the hospital or surgery this is a standard-rated supply of staff and is subject to VAT. The doctor themselves also need to consider their position in relation to VAT registration depending on circumstances as HMRC may view them as making taxable supplies to the agency in a similar situation to that of umbrella organisations.

Approach
It is essential that agencies take steps to ensure that they are VAT compliant, understand their position for VAT purposes and have appropriate contracts in place. A systematic VAT liability error can quickly lead to large VAT debts and these may be subject to error penalties if HMRC believe the errors are careless and will certainly be issued if considered deliberate. There are a large number of businesses whom may be at risk from incorrect interpretation of the provisions and it is our expectation that HMRC will make this a focus area in the future.

VAT Grouping-non-taxable persons can be included

News

26th April 2013

The European Court decision in the UK’s VAT Grouping case was handed down yesterday.

The Court agrees that non-taxable persons can be included in VAT Groups in accordance with current UK treatment.

There are no changes required to current UK legislation or policy following the Court’s judgement and the UK will continue to permit the inclusion of non-taxable persons in VAT groups.

VAT Groups and non-taxable members

News

18th April 2013

On 9^th April, the CJEU announced its judgement in the case of the EU Commission v Ireland on the issue of the inclusion of non-taxable persons within VAT Groups.

The Court agreed that non-taxable persons can be included in VAT Groups. This is good news for the UK as the judgement on a similar case against the UK is due to be announced later this month and this is a strong indication that it will be possible to continue to include non-taxable persons in UK VAT groups in the future.

5 April 2013 VAT Focus

News

5th April 2013

The latest newsletter contains items on:

1. Exemption of subscriptions
2. The DIY Scheme and live/work units
3. Information sheet on taxation of caravans
4. European case on voluntary registration
5. 40 years of VAT

Read in full.

VAT and the DIY housebuilders’ scheme-live/work units

News

5th April 2013

A recent case, Anthony Barkas, considered a development involving two barn-like properties with light industrial use planning consent (B1). The taxpayer applied for permission to convert one of the barns into a dwelling, the other to remain B1 use, the two to be used together as a live work unit (although the two properties were not physically linked they were close to each other). Permission was granted but with conditions, one of which (“condition 6”) was:

“6. The workshop/office within the application site shall only be used/operated by the occupiers of the dwelling hereby granted permission.”

The taxpayer submitted a DIY house builder’s claim. HMRC rejected this on the basis of condition 6, as “it is not possible to use the dwelling separately from the working space” the claim was not valid.

HMRC had an email from the planning authority which confirmed HMRC’s interpretation that the separate disposal of the dwelling was not permitted was correct.

The legal criteria for a dwelling included that “the separate use, or disposal of a dwelling is not prohibited . . .” The Tribunal ruled that condition 6 simply placed limitations on the use of the remaining commercial building rather than a prohibition on the disposal of the dwelling. They placed “no weight” on the planning authority’s opinions; the conditions must be interpreted as they stand. Therefore the DIY claim was valid.

Increasingly the rulings on DIY cases appear to be varying on very slight differences in facts and this highlights the importance of considering at a very early stage in a development whether there are likely to be any points of contention and addressing these with HMRC or the planning authorities as appropriate.