The latest CVC VAT Focus is now available on our website.

This issue includes HMRC News and Case Review. The Case Review considers:

1. Advocate General opinion – whether a leasing agreement with an option to purchase is a supply of goods.
2. Whether VAT repayment received from HMRC is ‘profit’ for the purposes of corporation tax.
3. Windfall received by HMRC – unjust enrichment?
4. Paypoints – standard rated or exempt supply?
5. Whether a husband and wife have separate businesses.

The latest CVC VAT Focus is now available on our website.

This issue includes HMRC News and Case Review. The Case Review considers:

1. Whether transfer of property in lieu of tax should be subject to VAT
2. Refusal of a tax authority to grant right to apply the margin scheme
3. Reduced rating of supplies of fuel
4. Separate supply by hotel of room for civil wedding ceremony
5. Construction company – denial of input tax and accusation of fraud
6. Default Surcharge appeal allowed in part

The latest CVC VAT Focus is now available on our website.

This issue includes HMRC News and Case Review. The Case Review considers:

1. Brockenhurst College – VAT exemption of restaurant and entertainment services supplied by the College
2. Whether decision to refuse amendment of effective date of registration was reasonable
3. Attribution of discounts, time bar and quasi assessments
4. Whether failure to notify penalty should be mitigated under ‘special circumstances’
5. Whether the sale of animals falls within the second hand goods scheme
6. VAT and MOT tests
7. Local Healthwatch Organisations – whether carrying on a business activity for VAT purposes

A recent VAT case, U-Drive Ltd (UDL) highlighted the rules applying when VAT is incurred in a situation where 3 parties are involved (a tripartite situation).

UDL supplies hire cars. Costs of insuring the hire vehicles with a third party insurer had risen and to mitigate this cost UDL set up captive insurance company, Parallel Insurances Services Limited (PISL).  The arrangements between UDL and PISL meant that UDL had a financial interest in keeping the costs of claims down and as a result when a vehicle owned by a third party was damaged in a collision with a UDL hire car UDL would, where it was more cost effective, pay for that vehicle to be repaired, as an alternative to the third party making a claim against PISL.

In these circumstances UDL contracted with and paid the repairing garage for work carried out on the third party’s vehicle.  The repairing garage invoiced UDL plus VAT.  There was no contract for repair services between the vehicle owner and the garage.

UDL made a claim to recover VAT charged by garages in respect of repair services. HMRC rejected the claim on the basis that the repair services were supplied to the third party vehicle owner, not UDL, and only the recipient of a service is allowed to recover VAT charged by a supplier.

In considering the case the Upper Tribunal (UT) concluded that in the first instance the contractual position should be considered, but then it was necessary to decide if that analysis reflected the economic reality of the transaction.

In the UDL case the UT considered that the contractual position did not reflect the economic reality; UDL did not receive the supply of the repairs and, as a result, was not entitled to recover VAT incurred.

This case serves as a reminder to consider VAT recovery when a business pays a cost when arguably another person receives the benefit of the underlying goods or services. Errors often arise, particularly with legal costs.  The leading case on this point, Airtours, considered advice from PWC paid for by Airtours but with PWC holding a contractual obligation to organisations from which Airtours was seeking finance.  Airtours was considered relevant by the UTT in deciding the UDL case.

If a business is incurring costs in a tripartite situation it is worth seeking advice on VAT recovery as claims could be challenged and give rise to tax assessments and penalties.

There is a broader problem with cases like this insofar as:

1. There was a business rationale for the arrangements in place (reducing costs); and

2. The contractual relationships were crystal clear.

Therefore HMRC, because it did not believe the outcome to be “fair,” has, with the support of the courts, imposed an “economic reality” that bears no relationship to the contractual position. Furthermore, it has taken this approach rather than using other tools or changing the law. Essentially, this means that businesses cannot rely on the legal certainty of their contractual arrangements because at any time HMRC could seek, to ignore the contractual reality to impose a different economic reality. Of course, this will be a one way street because taxpayers can expect short shrift from HMRC if they argue in cases that might reduce tax payments that economic reality should trump unhelpful contractual arrangements. After all, as HMRC guidance says “HMRC must apply the law correctly, and the Commissioners cannot choose to move away from this position merely because the result seems unfair or unreasonable. To move away from the strict application of the law would be counter to the will of Parliament”.

Of course, HMRC would probably argue that in this case it has applied the law strictly (to the economic reality). However, this being the case it should be open to taxpayers to argue an economic reality position and, in our experience, this would not be accepted by HMRC. It will be interesting to see whether this decision is appealed and the outcome.  However, perhaps more interesting in the long-term will be whether, in its enthusiasm to prevent outcomes it disapproves of, HMRC is opening a Pandora’s Box. The law of unintended consequences sometimes takes a long while to prove itself. There are lots of examples of HMRC adopting an apparently expedient “fix” to a perceived problem only to discover that there is a far higher price to pay in the long-term. However, it may be time for businesses to decide whether they are disadvantaged by their failure to apply “economic reality”. And, of course, these nebulous concepts make an already complicated tax system even more complicated since one person’s view of the economic reality may be completely different to another person’s view, although we can be quite confident that HMRC will work backwards from the answer it wants and claim that it cannot apply economic reality in cases that do not deliver this outcome (after all its hands are tied and it must apply the law strictly, however unfair the outcome might appear!).

The latest CVC VAT Focus is now available on our website.

This issue includes HMRC News and Case Review. The Case Review considers:

1. Tripartite situation – whether car hire company entitled to recover VAT on car repair invoices.
2. Supplies by Employment Bureaux.
3. Change of rate under the Flat Rate Scheme.
4. Whether a golf club was a non-profit making body for the purposes of the sporting exemption.
5. Discounts obtained using purchasing power – who supplies what and to whom?

The latest CVC VAT Focus on Land and Property is now available on our website. This newsletter is intended for readers with an interest in the Land and Property sector.  It summarises the latest news and cases relevant to the sector and is issued by email quarterly.

In this issue, we consider cases from the First Tier Tribunal concerning:

• VAT liability of the sale of a lodge with removable contents
• Construction of a pirate island
• Zero-rating – construction of buildings prior to discharge of planning condition when removed after commencement but before completion of works
• A number of DIY Housebuilder Claims concerning:
  • Planning permission for a live/work unit
  • ‘Separate use’ of dwelling, whether the subsequent removal of the condition in the planning permission has an effect
  • Whether the separate disposal of the dwelling was prohibited
  • Whether certain works lawful and materials incorporated, and whether VAT charged at incorrect rate can be refunded
  • Whether a Section 75 agreement prevented a new build from qualifying as a dwelling

The latest CVC VAT Focus is now available on our website.

This issue includes HMRC News and Case Review.

In our Case Review we consider decisions of the Courts and Tribunals regarding:

1. VAT liability of digital books
2. Oxygen concentrators intended for medical treatment
3. DIY housebuilders – whether works lawful and materials incorporated, and whether VAT incorrectly charged can be refunded
4. DIY housebuilders – did a Section 75 agreement prevent a new building from qualifying as a dwelling?
5. Zero-rating the construction of a building
6. TOGC and compulsory VAT registration
7. Compulsory deregistration
8. Fraudulent evasion of VAT and input tax claims

A question which is frequently put forward to the Courts and Tribunals is whether an activity is a business activity for VAT purposes. Whilst this is an issue often encountered by charities this can affect all businesses.

Only activities that are regarded as business activities fall within the scope of VAT. VAT incurred on costs relating to non-business activities is irrecoverable. Therefore, identifying the correct liability of activities/income is vital to determining the VAT recovery position on associated costs.

Historically, in deciding whether an activity is a business activity, HMRC has applied the ‘business test’. The business test derived from the cases of Morrison’s Academy  and Lord Fisher and consists of the following six questions. These act as a guide although the absence of one common attribute of ordinary businesses (e.g. the pursuit of profit) does not necessarily mean that the activity is not a business. The criteria are not, therefore, conclusive in every case.

1. Is the activity a ‘serious undertaking earnestly pursued’ or a ‘serious occupation not necessarily confined to commercial or profit making undertakings’?
2. Is the activity an occupation or function actively pursued with reasonable or recognisable continuity?
3. Does the activity have a certain measure of substance as measured by the value of taxable supplies made?
4. Is the activity conducted in a regular manner and on sound recognised business principles?
5. Is the activity predominantly concerned with the making of taxable supplies to customers for consideration?
6. Are the taxable supplies of a kind which are commonly made by those who seek to profit by them?

HMRC has previously said that this test (dating back to 1978) has been superseded and the recent Court of Appeal decision in Longridge on the Thames appeared to confirm this. In the case of Longridge, the Court of Appeal clarified that the test to determine whether an economic activity is carried on is whether there is a direct link between the payment made and the supply received. If there is no direct link between the service and the payment received there will not be an economic activity for VAT purposes. The fact that the supplier does not seek to make a profit is also irrelevant.

Interestingly, in the recent case of Gravel Road Records Ltd HMRC did not rely on the most recent litigation in Longridge. HMRC’s submissions included detailed consideration of the business test derived in Morrison’s Academy  and Lord Fisher. The use of the ‘old’ test in this case suggests that HMRC believe that this test is still relevant and this is something charities and businesses should bear in mind when considering whether an activity is for business purposes. The appellant in this case was not a charity.

HMRC de-registered Gravel Road Records Ltd for VAT and reduced VAT repayment claims to nil on the basis that no business activities had taken place during the period of VAT registration. Gravel Road Records had no entitlement to recover VAT incurred. Most of the VAT incurred related to the construction of a recording studio and no taxable supplies had been made. The construction was financed almost entirely by a third party as an investment. The recording studio was situated in industrial premises. There was a downturn in the music industry and the business failed to attract artists. Two clients were found but construction delays led to them finding alternative studios. The Tribunal found that at all times Gravel Road Records intended to carry on a commercial business activity and was intending to make taxable supplies. Therefore, the appeal was allowed.

These cases act as a helpful reminder to all businesses that consideration should be given to both tests when reviewing potential contracts for goods and services.

If you would like to discuss any of the services CVC can offer to review activities undertaken please contact us on 01206321029 or info@ukvatadvice.com and one of our consultants will be happy to speak to you.

The Budget VAT Focus is now on our website.

This includes:

• Increased VAT registration and deregistration thresholds.
• UK VAT on roaming telecoms services.
• Penalties for participating in VAT fraud.
• Consultation announced – fraud in the provision of labour in the construction sector.