HMRC NEWS

VAT Civil Penalties

HMRC has updated its guidance on civil penalties to remove references to TALA (Tax Administration Litigation and Advice).

HMRC Monthly Exchange Rates

HMRC has released its foreign currency monthly exchange rates for February 2020.

Updates on VAT Appeals

HMRC has updated its list of cases which it has either lost or has decided whether to appeal. The hearing dates for Done Brothers (Cash Betting) Ltd and The Rank Group Plc have been updated; both hearings will take place in July 2020.

How to Report Your EU Sales for VAT

Information about call-off stock has been added to the guidance on reporting supplies of goods and services to VAT-registered customers in another EU country using an EC Sales List.

BREXIT UPDATE

The UK left the EU on 31 January 2020. There is now a transition period until the end of 2020 while the UK and EU negotiate longer term arrangements. The current rules on trade, travel, and business for the UK and EU will continue to apply during the transition period. New rules will take effect on 1 January 2021. We will be keeping abreast of matters as they unfold and we will be adding updates to our website and newsletters as guidance is issued by HMRC.

Impact of Brexit on some partial exemption special methods

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

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

The new regulation can be found here SI 2019/513.

CASE UPDATE

FTT

1. VAT Assessments: Out of Time and Unreasonable

This appeal concerned best judgment assessments raised by HMRC against Wei Xian and Qian Hong Peng who operated a restaurant called Zhu Guang Restaurant (The Restaurant). Following some suspicion that the restaurant was understating VAT on its sales, HMRC launched an investigation in 2014 and concluded that sales were being suppressed. As the restaurant had insufficient business records, it made the assessments based on “best judgment”. The restaurant argued that the assessments were out of time and, in any light, were not made to best judgment.

Mrs Jackson, an HMRC Officer, attended three undercover visits to the restaurant to make observations. Whilst she could not see the till on these visits, she informed the Tribunal that she could hear the till and watch the unwinding of till roll. She paid for one of the meals with marked £20 notes in an effort to prove that cash sales were not being recorded. However, when an unannounced visit to the restaurant took place at cashing up time, those £20 notes were in the till. Despite this, in August 2016, Mrs Jackson raised assessments against the restaurant totalling £158,953.00 which dated back to the 09/12 period. It was submitted that, based on the undercover observations made by Mrs Jackson, the restaurant had been suppressing around £3,500 in cash sales per week.

The appellants submitted that HMRC’s assessments were out of time; as the assessment letter was issued on 1 August 2016, any assessment in respect of an accounting period ended prior to 09/14 is automatically outside of the two-year period allowed without proving that the taxpayer has acted deliberately. Whilst Mrs Jackson tried to argue that failure by the owners to keep back-up till receipts on an evening where the till battery had died evidenced a deliberate intent, the Tribunal noted that HMRC had failed to prove such a deliberate intent and dismissed the assessments for the periods to 09/12 as invalid. It also found that the assessments for the periods before 09/14 must also be invalid.

The restaurant owners also argued the remainder of the assessments were not made to best judgment; HMRC’s observations recorded only 1/3 of the recorded card sales in the till and could not be relied upon as accurate, that Mrs Jackson’s observations of a changing card:cash sales ratio was proof of nothing and that the alleged amounts in question were “absurd”. The Tribunal agreed with the appellants and gave a disparaging summary of HMRC’s conduct before reducing the remaining assessments to less than £6000; a reduction of over £150,000 from the original assessment.

Constable Comment: The Tribunal expressed a degree of exasperation with HMRC in this instance. The observations which had been made by Mrs Jackson were evidenced to be inaccurate as was her quoting of the appellants in her reports with statements which they would never have made. She disregarded the evidence before her and raised assessments based on her suspicion, not on best judgment. The Tribunal took a negative view of her conduct and it is recommended to read the judgment in full.

2. Supply of Staff or Medical Care

This case concerned a decision by HMRC to retrospectively compulsorily register Archus Trading (Archus) for VAT as its supplies were above the VAT registration threshold and were standard rated supplies of staff. Archus believed that it made supplies of VAT exempt medical services so disputed this decision.

The disputed supplies were made by Archus to the Ayrshire and Arran Health Board (AAHB). Under a contract between Archus and AAHB, Archus undertook to supply medical services at HMP Kilmarnock. The contract stated that the obligation to provide healthcare is AAHB’s and that it would fulfil this obligation through the appellant and employment of NHS staff. It also clarified that Archus is “…engaged in providing staff to the NHS so that the NHS can meet their obligations…”. HMRC argued that the contract highlights the position clearly; that Archus is making supplies of staff to AAHB in order for it to fulfil its obligations to HMP Kilmarnock.

Archus argued that if the contract were for the provision of staff, it would have specified that control of the staff would pass to AAHB and, owing to this, that Archus would not have taken out professional indemnity insurance. It also asserted that the contract was clear and consistent in relating to the provision of medical services and not a provision of staff; AAHB had no control over Archus staff members. This is a position which was supported by AAHB which added that it is Archus which orders drugs from the NHS and that it also arranged locum cover when its staff are unavailable. It also carries out extra medical work, which falls outside the scope of the contract, without any request from AAHB.

Analysing the position, the Tribunal considered the judgment in City Fresh Services Ltd, in which is was observed that “There will be a supply of staff if there has been a change of control from the supplier to the recipient over the activities of the individuals concerned.” It was also noted that AAHB is free to discharge its statutory obligations by providing medical services or by appointing a subcontractor to provide medical care.

The Tribunal held in favour of Archus, noting that the staff were always under the control of Archus (so were not supplied to AAHB) and that the supplies were VAT exempt supplies of medical care.

Constable Comment: The difference between making a supply of services and a supply of staff that provide those services can be a difficult distinction to make for the purposes of VAT. These cases are often complex and others have been significantly more challenging and less successful. It is important to seek professional advice when drafting contracts for the provision of services to ensure the correct VAT treatment is applied, although it is equally important that the business is carried out inaccordance with these contracts.

3. Penalty for Careless Inaccuracies: What is Careless?

This case is an appeal by Udlaw Limited (Udlaw) against a penalty assessment raised by HMRC for submitting inaccurate VAT returns as a result of failing to take reasonable care. Whilst Udlaw accepted that the returns in question were inaccurate, it claims that it did take reasonable care and should not be liable to a penalty for failure to take care.

Udlaw made supplies of holiday lettings of mobile homes. It was run by Mr Giggs and his family. His daughter, Mrs Gleeson, was responsible for the bookkeeping of the business but relied on accountants for the compilation of annual accounts, amongst other things. One role the accountants were tasked with was reconciling the money received from holiday lets reported in the VAT account and the annual accounts.

The business began to make losses and Mr Gigg’s health deteriorated as his prostate cancer progressed so the park was sold and a final VAT return was submitted showing a repayment of over £13,000. HMRC sought to verify this claim and visited the business. During this visit, an HMRC officer identified several issues including discrepancies between the annual accounts and VAT returns.

During the relevant period, Mr Gigg’s health declined, his wife died and one of his sons had a stroke. Owing to these circumstances, more responsibility was given to the accountants. Unfortunately for Udlaw, the accountants were going through a string of mergers with other firms and Udlaw’s case was not handed over correctly. This led to an under-declaration of VAT.

HMRC argued that the errors were careless and sought to impose a 15% penalty. Mrs Gleeson argued that Udlaw had taken reasonable care and that the penalty for “careless inaccuracies” should not apply. The Tribunal analysed what is meant by reasonable care within the context of VAT penalties and stated that “What is reasonable care in any particular case will depend on all the circumstances.” It considered that a taxpayer which chooses to rely on an accountant for its tax return is not careless where it satisfies itself that the accountant is not making any obvious errors. In the circumstances in which Mr Gigg found himself, the Tribunal observed that he acted reasonably in entrusting his accountants.

The Tribunal commented that the level of negligence demonstrated by the accountants was “pretty extraordinary”. Concluding that Mr Gigg had acted reasonably, the Tribunal allowed the appeal and the penalties were cancelled.

Constable Comment: Cases which revolve around penalties and whether a taxpayer has acted reasonably are always interesting. As observed in this instance, whether or not a taxpayer has acted reasonably is very much dependent on the circumstances. Whilst HMRC guidance claims that relying on an accountant is not an acceptable way to act “reasonably”, the Tribunal is clearly willing to consider this in the frame of the wider circumstances.

4. Failure to Register: Best Judgment Assessment

This case concerned Sital Khimji who ran a corner shop from November 2011 until February 2016. She failed to register for VAT in this period and when she sold the lease of the shop and left the area, she destroyed her business records claiming she was unaware of an obligation to retain them.

In December 2016, HMRC launched an investigation into the business. Unable to produce business records, Ms Khimji instructed an accountant to use her bank statements to prepare accounts for HMRC. In addition to these accounts, HMRC interviewed the new owners of the business and enquired as to the typical turnover of the shop. It was informed that in a good week turnover could be £3000 and in a bad week, £1000.

Ms Khimji was assessed for £27,325.53, a figure at which HMRC arrived without using the bank statements and accounts provided. HMRC also disregarded the interview with the current shop owners and claimed that turnover for the shop was £230,000 in a year.

Whilst Ms Khimji understood that she had breached the VAT registration threshold and made no challenge to this, she argued that HMRC were not acting reasonably and had not arrived at the assessment figures using best judgment. She submitted that the disregard for the bank statements and the information gained from the new owners was “illogical and unjustified”. She argued that the information from the new owners and her bank statements demonstrated that the turnover of the shop would not have been more than £100,000.

The Tribunal agreed with Ms Khimji and considered that she had proved that HMRC had failed to consider any of the information available to it. The assessment was re-calculated and the liability was reduced from HMRC’s £27,325.53 to £4255.68; a substantial difference of £23,069.85.

Constable Comment: It was unclear in this case why the HMRC officer disregarded the bank statements and accounts provided by Ms Khimji as well as the information gained from interviewing the current owner of the shops. If you are dealing with HMRC and feel that they are acting unreasonably, Constable VAT will be happy to assist in reviewing the position.

5. Evidence for Zero-Rating Exports of Goods

This appeal concerned a dispute about the availability of zero-rating for supplies of goods which were, purportedly, exported from the UK to China by A&S Import and Export Trading Limited (A&S). The issue was whether A&S had sufficient evidence to zero-rate its supplies.

A&S purchases branded goods in the UK to sell to middle-class Chinese consumers who are concerned about the prevalence of counterfeit goods in the Chinese marketplace. Originally the business focussed on baby milk formula but since 2012 it has grown significantly and now sells cosmetic products, phones and designer clothes and accessories. Therefore, many of the exports were of a high value. A director from A&S explained to the Tribunal that the Chinese authorities require purchases of goods from overseas to be below a certain value, as a result of which A&S would often incorrectly describe and undervalue the goods on export shipping documents.

A&S submitted a VAT return for period 01/17 claiming a repayment of £48,474.43 which was selected for checking by HMRC. A&S was unable to satisfy HMRC, or the Tribunal, that there was a link between any of the items which it had purchased, such as iPhones and handbags, and an associated export document.

VAT Notice 703, Paragraph 6.5, explains the conditions for zero-rating and clarifies that the proof of export must clearly identify the goods and an accurate value of the export. A&S argued that, despite its inability to link specific purchases and sales to export movements, the evidence which it had presented demonstrated that the relevant exports had taken place.

The Tribunal considered that, “whilst it is not a requirement that all the necessary evidence of export needs to be contained in a single document, the evidence of export must read as a whole clearly and correctly identify all the matters specified in paragraph 6.5”. It was held that A&S did not have sufficient evidence to zero-rate its supplies and upheld HMRC’s assessment.

Constable Comment: This case illustrates that making false declarations on customs documents can not only cause you problems in the country of destination if the package is searched and seized, but also in the country of origin. Given the recent introduction of changes to VAT law (Quick Fixes), it is a prudent time to analyse your businesses export procedure as the conditions for zero-rating have been restricted. Our coverage of the “quick fixes” can be read here. 

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

HMRC NEWS

Updates on VAT Appeals

HMRC has updated its list of VAT appeals which it has lost, or partly lost, which could have implications for other businesses.

Quarterly VAT Statistics

HMRC has released its three-monthly VAT bulletin which provides information on quarterly VAT receipts, composed of domestic VAT and Import VAT.

Point of Sale VAT Retail Scheme

HMRC has updated Notice 727/3 with information about changes in the treatment of vouchers.  

CONSTABLE VAT NEWS

Constable VAT has just released a new blog covering some compliance points around distance selling. Distance sales arise where a business in one EU member state sells goods to a consumer (not VAT registered) in another EU member state. We have recently encountered several cases of businesses failing to comply with EU distance sales regulations. If you think that your business may have made an error or misunderstood the rules regarding distance sales obligations, please get in touch with Constable VAT as we will be happy to assist.

CASE REVIEW

UT

1. Supply of Transport or Admission

This case concerned the appropriate rate of VAT which should be charged by Snow Factor Limited (SFL) when selling passes to use the ski-lifts which are available at the snow dome which it operates. The use of the ski-slope itself was not charged for; there is no argument that this would be standard rated. SFL argued that the supplies should be reduced rated as supplies of passenger transport; HMRC argued that the supplies made should properly be characterised as a right to make use of the ski-slope and as such should be standard rated for VAT purposes.

The FTT had previously ruled in HMRC’s favour but SFL appealed on the grounds that, whilst the main reason that customers came to the slope was to ski, the only service which was charged for was the transport on the lift.

HMRC argued that the FTT had been correct as the primary reason for customers to attend the ski slope was to ski and not to make use of the lifts. It argued, in line with Card Protection Plan, that the single supply made by SFL, which should not be artificially split, was a supply of admission to the ski slope which was chargeable to VAT at the standard rate.

SFL argued that, as access to the slope was free, that this was not a supply at all for VAT purposes, which arises where something is done in favour for consideration or reciprocal performance, such as a barter transaction. Therefore, it rejected the Card protection Plan argument as there were not two supplies; there was one supply of use of the lift.

The Tribunal held in favour of SFL and allowed the appeal.

Constable Comment: This case is a useful illustration of the principle of a supply for VAT purposes. Something which is freely given does not create an obligation to account for output tax unless input tax has been recovered in relation to that supply (this is a deemed supply). Allowing consumers to use an asset without charging them, and with no degree of reciprocation, does not satisfy the supply criteria for VAT purposes.

FTT

2. Input VAT Recovery on Set-up Costs

This case concerned the recovery of input tax by the appellant, Melford Capital General Partners (MCGP) which is the general partner of Melford Special Situations LP (MSS), an English limited partnership.

Acting through MCGP, MSS holds shares in an Isle of Man company called Hyde Park Hayes Ltd (HPH) which, in turn, holds the shares in a number of special purpose vehicles (SPVs). Each of these SPVs holds a separate asset such as commercial property. MCGP is owned by Melford Capital Partners LLP (MCP) which is contracted to provide advisory and property management services to MSS. MCP supplies these services to the SPVs in return for a fee payable from the SPV to MCP.

MSS incurs costs, through MCGP, relating to the operation of the structure including the costs of setting up and attracting investors and the operating costs of running the business. MCP and MCGP constitute a VAT group registration, HPH and the SPVs are in a separate VAT group.

HMRC issued a decision refusing to repay VAT incurred by MCGP on set-up costs on the grounds that VAT recovery by MCGP should be nil because these costs related solely to investment activities (which do not constitute an economic activity for VAT purposes). It also argued that the operating costs were recoverable but subject to apportionment to reflect that they relate partly to taxable supplies and partly to non-economic investment activities of the VAT group.

MCGP argued that it should be allowed to recover this VAT as the costs were incurred with a view to supplying advisory and management services to the SPVs and that there was no separate non-economic activity. It suggested that the costs were to be properly classified as a general overhead of the VAT group and that the VAT group only made the abovementioned taxable supplies. Therefore, it argued, that all of the VAT incurred was recoverable in full.

The Tribunal considered European caselaw around these issues and the discussion of the issues is complex. Ultimately, the Tribunal held in favour of MCGP and agreed that the costs incurred by the appellant related exclusively to taxable supplies. This is an interesting decision and businesses which may have restricted recovery of VAT, or have been treated similarly by HMRC, may wish to revisit the position.

3. Private Tuition Exemption

This appeal relates to the VAT exemption for supplies of private tuition and whether it applies to tuition in kickboxing. The appellant, Premier Family Martial Arts LLP (PFMA), offered classes in kickboxing and had treated its supplies as VAT exempt since its formation. HMRC investigated PFMA and issued a decision that its supplies were standard rated. HMRC assessed PFMA for output tax owing.

Following the ADR process, the assessment for output tax was cancelled and HMRC decided that PFMA should be registered for VAT, retrospectively, from 1 April 2018. Prior to the ADR process, the effective date of registration suggested by HMRC was 1 September 2011 and the assessment was for over £400,000; this was a successful ADR outcome for PFMA. However, PFMA appealed against the decision that its supplies should be standard rated for VAT purposes and argued that it was not required to be registered for VAT. HMRC argued that kickboxing is not commonly taught in schools and universities.

The Tribunal gave lengthy consideration to the EU judgment in Haderer and considered that, in order for a supply of tuition to be exempt, it must be of a subject which is “commonly taught at schools and/or universities in the EU”. It also derived from the judgment that the subject being taught must not be purely recreational and without educational benefit. The pivotal question before the Tribunal was, therefore, whether kickboxing is commonly taught at schools in the EU. PFMA sought to rely on a survey which had been sent to schools and academies but this did not work in its favour as HMRC, and the Tribunal, believed the figures were too low to claim that kickboxing was commonly taught in schools and/or universities.

This was fatal to the argument that the supplies should be exempt, and the Tribunal held against the appellant before considering whether kickboxing is purely recreational.

Constable Comment: Even though there was no requirement to do so, the Tribunal still came to a conclusion on the “purely recreational” point. Looking to previous judgments on this point, it was observed that subjects such as pilates have been held to be sufficiently educational to benefit from the exemption and that kickboxing is significantly less purely recreational than such activities. Interestingly it was stated that, had kickboxing been more commonly taught in schools, it would not have been barred from VAT exemption by being recreational in nature. The private tuition exemption area of VAT law is one which HMRC appears to have taken a keen interest in over the last few years.

4. Illegal Sales: When was threshold breached?

This is an appeal against a decision by HMRC that the appellant, Mr Kendrick, had a historic VAT registration obligation by virtue of his illegal sales of imported tobacco. HMRC assessed Mr Kendrick for £220,000 VAT and charged a penalty of a similar proportion as, it was asserted, that he should have been registered for VAT from March 2010. Mr Kendrick admitted that he had sold some illegally imported tobacco to his family and friends but challenged this assessment, claiming that he had never sold enough tobacco to breach the VAT registration threshold.

Between December 2009 and August 2013, HMRC seized a number of packages of tobacco addressed to Mr Kendrick amounting to nearly 50kg; the largest of these packages contained 22kg. HMRC used these figures and dates to establish the average amount sold per day and calculated that, in the relevant period, Mr Kendrick had a turnover of roughly £1.3million.

Mr Kendrick accepted that he made some sales to friends and family but highlighted that he never received the packages which had been seized by HMRC and that he did not request the amounts; a stranger he met on a boat in Holland would send him unspecified amounts of tobacco and Mr Kendrick would, in turn, post cash to one of several addresses given to him by his supplier. The Tribunal found this assertion to be not credible but accepted Mr Kendrick’s claim that he had not received the amount of tobacco necessary to make the value of supplies HMRC claimed he had.

To support his argument, Mr Kendrick stated that in order to make the quantity of sales which HMRC were suggesting, he would had to have supplied over half of all the rolling tobacco smoked in his town (Morecambe), consistently. Given that he lived in a static caravan, he claimed that he had neither the space nor the working capital to fund such a venture.

The Tribunal considered that Mr Kendrick had not breached the VAT registration threshold based on the evidence which was before them and therefore allowed his appeal against the assessment. However, the Tribunal did state that they could not conclude that Mr Kendrick was not liable to have registered for VAT from the date HMRC were suggesting. It was observed that Mr Kendrick may have breached the threshold by virtue of other sales but stressed that this was a matter for HMRC to consider.

Constable Comment: This case was interesting as it highlights that the VAT registration threshold can be breached as a result of illegal sales. There is no requirement in the law that the turnover of £85,000 needs to be gained through legal means; HMRC can assess for VAT on anyone who makes taxable supplies in excess of the VAT registration threshold and should have been registered.

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

HMRC NEWS

VAT Bad Debt Relief 

HMRC has updated its guidance on bad debt relief to correct certain minor errors.

Reverse Charge Sales List: Service and Availability Issues

There has been an announcement of planned downtime from 3pm to 5pm on Monday 13 January 2020.

VAT Refunds Manual

HMRC has updated its guidance around the time limits set out in the 1995 VAT Regulations.

CASE REVIEW

CJEU

1. Letting of Boat Moorings

This CJEU referral concerned the VAT liability of the letting of boat moorings in Germany. The appellant in the main proceedings is a non-profit association which seeks to promote the sport of sailing and other motorised water sports. EU law exempts the letting of immovable property from VAT, but German law provides that “there shall be no exemption for […] the letting of premises and sites for the parking of vehicles, the short term letting of places of camping sites and the letting and leasing of equipment and machinery of any kind…” German law affords a reduced rate (7%) to “the letting of living and sleeping areas which a trader keeps available for the short-term accommodation of visitors, and the short-term letting of camping areas.”

The appellant had been applying the reduced rate to its lets of boat moorings. The question before the Court was whether the reduced rate for the letting of camping or caravan sites also applied to the letting of boat moorings.

The Court opened its considerations by clarifying that exceptions, such as the exception to the exemption in the main proceedings, must be interpreted strictly and that the scope of exceptions must not be extended to services which are neither included in its wording nor intrinsically linked to the concept. It was concludedthat it is evident from the wording of the EU law is not to be read as permitting Member States to apply a reduced rate of VAT to boat moorings.

The Court held in favour of the German tax authority.

Constable Comment: This case clarifies that exemptions and exceptions must always be interpreted strictly. The letting of boat moorings does not appear to be analogous to the letting of short-term accommodation or camping areas.

2. Recoverability of VAT Incurred – Unregistered Land

This case concerned the right to deduct VAT incurred by the purchaser of some land in relation to registering that land in the Romanian Land Registry prior to its transfer by the vendor.

The appellant, Amărăşti Land Investment (ALI), carried out agricultural activities and purchased land to fulfil its purposes. The purchase of some of that land was affected by way of two stage process consisting of, primarily, a bilateral promise to sell whereby ALI acquired a claim to ownership of the land and, secondarily, upon completion of the administrative formalities. The contract would then be signed by both parties. Romanian law requires that contracts for the sale of land take the form of authenticated instruments and in order for this to be the case, the land in question must be registered at the Romanian Land Registry.

Despite being the purchaser, ALI incurred costs from a land-registration company for the purposes of the first registration of the land in the transaction; a statutory obligation of the vendor. It was agreed between ALI and the vendor that this was acceptable and that the vendor would reimburse ALI the costs incurred to register the land at a rate of €750 per hectare. The costs were not re-invoiced by ALI to the vendor and the full price of the land excluded the value of the land registration related expenses.

ALI deducted the VAT incurred on the land registration fees but was assessed by the Romanian tax authority on the grounds that each payment of €750 represented services supplied by ALI to the vendor without invoicing the value to the vendor or collecting the relevant VAT. EU law dictates that in this situation, where a party to a transaction acting in his own name but on behalf of another person takes part in a supply of services as an intermediary, he is deemed to have received and subsequently supplied those services himself. ALI disagreed with this position and argued that the costs incurred on land registration were investment related costs incurred for the purposes of carrying out its taxable transactions and, therefore, that it was entitled to deduct the VAT.

The Court held that the EU law does not preclude parties to a contract for exchange of land from agreeing that the purchaser, being a taxable person, will incur costs on behalf of the vendor. However, it was held that the mere presence of such a clause is not conclusive on whether the purchaser will be entitled to deduct VAT incurred in relation to these costs. The Court went on to conclude that even if such an agreement exists between the two parties, the purchaser is still deemed to have received and supplied the services.

Constable Comment: The matter will be referred back to the national Court to make an ultimate ruling on the deductibility of the VAT incurred by ALI. However, it appears from this judgment that ALI will be required to declare output VAT on supplies which it is deemed to have made to the vendor.

UT

3. Zero-Rating Newspapers – News Corp UK & Ireland

This case is an appeal by News Corp UK & Ireland (Newscorp) against an FTT decision that digital versions of newspapers were not zero-rated. Newscorp is the representative member of a VAT group that publishes; The Times, The Sunday Times, The Sun and The Sun on Sunday. The issue is whether digital versions of newspapers, which were introduced in 1991, significantly after VAT law was first drafted in 1972, are “newspapers” within the intended meaning of the UK law allowing zero-rating to be applied to “newspapers, journals and periodicals”.

The FTT had previously concluded that zero-rating could not apply on the grounds that the digital versions of the newspaper, which are available through various mediums, constitute a supply of services. This differs from a traditional newspaper which is a supply of goods. This, the FTT concluded, was fatal to Newscorp’s case that the digital editions were “newspapers”. The UT disagreed with this assessment, highlighting that the UK law (s.30 VATA 1994) specifically allows zero-rating for goods and services. Therefore, it adopted a different approach and stated that in order to conclude that a “newspaper” in the UK law includes digital versions, it is necessary to determine if they share enough characteristics, or that “they fall within the same genus”. The FTT had made findings of fact that analysed this issue and had concluded that the paper and digital versions were “…when the evidence was viewed in the round, the same as or very similar to the newsprint editions.”

HMRC challenged the FTT’s findings and argued that the digital versions of the newspapers were sufficiently different from the physical versions; it claimed that the digital editions provided “rolling news” as opposed to a traditional newspaper and that, in any event, the two versions were sufficiently different to not be treated similarly. This argument was not successful, the UT dismissed HMRC’s challenge. It concluded that, as the FTT had found that the different versions of the newspaper were “the same or very similar”, and that the zero-rate could apply to both goods and services, that the zero-rate should be applied to the digital versions of the newspaper.

Constable Comment: This appeal may be taken further by HMRC despite the fact that the ruling seems to be in line with the UK law. However, the EU Council agreed a proposal for a Directive in October 2018 which allows member states to apply reduced and zero-rates to electronic publications where, previously, electronically supplied services have always been standard rated for VAT across the VAT system. Whilst this Directive will be discretionary, HMRC may seek  to mainitain a mandatory standard rate applied to electronic newspapers, as set out in VAT Notice 701/10.

FTT

4. DIY Housebuilders: Date of Completion

This appeal concerned a DIY Housebuilder’s claim for a refund of VAT made by Liam Dunbar who constructed a property and submitted a claim for repayment within three months from receiving a certificate of completion. Although the claim was submitted within the three-month time limit, HMRC rejected the claim on the basis that the house had been completed more than three months before receiving the claim and that the date of the certificate should be ignored.

In June 2017, the architect confirmed that the property was complete, so Mr Dunbar contacted the HMRC helpline to ask for guidance about making a refund claim for the VAT incurred whilst developing the new property. HMRC informed Mr Dunbar that he should wait until he had a formal certificate of completion and that the claim must be made within three months of that date. Following the receipt of a certificate of completion on 19 February 2018, Mr Dunbar sent his claim to HMRC on 8 May 2018 and it was received by HMRC on 15 May 2018; the claim was within the three-month time period after receiving the certificate of completion.

However, HMRC denied the claim on the grounds that the building had been complete for more than three months and argued that “completion”, for the purposes of the DIY Housebuilder Scheme, needs to be considered on a case-by-case basis. It was asserted that electricity was connected on 26 March 2017 and that this was the date of practical completion. In support of this, HMRC submitted that Mr Dunbar moved into the property in March 2017.

The Tribunal considered that the question which needed to be answered was “what is meant by the phrase “the completion of the building” in regulation 201(a) VATR”. It was stressed it could not be made clearer by the regulations that the certificate of completion is the primary evidence of completion needed to support a claim to a refund. Regulation 201(b) requires the taxpayer to furnish HMRC with a “certificate of completion obtained from a Local Authority or such other documentary evidence of completion of the building as is satisfactory to the Commissioners”.

The conclusion of the Tribunal was that, for the purposes of a VAT Housebuilder refund claim, the completion of a building takes place when a certificate of completion is issued or, if there is no certificate issued, on such other date as may be evidenced by documents produced to HMRC by the taxpayer. The appeal was allowed and the refund was paid to Mr Dunbar.

Constable Comment: The Tribunal commented in this case that if, as HMRC contend, the date of completion depends on all the facts of the case, it would be almost impossible for the taxpayer to be sure when completion had taken place. Whilst in other areas of VAT law the date of completion may be given a different meaning, in the context of the DIY Housebuilder’s Scheme, this decision states that the date of the certificate is the date of completion. Whilst this is a good result for the taxpayer, we have seen similar cases not held in favour of the taxpayer. If you are building your own property, it is always worth seeking professional advice to ensure that the claim is handled effectively to guarantee the highest chance of success.

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

Christmas closure

We will be closing on the afternoon of Tuesday 24 December and will reopen on Thursday 2 January 2019 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 have not sent Christmas cards this year and instead donated to a local shelter providing support to homeless men and women. However, 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.

HMRC NEWS

Group and divisional registration (VAT Notice 700/2)

This notice has been updated to include information about the legislative changes to the eligibility criteria to include certain non-corporate entities, which are individuals, partnerships and Scottish partnerships.

VAT Annual Statistics

HMRC has released an overview of VAT statistics, covering receipts information and the characteristics of the VAT trader population in the UK.

December 2019 Exchange Rates

HMRC has issued its approved exchange rates for foreign currency. These are available in various formats.

CONSTABLE VAT NEWS

We have recently published a blog about the four EU VAT “quick fixes”. It is available to read on our website.

The quick fixes will be relevant to all businesses involved in cross-border trade and include:

• Simplification of “Call-off stock”
• Simplified evidential standards for dispatches
• Uniformity of rules in chain transactions
• Clarification of rules for zero-rating dispatches

If you would like to discuss anything highlighted in this blog then please do not hesitate to contact Constable VAT. We will be happy to answer any questions and talk about the ways in which the quick fixes apply to your business operation.

MTD Survey

The CIOT and ATT are asking tax professionals and businesses to complete a survey on their experiences of making tax digital (MTD) for VAT and their thoughts on next steps. The survey (47 questions) is expected to take 15 minutes to complete and closes on 31 December. The professional bodies will use the responses as the basis for a submission to HMRC on any future roll-out of MTD.

The survey can be accessed here. It should take approximately 15 minutes to complete for agents or nine minutes for those who are not agents. If you are only completing the questions on the future of MTD, this will take less than five minutes.

CASE UPDATE

CJEU

1. Exemption for Cost Sharing Groups – Infohos

This referral to the CJEU concerned whether services provided by Infohos were exempt from VAT; Infohos arguing that its services were exempt, The Belgian Tax Authority disagreed and considered that the services supplied were taxable at the standard rate of VAT.

Infohos is an association set up by a group of Belgian hospitals, the hospitals are the members of the association. It specialises in supplying hospital IT services. It provides specific IT services to hospitals in the group and the same services to non-members. EU law exempts from VAT services provided between members of independent groups (cost-sharing exemption) where the persons in the group are carrying on activities which are exempt from VAT. This is enshrined in Belgian law with the following provision “the activities of the group consist exclusively in providing services directly to the benefit of their members […] and they all carry out an activity exempted under section 44…”

Owing to the EU provision, Infohos did not register for VAT. It believed that it was not eligible to do so as it made exclusively VAT exempt supplies. However, the Belgian tax authority ruled that because Infohos supplied services to non-members as well as members, the exemption could not apply to any of the supplies made and that Infohos should have registered for VAT. The question which was referred to the CJEU was whether EU law precludes domestic laws, such as the one at hand, which make the applicability of this VAT exemption conditional on the fact that only group members receive supplies.

The Court observed that it does not appear from the wording of the EU law that in order to benefit from exemption, no supplies can be made to non-group members. This was a provision only in the Belgian law. Therefore, according to the EU law, the exemption may be granted for services rendered by autonomous groups of persons to their members – it cannot be inferred from its wording that it could be applied only if these groups are required to provide services to their members only. In concluding, The Court held that the Belgian provision was precluded by the overriding EU law. It did, however, confirm that the supplies made to non-group members were not VAT exempt.

Constable Comment: This case demonstrates how, in certain specific circumstances, identical supplies of services may attract different rates of VAT depending on the status of the recipient of the services. Whilst EU law permits domestic law-making bodies to guard against this by applying specific restrictions, they are not permitted to generally restrict the applicability of an EU provision as Belgian law tried to in this case.

UT

2. Supplies of loan administration services – Target Group Limited

This appeal concerned whether loan administration services supplied by Target Group Limited (TGL) were VAT exempt payment processing services or standard rated loan management services; HMRC arguing the latter.

The question which the Tribunal fashioned for itself to answer was whether TGL’s services were exempt as “transactions concerning deposit and current accounts” and, if so, if the supplies were nonetheless standard rated as debt collection services. In order to reach this conclusion, it was necessary to assess what the definition of “current account” is.

The Upper Tribunal agreed with the assessment of the FTT that the accounts in question were not “current accounts”. A key function of such an account is the ability not only to pay in and draw out funds but also to pay third parties directly by drawing on the funds available in the account. The accounts in question in this case lack this functionality, amongst other things such as the inability to go into credit, and so are not “current accounts” which fall within the VAT exemption.

Having reached the conclusion that the services supplied by TGL were not exempt from VAT as they were not applied to “current accounts”, the Tribunal observed that it was not necessary to assess and comment on the notion of the services being excluded from the exemption as “debt collection services”. The appeal was dismissed.

Constable Comment: Whilst the outcome of this case goes against the taxpayer, it is nonetheless useful in highlighting the key factors of current accounts for the purposes of the VAT exemption. Whilst there is no specific definition in the legislation, it is accepted that current accounts allow clients to deposit and draw funds at any time as well as permitting customers to draw from the funds to pay third parties directly.

FTT

3. Entitlement to deduct VAT incurred on advice in relation to bonus payments – Taylor Pearson Construction Limited

This appeal by Taylor Pearson (Construction) Limited (TPC) concerned a VAT assessment by HMRC seeking to recover input VAT which TPC had recovered. The input VAT incurred related to services provided by tax advisors as to how the company could reduce its tax and NIC liabilities when paying bonuses to its directors. HMRC sought to assess on the basis that the supplies were not for the purpose of the company’s business and did not relate directly to a taxable business activity.

Emerging from the recession of 2008/09, TPC was seeking tax efficient ways to reward its directors without increasing their salaries. In order to achieve this, several professionals were engaged between 2010-2013 to advise on how to issue shares to the directors to mitigate tax and NIC contributions.

HMRC argued that, despite the supplier’s invoice being made out to TPC, the supply was for the benefit of the directors as individuals. It was also argued that the issue of shares is an exempt supply and, therefore, that the VAT incurred was irrecoverable as it directly related to VAT exempt supplies.

The Tribunal observed that HMRC was, in fact, incorrect in its contention that the issue of shares is exempt as, following the case of Kretztechnik, an issue of shares is a transaction which is outside the scope of VAT. Generally speaking, input VAT in relation to supplies of this nature is treated as residual and is recoverable in line with the company’s partial exemption calculations. The appeal therefore turned mostly on the point around whether or not the costs were incurred for the overall taxable business purposes of TPC.

Considering this point, the Tribunal observed that the advice was provided to the company and, although the directors were the significant beneficiaries, the benefit was earned entirely in their capacity as directors of the company. The Tribunal noted that there was a significant benefit to the company – the directors would not have to pay income tax on their bonus. Had it been that the directors were required to pay income tax, the company would have had to pay out higher amounts. Therefore, the Tribunal held that the benefit was to the company as well as the directors and allowed the appeal against HMRC’s assessment. The supplies received were for the purposes of the business and had a direct and immediate link with TPC’s taxable supplies.

Constable Comment: This case is useful in demonstrating an issue which has arisen before the Tribunals and Courts previously in a wealth of caselaw including Becker and Praesto. In this instance, despite there being a benefit to the directors of the company, there was, conversely, the same direct benefit to the company as it had to pay out less in bonus payments.

4. Zero-rating Construction – Westow Cricket Club

Westow Cricket Club (the Club) is a Community Amateur Sports Club (“CASC”) registered under section 58 of the Corporation Tax Act 2010 from October 2012. It is not, for the avoidance of doubt, a registered charity.

The Club is run by unpaid volunteers with a love for village cricket.  The Club raised funds to build a pavilion and sports hall adjacent to the cricket ground. Prior to any building work starting, on 22 March 2012, the Club wrote to HMRC giving details about the Club and the building project and seeking guidance on the zero rating of supplies to the Club in the course of the construction of the pavilion and sports hall. HMRC’s response was not definitive and referred the Club to HMRC’s notice, but was read by the Club as indicating that zero-rating was appropriate and a certificate was issued to the contractors undertaking the work

This appeal concerns itself with the decision by HMRC to issue, on 31 March 2015, the Club with a penalty in the sum of £20, 937.  The penalty arose from the decision to issue a zero-rating certificate to Atkinson Builders Ltd on 9 March 2013 in relation to supplies to the Club during the course of the construction of a new pavilion.

The only issue before the FTT was whether or not the Club could prove that it had a reasonable excuse for issuing the zero-rating certificate, it having been conceded that the Appellant ought not to have issued the zero-rating certificate.

The FTT concluded that there was not a reasonable excuse on two grounds:

1. HMRC’s letter stated that it was not definitive advice and pointed the Club to consider further information.
2. The zero-rating certificate is explicit and asks for confirmation that the building will be used “solely for…a relevant charitable purpose, namely by a charity”. The requirement is expressly set out and there is no other objectively reasonable interpretation that might be applied. The Club is not a charity.

The FTT also considered whether the penalty was disproportionate, but concluded it was not as it simply resulted in the Club paying a sum equal to the amount of VAT that was properly due.

Constable Comment: This is one of several cases that have been considered by the Tribunals on this point and given HMRC’s response it seems harsh that it was not that the Club had a reasonable excuse. However, this does highlight the need to obtain a non-statutory clearance on matters of uncertainty.  

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

HMRC NEWS

VAT Accounting Manual

The VAT Accounting Manual has been updated to reflect certain changes in HMRC’s ability to use discretion when directing what VAT return stagger a business should account to.

VAT Grouping Manual

The terminology used in the manual has been changed in various sections.

EU VAT Refunds

The planned downtime from 9pm on Tuesday 12 November 2019 to 6am Wednesday 13 November 2019 and from 9pm on Thursday 14 November 2019 to 6am Friday 15 November 2019 was cancelled.

CASE REVIEW

First Tier Tribunal

1. Relevant Charitable Purpose Building

This appeal by Madinatul Uloom Al Islamiya (The College), is against a decision by HMRC that construction services received by The College did not qualify for VAT zero-rating.

This is an issue which has been in the Courts a lot in recent years, cases such as Longridge and Wakefield considering whether a charity is operating a business or “economic activity”. In this instance, The College operated a boy’s residential Islamic faith school where attendees are taught the national curriculum and Islamic Studies. The College is fee-paying and sets this fee by reference to other similar residential faith schools.

The College built a new multi-functional hall. It issued a certificate to the contractor confirming that the hall would be used for a relevant charitable purpose (RCP) insofar as it would be used for solely non-business purposes. Whilst the Tribunal considered several issues such as whether the hall was a building and, if so, whether it was an annexe, the point on which the case turned was the RCP point. There were comparisons with the Yeshivas Lubavitch judgment to be made in considering whether The College was operating an economic activity. In that case, it was held that the zero-rate could apply to a similar situation (our coverage here).

The College argued that its fees were donations. If a pupil’s parents/guardians could not afford to make a payment, generally the debt was not pursued where there were good reasons. HMRC disagreed with this analysis. The Commissioners argued that the money received by The College represented consideration for a supply of education and that it was not a donation. Merely failing to pursue a bad debt does not make it a donation. The Tribunal observed that, whilst The College did receive substantial donations from the religious community, these donations were distinct from the fees charged and that this was reflected in The College’s financial statements. Considering that the fees charged are significant “in amount and in aggregate” and that the fees received make a significant contribution to the cost of providing the education, the Tribunal ruled that this hall was not constructed for a RCP and, therefore, that VAT was due on the construction costs.

Constable Comment: This case is yet another in a long string of business/non-business decisions relating to the construction of buildings. What has become clear throughout the last few years with all these judgments is that HMRC are particularly restrictive in accepting the applicability of the zero-rate for a building to be used for non-business purposes. Whilst the ruling in Wakefield re-opened the door to a contextual approach to deciding if an activity is “economic” in nature, it still appears a particularly grey area of the law.

2. Application of the Welfare Exemption

This appeal concerned an application made by RSR Sports Limited (RSR) for repayment of output VAT which it believed it had paid incorrectly. The application for repayment was based on the belief of RSR that its supplies were VAT exempt and that it had treated its supplies as taxable (standard rated) in error. HMRC argued that the supplies did not benefit from the VAT exemption for supplies of welfare services and, therefore, that VAT was correctly due on all of the supplies in question made by RSR. The VAT incurred was £229,000 which was declared over a four year period.

RSR trades as Get Active Sports and provides various services such as; after-school clubs, school holiday camps, childcare before and after school hours. It also provides staff to schools to cover teachers and to assess pupils. The supplies in question were the holiday camps provided for schools. RSR believed that these were services closely concerned with the care or protection of children and were “welfare services” for the purposes of the VAT exemption.

After some discussion of relevant caselaw, it was decided that the supply being made by RSR was a single supply. The question before the Tribunal was whether it was a single supply of activities for children, with an ancillary element of childcare, or vice versa. It is worth noting that there was no debate around whether RSR was eligible to make exempt supplies or around the interpretation of the exemption: the sole issue is the nature of the single supply being made.

The considerations made by the Tribunal were quite lengthy for a decision of this nature and merit a read if the situation applies to your business or charity. The findings and the reasoning for each finding are set out individually in a helpful way. A key area of the decision was the fact that staff did not hold coaching qualifications and that activities which were made available for the children were not performed to any external standard. The Tribunal supposed that this was indicative of the fact that the main aim of the camps was to provide childcare for the children and not to provide the activities themselves.

Constable Comment: This case turned on very specific facts and, on face value, appears to contradict some previous caselaw and HMRC’s general position. Whilst exemptions must be applied narrowly, this shows that there is scope for a sensible dialogue around these issues rather than a restrictive approach which has been taken in the past. In reality, the parents were paying for RSR to look after their children whilst they were at work, not for their children to participate in specific activities. This is a decision of the First Tier Tribunal only and it remains to be seen whether HMRC will appeal the decision to the Upper Tribunal.

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

Thank you for subscribing to our VAT Focus. This edition provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Tribunals and Courts. This version discusses the rulings in Unitel, DIREKTexpress and Lunar Missions. Issues covered include the zero-rate for exports, the exemption for universal postal service providers and the time of supply for single purpose vouchers.

HMRC NEWS

DIY Housebuilders VAT Refund Scheme

HMRC has updated some of the terminology used in its guidance around reclaiming VAT for DIY housebuilders.

Domestic Reverse Charge

This notice has been updated to include information about the introduction of the domestic reverse charge on renewable energy certificates.

BREXIT UPDATE

The UK has been granted a “flextension” by the EU which extends the deadline for reaching a Brexit deal until 31 January 2020. The nature of such an extension means that the UK can leave before this date, if a deal is reached, on either 1 December or 1 January. No new action is required from businesses as a result of this extension, but it allows a bit more time to ensure preparedness in the event of a no-deal scenario. If you would like any assistance with making sure that your business is ready for Brexit, from a VAT perspective, please get in touch with Constable VAT.

As a result of the upcoming general election, Parliament will be dissolved on 6 November 2019 to allow for political parties to mount effective campaigns. This means that there will now not be a budget announcement on this date and it is unlikely that there will be a budget announced in the remainder of 2019.

Get your business ready to import from the EU to the UK after Brexit

Read HMRC’s guidance about what businesses need to do now to make sure they are able to receive goods from the EU if the UK leaves without a deal.

Help and support for traders getting ready for Brexit

Registration for a new webinar about completing customs import declarations has been added.

CASE UPDATE

CJEU

1. Substantive Conditions for Zero-rating Dispatches

This referral concerned an appeal by Unitel, a Polish company, against a decision of the Polish tax authorities to refuse zero-rating on goods which were sold and shipped to a customer in Ukraine. The refusal was because the recipients of the goods who were identified in the invoices for the export were not the parties who actually received the goods.

The domestic Court therefore referred the issue to the CJEU and posed the question whether the principles of fiscal neutrality and proportionality preclude the disapplication of the zero-rate for exports where it can be shown that the goods were exported to a destination outside the EU purely because the recipient was not the recipient identified on the sales invoice.

The purpose of the exemption for exports is to ensure that exported goods are taxed in the place where those goods will be consumed – in this case, Ukraine. For the purposes of VAT, goods are regarded as having been sold when the right to dispose of the goods as owner has transferred to the recipient. It was observed that the substantive conditions for the zero-rating of an export are that the goods are sold and exported to a customer outside of the EU; there is no specific EU requirement that the customer be identified.

It was, therefore, stressed that the principle of fiscal neutrality requires the VAT exemption to be granted even where certain formalities have not been adhered to, provided that the substantive conditions for the zero-rate have been met:

• The goods are sold
• They are exported outside of the EC
• They have physically left the EC

The matter was referred back to the domestic Court with the decision being that the zero-rate cannot be disapplied because the recipients were not the recipients declared on the sales invoice.

Constable Comment: This is another case in a long line of previous caselaw which suggests that so long as the substantive conditions for zero-rating are met, with regard to exports, that the absence of certain formalities will not restrict the application of the zero-rate. Interestingly, the possibility of the supplier being involved in tax evasion was discussed and it was observed that there would be a different outcome if the supplier knowingly made false declarations.

2. Exemption for Postal Services

This CJEU referral concerned the interpretation of the VAT exemption for postal services and the way in which it was applied in Germany. EU Law provides a VAT exemption for the supply of a universal postal service.

The company in question, DIREKTexpress, is now in liquidation but had been concerned with the delivery of, primarily, Court or administrative authority documents through subsidiaries throughout Germany. It held a licence issued by the German authorities to carry on this business. The question before the CJEU was whether the provision of such a service constituted a “universal service” as described by the VAT exemption.

The Court observed that the exemption in EU law is intended to promote certain activities which are in the public interest. Therefore, it was suggested that the exemption would not apply where the services in question were for the specific benefit of an economic operator. This was a key consideration in deciding whether the VAT exemption would apply.

The Court considered that the purpose of the services offered was not to meet the requirements of an economic operator but to assist in the proper administration of justice and, therefore, that the activity was in the public interest. This means that those providing services such as those in the main proceedings, i.e. the licensed delivery of Court documents, must be regarded as “universal service providers” for the purpose of the exemption and are, therefore, VAT exempt.

Constable Comment: This judgment confirms that other businesses who may be operating similar models should consider the historic VAT treatment of their supplies. VAT exemptions will always be interpreted very strictly by the Courts. Before trying to retroactively apply a VAT exemption the circumstances need to be carefully considered and it is advisable to seek professional advice.

UT

3. Time of supply for single-purpose vouchers

This appeal by Lunar Missions Limited (LML) against the decision of the FTT relates to the time of supply of vouchers it gave customers in exchange for their pledges of investment. HMRC had decided that LML was liable to register for VAT based on these sales which significantly exceeded £85,000 and reached a total of over £600,000 within a matter of days.

In exchange for pledges of investment money, LML would provide the customer with the right to occupy some digital, or physical, space within a spacecraft which would be sent to the moon; this was described as a time-capsule. Initially, LML had believed that it was making no taxable supply but ultimately conceded that it was giving rewards to customers in exchange for consideration. After lengthy consideration, both parties agreed that LML were making supplies of single purpose vouchers and, therefore, that they were liable to VAT. The Tribunal found in favour of HMRC’s judgment that LML should have registered in 2014 when it received the money and issued the vouchers.

The issue in the appeal at hand is when the time of supply arises for the sale of single-purpose vouchers. Where vouchers are sold which can be used to buy things at different VAT rates, for example a voucher to use in a supermarket, the VAT is accounted for by the supermarket when the voucher is redeemed – not when the sale is made. However, where the voucher can only be used to buy a particular item which attracts one rate of VAT only, then the tax point arises when the voucher is sold and the VAT rate is whatever rate the underlying benefit attracts. This means that for a single purpose voucher of this nature, the sale was standard rated.

LML argued that there was no reason for the time of supply for the sale of a single purpose voucher to be the time at which that supply was made; essentially it argued that s6 VATA does not apply to vouchers. LML submitted that there was no legal basis for applying s6 VATA to the “issue of vouchers” as there is no definition of when a voucher is “issued”.

The UT dismissed this appeal, analysing the decision in Lebara where it was decided that a voucher is issued when the sale takes place – the service is performed for the purposes of s6 VATA when the sale takes place and not when it is fulfilled.

Constable VAT: From the submissions of LML, it is hard to tell what their case was as where a voucher is a single purpose voucher it is regarded as a supply of services which does not fall within any of the special provisions for multi-purpose vouchers (for which a tax point arises when redeemed, not issued). The essence of their argument was that, under s6 VATA, the tax point for services arises when those services are “performed”. It was decided that the service being supplied was completed when the voucher is issued and not when the service to which the voucher entitles the holder is fulfilled.

This case is, therefore, useful in clarifying that where a voucher is not a multi-purpose voucher, the tax point arises when the voucher is sold to the customer as this is when the service is performed. It would seem a fair view to adopt to say that the service supplied in this context is the provision of the voucher and not the underlying benefit of that voucher.

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

HMRC NEWS

Who should register for VAT? (VAT Notice 700/1)

HMRC has updated its guidance on submitting advanced notification of UK VAT registration should the UK leave the EU without a deal.

Find software suppliers for VAT and the EC Sales List

Guidance has been updated to include new suppliers.

VAT MOSS exchange rates

The VAT MOSS exchange rates ending September 2019 have been added.

New Extra Statutory Instrument

The government has tabled an extra statutory instrument (number 1309, 2019) under the cross-border trade (Public Notices) (EU Exit) Regulations 2019.

The regulation allows HMRC to ask the Treasury to change the law as it applies to VAT and excise duties in the UK, for a period of six months from the date of the UK’s withdrawal from the EU, without having to seek permission from Parliament.

MTD Digital links – applications for deadline extension

On 17 October HMRC announced that businesses with complex or legacy IT systems can apply for additional time to put the required digital links in place, subject to meeting certain qualifying criteria. If a business qualifies then the additional time will be granted as a specific direction.

Further detail on the criteria to qualify for an extension, and how to apply, are set out in new paragraph 4.2.1.3 in VAT Notice 700/22.

In summary to be considered for a specific direction, affected businesses will need to:

• make a formal application to HMRC as soon as possible for an extension and by no later than the end of the relevant soft-landing period
• explain why it is unachievable and not reasonable for the business to have digital links in place by the MTD VAT digital links mandation date (in April 2020 or October 2020, for businesses mandated to join MTD in 2019) for example, why does commercially available software not meet the digital link requirement for the business?
• submit details of the systems that are unable to be digitally linked (provide a current map of existing VAT systems, highlighting the exact areas that cannot be digitally linked)
• provide a clear explanation and timetable for when and how the business will become fully MTD compliant (ordinarily no later than one year from the end of its soft-landing period)
• state the controls the business will put in place to ensure any manually transferred data is moved accurately and without error

Brexit – auto enrolment for Transitional Simplified Procedures

Simplified import procedures called Transitional Simplified Procedures (TSP) will come into effect if the UK leaves the EU on 31 October. For businesses new to customs processes this is likely to be the best option for them.

On 15 October 2019 HMRC announced that they were in the process of writing to around ninety five thousand VAT registered businesses to notify them that they have been registered for TSP.

TSP will allow registered businesses to import goods from the EU to the UK without having to make full customs declarations at the border or pay import duties they owe straight away.

To move goods from the EU into the UK using TSP they will need to:

• be established in the UK and meet the eligibility criteria;
• keep records of their imports, and be prepared to make monthly supplementary declarations to HMRC;
• check the tariff rates on imports to find out if there will be any customs duties to be paid; and
• apply for a Duty Deferment Account, which will allow them to pay duties owed on goods monthly rather than as soon as the goods enter the UK.

For more information about TSP and record keeping, see ‘Register for transitional simplified procedures to import goods in a no-deal Brexit‘ on the HMRC website.

Businesses that are not VAT registered will not be automatically enrolled for TSP. If businesses are not VAT registered and they import goods, HMRC recommend they apply for TSP.

BREXIT BUDGET UPDATE

The chancellor has said that if the UK leaves the EU with a deal on 31 October 2019 his budget will be the following week, Wednesday 6 November 2019. However, if there is no deal, the government has confirmed that it will ‘take early action to support the economy, businesses and households.’ A budget would occur in the following weeks.

CASE UPDATE

CJEU

1. Exemption for Medical Services 

This EU referral concerned the interpretation of the VAT exemption for medical services. The appellant, Mr Peters, is a medical specialist in the field of chemistry and laboratory diagnostics. Between 2009 – 2012, he supplied services to a laboratory in Germany in exchange for remuneration of €6,000 pcm. This income places Mr Peters’ turnover above the VAT registration threshold in Germany, however, he did not register for VAT as he believed that his turnover was wholly exempt as it related to the provision of exempt medical services. The German tax authority considered that his supplies were taxable and assessed accordingly.

There were two questions before the Court in this instance; whether the provision of medical care supplied by a medical expert in chemistry and laboratory diagnostics is capable of falling within the exemption, and whether the exemption is subject to the condition that the medical care in question is supplied within a framework of a confidential relationship between professional and patient (this was a contention of the German tax authority).

In considering the first question, it was observed that “medical care” is characterised by an intention to diagnose, treat and cure diseases and health disorders and it was concluded that the services provided by Mr Peters were capable of falling within this exemption. To provide an answer to the second question, The Court assessed the wording of the relevant Article:

“The provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned”

It was noted that “It does not in any way follow from the wording of that provision that, in order for the provision of medical care to be exempt, it must be supplied within a framework of a confidential relationship…”

It followed that the Court ruled that the services provided by Mr Peters are capable of being exempt for VAT purposes and the matter will be referred back to the domestic Court to reach a conclusion.

Constable Comment: It is hard to see why the German authorities believed that, in order for the medical exemption to apply, the supplies must be made in the framework of a doctor/client confidential arrangement. There is no such qualification in EU law. It is possible that this is a German domestic principle, but this illustrates the superiority of the EU judgments.

UT
2. Eynsham Cricket Club

This appeal related to whether the zero-rate of VAT was applicable to construction services supplies to Eynsham Cricket Club (ECC). ECC built a new pavilion after their old one burned down and issued a certificate to the contractor stating that the new pavilion would be used by a charity as a village hall or similar and, therefore, that the payment between ECC and the contractor should be zero-rated for VAT. HMRC disagreed with this and assessed for the VAT owed by the club.

The First Tier Tribunal had held in favour of HMRC on the grounds that ECC had not been established for purely charitable purposes. However, during a case review, HMRC conceded that this was incorrect and an Upper Tier Tribunal reversed the decision so ECC was permitted to treat the construction expenses as zero-rated for VAT. The case now comes before the Upper Tribunal formally with ECC as the respondents.

In UK VAT law, where a new building is constructed for a charity and is to be used as a village hall or similar in providing social or recreational facilities for a local community, the construction costs can be zero-rated. HMRC believed that ECC was not a charity. There was a lengthy consideration of the law in the Finance Act and the Charities Act around what constitutes a charity and whether a “Community Amateur Sports Club” could have been established for charitable purposes. None of this focussed around VAT law and was based on the interpretation of law of charities and sports clubs. The Tribunal concluded in favour of HMRC, that ECC was not established for purely charitable purposes.

This meant that the zero-rate did not apply to the construction costs and the assessment raised by HMRC stood, ECC had to account for this VAT.

Constable Comment: Whilst this case ultimately focused on law unrelated to VAT, there were some useful observations made by the Tribunal. One area of the VAT law which often causes issues is charges made by the charity to the community for use of the newly constructed building. In this judgment, it was reiterated that the fact a person wishing to hire a building has to pay a fee does not preclude the building being seen as similar to a village hall. This is a particularly current area of the law, it would seem that HMRC have been targeting charities constructing village halls. If your charity is going to construct a building, it is essential to seek professional advice to ensure the correct VAT treatment.

FTT

3. Supply of services or staff?

This appeal by Medacy Ltd is against assessments raised by HMRC for underdeclared output VAT. Medacy made supplies to GP practices and believed it was exempt supplies of medical services, HMRC argued that the supplies were standard rated supplies of staff.

UK VAT law exempts the provision of medical care services when provided by members of the register of pharmaceutical chemists and their employers. The effect of this is that when a company contracts to supply medical services, this supply is exempt despite the fact that the company itself is not on the register.

There is a significant amount of case law relating to this area of VAT which the Tribunal considered, including Sally Moher, Rapid Sequence Limited and City Fresh. After considering all of these cases, the Tribunal observed that to reach a conclusion, regard must be had for all of the relevant facts and not just the contract between the GPs and Medacy. It also observed that, following the case law, one of the most important factors to consider is who controls or supervises the activities of the relevant individuals (in this case, the pharmacists supplied to the GPs).

HMRC argued that the GP practices have control over day to day activities of the staff as it is the GPs who decide what services to purchase from Medacy and they control the amount of hours of service they wish to receive. It is the GP who allocates the tasks to the pharmacist and has some control over the way in which the pharmacist provides the service within that surgery.

The Tribunal considered a broad range of factors in determining whether these supplies should be treated as supplies of staff or services. Of significance was the fact that Medacy spends a significant amount of money on insurance for its staff; why would it do this if it was supplying staff rather than services? It was also observed that in this case, Medacy had more control over the pharmacists than the employers in some of the case law referred to. The first port of call for the pharmacists if they were struggling with any activity was Medacy and not the GP. Whilst the GPs did have some control over the hours that the pharmacist was present and the services which were to be provided, the Tribunal considered that this was just a reflection of any working contract for the provision of services. It was concluded that, on balance, this was an exempt supply of medical services.

Constable Comment: Cases of this kind are always interesting as there is no legal line which is crossed to change a supply of staff into a supply of services. Regard must always be had for the whole circumstance and the reality of the situation. As with other areas of the law, the contractual terms are not always determinative. When deciding whether a supply is of staff or of services, it can be very complicated and it is always prudent to seek professional advice.

4. DIY Housebuilders Scheme

Stewart Fraser has lost his appeal against a decision of HMRC to refuse to refund VAT incurred on the construction of a new dwelling. A claim in the sum of £17,707.84 had been submitted under the DIY housebuilders scheme. The case dealt with the sole issue of whether the claim was made within 3 months of completion of the dwelling. The timeline can be summarised as follows:

• Mr Fraser occupied the property from 23 December 2015
• Council Tax Banding issued on 3 June 2016 (retrospective date for council tax of 23 December 2015)
• Certificate of completion issued by local authority on 16 April 2018
• VAT refund claim submitted to HMRC on 10 July 2018

The significant time log between the occupation of the property and the issue of the certificate of practical completion concerned ventilation which was installed in June 2016.   A dispute arose between Mr Fraser and the local authority concerning a validation report as to the quality of the ventilation and gas membrane to protect future residents in the event of a gas leak. The dispute was resolved in April 2018.

Mr Fraser did not attend the hearing, but he agreed that he could not apply for a completion certificate until the validation of the gas membrane was accepted by the council. This was a matter beyond his control and the building was not completed until that point.

HMRC’s arguments were that the time limit is enshrined in law and the Commissioners have no discretion to extend it. The property was occupied in 2015. The only work completed since occupation was to change the fans in June 2016. The DIY refund claim was submitted 2 years after this. There was no requirement to await the issue of a completion certificate to submit a DIY housebuilders VAT refund claim.

The Tribunal Judge found in HMRC’s favour noting that neither VAT law nor HMRC guidance states that a VAT refund cannot be applied for until a completion certificate has been issued under the DIY housebuilders scheme.

Constable Comment: This decision is slightly at odds with that in Farquharson where the FTT concluded that despite occupying the property for over 8 years, a DIY housebuilders claim was valid because it was made within 3 months of the completion of the dwelling. That said, each case must be judged on its own facts which are specific to it. This is a particularly ambiguous area of the law in its application and it is always worth seeking professional advice when initially considering the project rather than when it may be too late.