Author Archives: Sophie Cox

Constable VAT Focus 30 May 2019

30th May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the liability of the provision of fuel cards to subsidiaries, the exemption for the leasing of immovable property and the VAT liability of non-refundable overpayments.

HMRC NEWS

Notice 742A: Opting to Tax Land and Buildings

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

Notice 701/41: Sponsorship

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

Help and Support for VAT

HMRC has updated its selection of webinars and online courses.

Making Tax Digital for VAT

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

CONSTABLE VAT NEWS

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

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

CASE REVIEW

CJEU

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

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

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

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

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

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

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

Court of Appeal

2. The Exemption for the Letting of Immovable Property

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Constable VAT Focus 16 May 2019

16th May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the deductibility of input VAT in different situations, where a tax point arises in relation to certain types of services and what constitutes “school or university education”.

HMRC NEWS

Update to Public Notice 701/41: How VAT applies if you give or get sponsorship.

This notice explains how VAT applies if you give or receive sponsorship. A new section on crowdfunding has been added.

Update to Compliance Checks for VAT

This factsheet contains information about the penalties HMRC may charge you for a VAT or excise wrongdoing.

Update to Public Notice 700/22: making Tax Digital for VAT

This notice explains the rules for Making Tax Digital for VAT and about the digital information you must keep if they apply to you.

VAT Single Entity and Disaggregation

HMRC has updated its list of useful legal decisions in its internal guidance for single entities and the rules around disaggregation.

CASE REVIEW

CJEU

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

This case concerned Budimex S.A., a Polish company engaged in the provision of construction services. The question which arose was when a tax point arises for a supply of services under which payment only becomes due when the customer is satisfied with the works; when the services are “performed” or when the customer certifies their satisfaction. Polish law dictates that where an invoice has not been issued within 30 days after the completion of work then the tax point arises on this date. Budimex had not issued an invoice for the supplies it made to a customer as they had not yet certified their satisfaction so had not paid any money over, the Polish authorities sought to recover the output VAT as a de facto tax point had arisen after the passing of 30 days from the completion of the services.

In considering this question, the Court highlighted that, according to EU law, VAT is to become chargeable when the goods or services are supplied. However, it was also considered that, taking into account the economic and commercial realities of the industry, that the contractual term may incorporate part of the service offered.

That is to say that Budimex was supplying construction services which, contractually, would only be “performed” when the customer was satisfied with the work, a contractual term specifically allowed for by the Federation of Consulting Engineers. Therefore it was held that the requirement for the customer to be entirely satisfied is a part of the service being offered.

The Court held in favour of Budimex.

Constable Comment: The type of rule in question stating that a de facto tax point must arise at some stage seeks to combat avoidance by companies who deliberately do not create a tax point in order to defer VAT liabilities. However this case shows that it is possible for these rules to be circumvented where “customer satisfaction” is a specific provision of the supply made.

2. Fictitious Transactions: A Right to Deduct?

This Italian referral considered whether supplies which were fictional but created no loss to the Revenue bear a right to deduct input VAT.

EN.SA is an Italian company which produces and distributes electricity, the Italian tax authorities denied recovery of input VAT in relation to certain supplies as there was no actual transmission of energy. The question arose before the Court whether this refusal breached the principle of fiscal neutrality.

Whilst accepting that it was not the case in the current circumstances, the Court considered a situation in which the customer had acted in good faith in which case, it was hypothesized, that the right to deduct would have to arise owing to the underlying principles of the EU law. Therefore it was found that the Italian law which gave the Italian authorities the right to refuse the repayment of input VAT was not contrary to EU law.

However, in considering the question, the Court also pondered whether a fine may be levied equal to an amount of the deduction made. It was found that a fine of this amount would go against the EU principle of proportionality and, therefore, that domestic tax authorities are precluded from issuing this type of fine.

Constable Comment: this was an interesting case as, on the surface, a fictional transaction should clearly not give rise to a right to deduct VAT. However, the Court was forced to consider a situation in which a customer had acted in good faith in which it stated that the right to deduct must arise. Therefore this judgment applies to very specific facts and national legislation which prevents the right to recover more broadly may be incompatible with EU law.

3. The Exemption for Private Tuition

This case concerned whether the provision of driving tuition by a private company benefits from the exemption found in EU law for the provision of education in the public interest, typically provided by schools and universities, when provided by certain private bodies.

A&G Fahrschul-Akademie GmbH (A&G) is a German company which provides private driving tuition to students with an aim of ultimately earning a driving license. It applied to have its VAT debt cleared as it believed it was exempt from VAT but the German tax authorities refused on the grounds that the tuition provided is not normally taught by schools and universities. A&G appealed this point and the question was referred to the CJEU; does the concept of school or university education cover driving schools?

In considering this point at length the Court suggested a broad definition of what does constitute “school or university education” for the purposes of the exemptions:

“…an integrated system for the transfer of knowledge and skills covering a wide and diversified set of subjects, and to the furthering and development of that knowledge and those skills by the pupils and students in the course of their progress and their specialisation in the various constituent stages of that system.”

The Court then posited, in the light of this consideration, that driving tuition provided by a private body would be specialised tuition rather than a transfer of knowledge and skills covering a wide set of subjects.

Constable Comment: This judgment will be important in the future as it provides a reasonably solid framework for what constitutes a school or university education, a part of the legislation which comes without a definition. However, whilst a good starting point, this is a broad definition with plenty of constructive ambiguity meaning the issue is likely to surface in the Courts again.

4. Incorrectly Charged VAT: Recoverable?

This case concerned whether PORR, a Hungarian company involved in construction, was entitled to deduct input VAT on certain transactions in relation to which VAT had been incorrectly charged under the normal VAT system where the reverse charge mechanism should have been applied by the supplier.

PORR sought to argue that the supplies were not subject to the reverse charge mechanism and, in any case, the tax authority had denied it the fundamental right in the VAT system to deduct input VAT. The tax authorities contended that such a right had not been denied, indeed that it had been expressly provided for under the reverse charge procedure. PORR also put forward that the tax authorities had failed to ascertain if the suppliers could correct this mistake at no expense to PORR.

The Court considered the relevant EU law and concluded both that the tax authority had no obligation to seek corrections from the supplier and that PORR has failed, in a substantive way, to fulfil its obligations under the reverse charge mechanism. The VAT charged was, therefore, not deductible by PORR.

Constable Comment: Different to the EN.SA case which dealt with fictional transactions, the transactions in this instance took place but had been classified incorrectly as normal supplies rather than reverse charge supplies. This outcome may appear harsh to a customer who has acted in good faith but it is vital to ensure that input tax cannot be deducted twice; once by the supplier and once by the customer.

5. Restrictions on Recovery of Input VAT

This case concerned Grupa Lotos S.A., a parent company to a group of companies in Poland, operating in the fuel and lubricants sector. Polish law excludes the recovery of input VAT incurred on overnight accommodation and catering services with limited exceptions where the cost relates to a supply of tourism services or, in the case of food, the provision of microwave meals to passengers. This provision in domestic law predates Poland’s accession to the EU however it was extended in 2008 to further exclude all overnight accommodation.

The dispute in the domestic court concerned whether Grupa Lotos could deduct VAT incurred on accommodation and catering services purchased, in part, for its own use and part for its subsidiaries. Grupa believed it should be entitled to recover a portion as it was not the consumer of the services and VAT is a tax on the consumption of goods or services. The Polish tax authorities disagreed and claimed that the Polish law made no distinction between the consumption and purchase for resupply of these services.

The matter was referred to the CJEU, the question being whether EU law must be deemed to preclude legislation such as the Polish law in question after its accession to the EU and whether domestic law can extend pre-existing exclusions after accession to the EU.

Giving consideration to the nature of the VAT system and relevant case law such as Iberdrola, the Court turned to look to Article 176 which provides that Member States may maintain restrictions on recovery which were in force before their accession to the EU. It was held that the Polish law, as it was in place prior to Poland’s joining the EU, was valid but that EU law would preclude the introduction of legislation akin to this were it to be introduced whilst any given Member State was within the EU. Therefore the extension to the exclusion in 2008 was invalid.

The question of VAT recovery in this particular case has been referred back to the domestic courts to determine if the supplies involved are ‘tourism services’.

Constable Comment: This case serves as a reminder of how EU law works. Whilst “direct effect” means EU law takes precedence where domestic law is incompatible with new EU laws, where a country joins the EU and becomes a member state, direct effect does not apply retrospectively. This is interesting given the current climate with five nations seeking to join the EU; they may be allowed to keep certain restrictions but will not be allowed to extend them if they successfully enter the EU.

Constable VAT Focus 28 March 2019

28th March 2019

HMRC NEWS

Trading With the EU if the UK Leaves Without a Deal

HMRC has updated its guidance on leaving the EU in particular to reflect the fact that there is to be an extension to arrangements already announced regarding the use of Transitional Simplified Procedures (TSP), which will make importing goods easier.

Impact Assessment for VAT and Services if the UK Leaves Without a Deal

HMRC has released an impact assessment on the effect on businesses of amendments to existing VAT legislation and the introduction of transitional provisions for the supply of services between the UK and the EU.

VAT Treatment of Pension Fund Management

The policy of allowing insurers to treat all pension fund management services as exempt from VAT under the insurance exemption is to be discontinued. This policy change applies from 1 April 2019.

CASE UPDATE

CJEU

1. Exemption for Letting Immovable Property

This case concerned the interpretation and applicability of the VAT exemption for the letting or leasing of immovable property. The Portuguese tax authorities assessed Mr. Mesquita for VAT on contracts relating to the transfer of the use of vineyards for agricultural purposes for a period of one year. These transactions had been treated as exempt from VAT.

The question before the Court was whether the exemption for letting immovable property related to this contract.

The Court considered that the purpose of the EU law conferring the exemption on certain transactions was owing to the fact that the leasing of immovable property is normally a relatively passive activity which does not generate a large amount of income.

Where services are supplied along with the immovable property in a single transaction, such as supervision or maintenance, then the whole transaction is subject to VAT. However, the Court found that there were no services provided with the vineyards so the exemption could be applicable.

Constable Comment: The contract in the main Portuguese proceedings led to what the tax authorities believed to be a transfer of assets thus creating a taxable supply. The Court held that even if assets are transferred in this type of contract, they are ancillary to the main supply and the exemption still applies to the whole contract value.

Supreme Court

2. Education Exemption: Meaning of “eligible body”

This appeal concerned the criteria to be applied when determining if a particular body is eligible for the purposes of the VAT exemption afforded to certain bodies providing education to students.

The appellant, SEL, the English subsidiary of a Dutch company, contended that its supplies of UK education were exempt from VAT as it was a college of Middlesex University (MU). It appealed against assessments to VAT raised by HMRC. The appeal was allowed in the First Tier Tax Tribunal but it was escalated by HMRC and eventually ascended to the Supreme Court.

MU is a UK university and as such benefits from the exemption from VAT. This exemption is, under UK law, extended to “… a university and any college, school or hall of a university”. The Court, therefore, gave some consideration to what constituted a college of a university and observed that the “integration test” employed initially by the First Tier Tribunal was correct. The following five factors must be considered in arriving at a conclusion as to whether a particular undertaking can be considered a college of a university:

Whether they have a common understanding that the body is a college of the university
Whether the body can enrol students as students of the university
Whether those students are generally treated as students of the university
Whether the body provides courses of study which are approved by the university
Whether the body can present its students for examination for a degree from the university

In examining whether or not these criteria applied to SEL and its arrangements with MU, the Court concluded that the exemption did apply to SEL which had been referring students for degrees from MU since the beginning of their arrangement in the 1980s. It was found that there is no need for there to be a constitutional association with a university in order to be a college of that university.

Constable Comment: The criteria laid down in this instance for determining whether or not a body is eligible are not intended to be definitive and the Court observed that, in each instance, regard must be had to the individual facts of each arrangement between a university and an associated body.

Court of Appeal

3. Deductibility of VAT on Criminal Defence Costs

This case concerned whether or not input VAT incurred by a company in defending its director was deductible by that company as input tax. Mr. Ranson left a company, CSP, and set up his own rival firm in the same area, taking three employees with him. It was alleged by CSP that he had breached his fiduciary duties and also that he had misused a contact list from CSP for establishing his own business. CSP sought an account of profits earned by Mr. Ranson as a result of his breach of duty and sought to recover funds from Praesto.

In defending against these claims, Mr. Ranson instructed solicitors who were successful in his defence. The issue arose as a result of the solicitors addressing one invoice to Praesto and a further eight to Mr. Ranson individually. HMRC did not dispute the deductibility of the input VAT in relation to the invoice addressed to the firm but disputed the others as a result of the addressee.

VAT incurred is deductible so far as it has a “direct and immediate” link with the company’s taxable supplies. However where the legal costs form a part of the cost components of the company’s supplies it is also accepted that they have a direct link with the company’s economic activity as a whole.

HMRC placed a lot of emphasis on the fact that the invoices being disputed were addressed to Mr Ranson. Mr Ranson argued that Praesto were party to the proceedings in all but name and there was a direct benefit to the company in defending him. The economic reality of the situation was the solicitors were defending both Mr Ranson and Praesto.

The Court agreed with Mr Ranson that there was a direct benefit to Praesto in defending claims against him as if the claims had succeeded against Mr Ranson, CSP would have sought to recover profits made by Praesto. It was concluded that the VAT incurred by Praesto in mounting a defence against the allegations of CSP was, indeed, deductible.

Constable Comment: This is an interesting topic as, more often than not, the actual receipts and contracts are looked through to the economic reality of the supply. Whilst this appeal was allowed, one judge dissented, believing the fact that the invoices were addressed to Mr Ranson personally to be fatal to the appeal. This type of case will always need to be considered carefully, it is prudent to seek professional advice in relation to input VAT recovery in this scenario.

4. Default Surcharge: Reasonable Excuse

This appeal against a default surcharge turned on whether or not the applicant had a reasonable excuse for late payment. The appellant argued that he was unable to log in to the online gateway necessary for making VAT payments.

Mr Farrell received a notice of liability to surcharge which required payment by 7 May 2017. He was unable to log in to the Gateway using the information he previously saved in his computer. When he contacted the webchat he was told that he needed to speak to technical support. Technical support informed Mr Farrell that they could not deal with his enquiry until after 8 May 2017; after the due date for payment of the surcharge.

On the 8 May he spoke to the technical support team and was told that he had been using an incorrect User ID, a new one was sent to him but it turned out to be the first ID he was given before having it changed by HMRC when the Commissioners updated the system. Based on the changing of his logon details, he contended that he was not to blame for missing the payment date.

HMRC denied that his logon details had ever been changed and said there was no record of the webchat which Mr Farrell claimed to have had. Mr Farrell had clear evidence that this was not the case in the form of a saved conversation with Alexander form HMRC’s webchat and his “Browser Password Recovery Report”. This showed that his ID had indeed been changed when HMRC updated their system and that it had changed back to the original.

HMRC sought to argue that Mr Farrell had been using an incorrect ID number and therefore that he was responsible and did not have a reasonable excuse.

The Court held that Mr Farrell made reasonable efforts to pay the VAT due and that it was not clear why HMRC did not have the facilities to deal with Mr Farrell’s enquiry. The appeal was allowed; there was a reasonable excuse.

Constable Comment: This case demonstrated that HMRC do make mistakes when dealing with the taxpayers. It is a useful reminder that it is always prudent to maintain your own records of conversations with HMRC officers in order to evidence advice given or any mistakes made on HMRC’s behalf. We would recommend obtaining an officer name and a “call reference number” when speaking with HMRC.

Constable VAT Focus 28 February 2019

28th February 2019

HMRC NEWS

Find Software that is Compatible with Making Tax Digital for VAT

Check which software packages are compatible with Making Tax Digital for VAT.

HMRC Impact Assessment for the Movement of Goods if the UK leaves the EU without A Deal

The impact assessment originally published on 4 December 2018 has been updated to include the impacts on the customs, VAT and excise regulations laid before Parliament in January 2019.

HMRC Impact Assessment for the VAT Treatment of Low Value Parcels

Again, the original impact assessment has been updated.

BREXIT ALERT

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then. It is essential that any traders or businesses which may be affected by changes in VAT procedures make plans to ensure a smooth transition.

Businesses trading with the EU need to consider the following:

If goods are moved

Getting an EORI number
Registering for simplified import procedures

If electronic services are supplied

Registering for non-Union MOSS in an EU member state as soon as possible after 29 March if there is no deal.

If goods are supplied to consumers in the EU under distance selling rules

Maybe VAT registrations are required in other EU countries?

If VAT is paid in other EU member states

Claims for 2018 must be submitted before 29 March 2019
How will this VAT be claimed after Brexit?

HMRC has updated its online guidance on the above, which can be viewed here.

Contact Constable VAT if any of the above will affect you or your business, we are happy to advise on any VAT related matter.

CONSTABLE VAT NEWS

Remember to enrol for Making Tax Digital on time and during the right enrolment window for your VAT accounting periods. Constable VAT have analysed the enrolment windows and our summary can be found here.

CASE REVIEW

CJEU

1. The Exemption for Goods Imported to be dispatched to Another EU Member State

This case concerned whether the exemption for import VAT on goods arriving in an EU member state to be dispatched immediately to another EU member state and whether domestic tax authorities can disapply the exemption where tax evasion is involved.

Vetsch is an Austrian company which acted as a tax representative for two Bulgarian companies, “K” and “B”. Vetsch submitted declarations stating that goods imported from Switzerland, by K and B, benefited from the exemption for goods imported for subsequent dispatch. However, the subsequent dispatch did not occur and Vetsch became liable under Austrian law, as representative, for the import VAT which should have been paid.

Vetsch appealed against a decision from the domestic tax authorities to that effect but the appeal was refused. Vetsch brought an appeal on a point of law before the domestic Courts which led to the CJEU referral.

The Court came to the conclusion that, as Vetsch was unaware and there was no evidence to support the idea that it knew or ought to have known about the subsequent evasion that the exemption could not be refused.

Constable Comment: This case shows how at an EU level, the strict interpretation of the law is not always adhered to if it creates inequitable results. In finding that Vetsch did not know and would not have known if carrying on business as a reasonable person would, the Court has upheld the idea of equity.

2. Retroactive Application of Implementing Decisions

This case concerned the application of the Decision authorising the Hungarian Government to apply the reverse charge procedure enshrined in EU law. The Hungarian tax authorities were notified of their authorisation in December 2015 but sought to rely on the implemented provision to retroactively assess Human Operator Zrt. for the January 2015 VAT return.

The question before the Court in this instance was whether EU law precludes national legislation from retroactively applying measures authorised in an Implementing Decision where that Decision does not make a comment on the retroactive applicability of that Decision or give a date on which it comes into effect.

The Court gave consideration to the principles of legal certainty and the protection of legitimate interests. They concluded that the requirement of legal certainty must be observed very strictly when it comes to rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which the rules impose on them. It was also held that these principles must mean that EU law can only apply to situations after they have explicitly come into force.

In the absence of a provision in the Decision suggesting a different date for it to bite, the Court considered that it must be taken to be effective from the date on which it was published.

Constable Comment: This case is a good demonstration of how the CJEU seeks to protect the rights of individuals and businesses against the State. The fundamental principles of the EU and the spirit of the law are given a great degree of influence in the European Courts. This decision has prevented a seemingly unconscionable result.

First Tier Tribunal

3. Electric Blinds in a DIY Build

This case concerned the right to deduct input VAT incurred in relation to a DIY house build by Mr David Cosham. Mr Cosham designed an “eco-build” property and sought to recover input VAT on building materials used under the DIY housebuilders scheme. HMRC accepted certain elements of the claim but rejected the element which related to electric blinds installed at the property, asserting that electric blinds are not within the definition of “building materials” for VAT purposes associated with the scheme.

Appealing HMRC’s decision, Mr Cosham claimed that the blinds did fall within the definition as they are “ordinarily incorporated by builders in a building of that description”. He contended that “buildings of that description” should, in this case, be taken to mean “eco-builds”.

Giving some consideration to relevant case law, the Tribunal found that “eco-builds” were a well-established market sector and could be recognised as a distinct type of property. The onus was put on Mr Cosham to show that blinds such as those in question were “ordinarily incorporated” into properties of this description. Mr Cosham could produce no such evidence so his appeal was denied, the Tribunal holding HMRC’s decision to be correct.

Constable Comment: This conclusion drew on previous case law such as Taylor Wimpey and came to the conclusion that “eco-builds” are to be treated as a class of property in themselves. This is interesting as it could be argued that, compared to older housebuilding practices, the vast majority of new build homes are definable as “eco”. This case has opened up the question of what exactly is ordinarily incorporated into an “eco-build”. It is unsurprising that HMRC pursued this point. Blinds more generally are objected to by HMRC despite losing a previous case at the First Tier Tribunal on a related point.

4. Deception: A Supply of Goods or Services?

This case concerned Mr Owen Saunders who had been found guilty of taking money in exchange for work he promised to perform but never had the intention of performing. He had been found guilty as a criminal and been sentenced to time in prison as well as having been served a confiscation order for in excess of £60,000. The confiscated funds had been divided equally amongst his victims by way of compensation for their loss.

HMRC contended that Mr Saunders was engaged in a business activity and should have been registered for VAT. The Tribunal believed that the crucial issue was whether or not there had been a supply for a consideration made in the furtherance of business. Giving consideration to the examples of drug dealers (who can pass title in goods) and fences (who cannot as they never gained title) as well as the definition of a supply in accordance with VAT law, the Tribunal held that there was no supply by Mr Saunders for the monies he received.

The assessment and associated penalties against Mr Saunders were quashed, it was held that his conduct had led to a “total failure of consideration” which was evidenced by the fact that 100% of the confiscated money was paid back to the victims.

Constable Comment: This was an interesting case in that it analysed Mr Saunders as akin to a drug dealer or someone fencing stolen goods. A particularly interesting point raised was the fact that a drug dealer can pass title to his goods and thus his turnover represents supplies and consideration so, in turn, could create an obligation to register for VAT. This illustrates the point that a lack of compliance with the law does not discount the supplies made from turnover for VAT purposes.

Constable VAT Focus 14 February 2019

14th February 2019

HMRC NEWS

Check When a Business Must Follow the Rules for Making Tax Digital for VAT

Find out if and when you (or your clients) need to follow the rules for Making Tax Digital for VAT.

Use Software to Submit Your VAT Returns

If you submit VAT returns as a sole trader, limited company, partnership or as part of a VAT group, you may be eligible to join the Making Tax Digital Pilot for VAT.

Making Tax Digital for VAT as an Agent

Follow these steps if you are an agent and you want to submit VAT returns for your clients digitally.

CONSTABLE VAT NEWS

We have an upcoming Breakfast on 27^th February where we will discuss the impact of Brexit on VAT. Please book yourself a spot as food will be provided for those with reserved spaces. For details, please see here.

The CIOT have released a useful illustration of when businesses must register for the Making Tax Digital pilot for VAT. Our analysis can be found here.

CASE REVIEW

CJEU

1. Evidence in Criminal Prosecutions

This case concerned the EU law around the collection of VAT as well as the general EU principle of effectiveness. The main case focusses on a Bulgarian VAT offence but the questions before the CJEU in this instance concerned whether EU law must be interpreted as precluding a national court from applying a national provision excluding evidence which was obtained illegally.

Petar Dzivev and others were charged with having committed fraud in Bulgaria and sought to profit by not paying over tax owed to the Bulgarian tax authorities. A Bulgarian Court ordered that telecommunications between Mr. Dzivev and others involved should be intercepted.

It is common ground that the Court which authorised the interception did not have the necessary jurisdiction to do so, therefore the interceptions were not in accordance with the law of the Charter of Fundamental Human Rights.

The CJEU held that in cases such as this, EU law cannot require a national court to disapply a procedural rule preventing the state’s reliance on illegally obtained evidence. It was observed that even in situations where only this type of evidence is capable of proving that the offences were committed, EU law still may not prevent a national court from excluding evidence obtained illegally.

Constable Comment: In this instance the right to privacy given to individuals under the Charter of Fundamental Human Rights was given priority over the ability of the state to effectively collect taxes under the principle of effectiveness. It is not a surprising result but it is demonstrative of the EU’s tendency to confer rights on individuals over member states.

FIRST TIER TRIBUNAL

2. Agent or Principal?

This case concerned whether or not Mr Bryn Williams was acting as an agent or a principal in relation to the taxi business which he operates. He takes bookings for and tenders for contracts with local authorities who provide cab travel. He sends his drivers out to complete the contracts he signs.

HMRC contended that he acts as a principal, supplying taxi services to local authorities and, in turn, receiving taxi services from drivers, all for a consideration. They stated that Mr. Williams owns some of the cars himself and he bears the running costs of the contracts, which were negotiated without driver input. Mr. Williams argued that he was an agent, highlighting various factors pointing to this such as the fact that drivers could negotiate fess with him and keep their cars at home.

As with all agent or principal cases, regard was given to the material aspects of the operation as opposed to the strict wording of contracts. The Tribunal considered the nature of the connection between the driver and the local authority who Mr. Williams paired up. A typical agency situation would involve Mr. Williams negotiating on behalf of a driver, ultimately to form a contract between the driver and the local authority.

It was found that when Mr. Williams was negotiating the contracts with the local authorities there was no pre-determined driver meaning that there was no relationship between the local authority and the driver. Therefore it was held that Mr. Williams must be acting as a principal as there was no driver on whose behalf he was acting.

Constable Comment: This case shows the delicate balance of factors that determine whether someone is an agent or a principal. Due regard must be had to the contracts in place but also the commercial reality of the transaction. This case highlighted some useful areas of consideration and if your business operates in a similar way to Mr William’s, it is essential to ensure it is operating correctly to avoid unexpected VAT bills in the future.

3. Reasonable Excuse: Default Surcharge

This case concerned Ms. Chandler, a VAT registered sole trader who used the Flat Rate Scheme (FRS) to account for her VAT. In 2015 HMRC visited her and discovered that she had failed to increase the FRS percentage used in line with both statutory increases and the expiration of the “first year reduction” of 1%. HMRC sought to penalise Mr. Chandler but she contended that the default surcharge should not apply to her as HMRC had not taken all payments made by Ms. Chandler into account.

Ms. Chandler had made payments to HMRC but had made them to the wrong account; she had previously traded using a different registration number and mistakenly paid her VAT liability into this account meaning the funds were suspended and held by HMRC. HMRC did not accept this as payment, asserting that in order for a payment to be effective it had to be credited to the correct account. The Tribunal found this to be incorrect. It was found that the VAT regulations only require VAT to be paid to the Controller: which taxpayer account is not mentioned.

Despite this, there were still some historic accounting periods which attracted a default surcharge. For these periods Ms. Chandler argued that she had a reasonable excuse for the lack of funds which rendered her incapable of making payments to HMRC. Whilst an inability to pay cannot constitute a reasonable excuse, the Tribunal is willing to accept that the underlying cause of a lack of funds may indeed constitute such an excuse. Accepting that a fraud committed against Ms. Chandler constituted a reasonable excuse for the remaining periods, the Tribunal held that all surcharges against her were cancelled.

Constable Comment: This case is a useful example of where there is a reasonable excuse for having made late payments to HMRC. Whilst HMRC and the Tribunals are normally reluctant to accept a lack of funds as an excuse for late payment, in this instance there was a clear reason for the insufficiency of funds, the effects of which were being felt later.

If these cases raise any points that you would like to clarify or discuss, or you have any other VAT related concerns, please do not hesitate to contact Constable VAT and we will be pleased to assist.

Making Tax Digital Update

News

13th February 2019

New Information Regarding Enrollment

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

It is important to note that HMRC guidelines state that:

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

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

Stagger Group 1

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

Stagger Group 2

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

Stagger Group 3

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

Monthly VAT Returns

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

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

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

International VAT Post-Brexit: Breakfast & Discussion

News

8th February 2019

International VAT Post-Brexit

Breakfast & Discussion with Constable VAT

Guidance On:

Buying and Selling Goods Cross-border Post-Brexit

International Supplies of Services

Impact on Cross-border VAT Recovery

The Future of Specified Supplies

Open Q&A to follow the presentation

27 February 2019

8AM – 10AM

Directions: Holiday Inn Express Colchester

Contact us to book your space for breakfast

Call: 01206 321 029

Email: alex.raynes@constablevat.com

Constable VAT Focus 01 February 2019

1st February 2019

HMRC NEWS

Goods or Services Supplied to Charities

Find out when suppliers can apply the VAT zero rate VAT for advertisements and goods used for the collection of donations.

Software Suppliers for Sending VAT Returns

Find out which software packages support the Making Tax Digital pilots.

VAT Supply and Consideration

Payments that are not consideration: Grants. This section of guidance will help you determine whether a payment described as a grant is consideration for a supply of goods or services and will be of particular interest to charities and other not-for-profit organisations in receipt of grant funding.

Customs, VAT and Excise Regulations: Leaving the EU with No Deal

This collection brings together regulations, explanatory memoranda and an impact assessment in preparation for day one if the UK leaves the EU with no deal.

CASE REVIEW

CJEU

1. The Deductibility of Input Tax Incurred by Branches

This case concerned the Paris branch of Morgan Stanley and whether it was entitled to deduct input VAT it incurred on expenditure relating exclusively to the transactions of its principal establishment in another member state of the EU. The branch carries out banking and financial transaction for its local clients as well as supplying services to the UK principal establishment and had deducted in full the VAT incurred relating to both types of supply. The domestic tax authorities believed that this input VAT should not be fully deductible but that it should be apportioned using the principal establishments input VAT recovery fraction.

The main question which arose before the Court was whether the proportion of recoverable VAT incurred by the branch relating exclusively to the transactions of its principal establishment should be calculated in line with the branches or the principal’s input VAT recovery rate. It was also asked what rules should be applied in relation to expenditure relating to both transactions by the branch and by the principal.

Giving extensive consideration to the wealth of case law surrounding this subject, the Court decided that, in relation to the first question, that neither of the suggested calculations was correct. It was held that in relation to such expenditure, the associated input VAT is deductible in line with a fraction calculated as:

“Taxable transaction which would be deductible if carried out in branches states / Turnover (excl. VAT) made up of those transactions alone”

With regard to the second question of general costs of the branch which are used for both domestic transactions and transactions with the principal branch it was decided that account must be taken, in the denominator of the fraction, of the transactions carried out by both the branch and the principal establishment. The numerator of the fraction must represent the taxed transactions carried out by the branch and the taxed transaction carried out by the principal establishment.

Constable Comment: This confirms that VAT incurred by branches on expenses relating to supporting its head office are recoverable by looking thorugh to the supplies made by the head office. The calculations for the recoverable amount of input VAT are complicated, especially where the look through reveals the head office to be making both taxable and exempt supplies. If your business makes supplies to a head office it would be prudent to seek professional clarification of the correct treatment of input VAT incurred in relation to these supplies.

Upper Tribunal

2. Welfare Services Exemption

The question before the Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality.

The Learning Centre Romford (TLC) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which TLC receives funding. TLC had treated these supplies as exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

TLC argues that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same style of care as TLC but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and TLC were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable Comment: This was an interesting joint case which focussed on an area of disparity between the implementation of EU law in England and other devolved powers such as Scotland and Wales. Whilst there is a difference in the ways in which the law operates in different areas of the UK, the Tribunal found that this is as a result of the devolved powers implementations and not a failure of the UK to adhere to an EU Directive. This decision will also be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, would generating taxable supplies be advantageous?

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

This case concerned whether or not there was a direct and immediate link between input VAT incurred by Adullam Homes Housing Association (AHHA) and its taxable supplies of support services. AHHA is a partially exempt business making taxable supplies of support services and exempt supplies of accommodation.

The dispute arose with regard to whether input tax incurred on acquiring, maintaining, repairing and cleaning accommodation can be linked to the taxable supply of support services or if, as HMRC contend, there is no such link and this input VAT is wholly irrecoverable. AHHA sought to argue that the acquisition and maintenance of accommodation was necessary as part of the overall supply made of accommodation based support services.

The Tribunal gave extensive consideration to case law around the issue of attribution of input VAT incurred by a partially exempt business. The conclusion was reached that the costs, whilst related to the provision of accommodation, were incurred in order that the Appellant had clean, safe and secure premises to enable it to bid for accommodation based support contracts. This constituted a direct and immediate link with the provision of support services.

It follows from this conclusion that the inputs incurred by AHHA in relation to maintain the accommodation were residual and fell to be recovered in line with their partial exemption percentage.

Constable Comment: Certain difficulties present themselves when performing partial exemption calculations, one of the most common is in deciding whether particular inputs should be directly attributed to taxable or exempt supplies or if they fall to be apportioned. Where looking through to the recipients onward supplies it can become difficult to ascertain the correct treatment of input VAT in line with the principles highlighted in this case. If your business is partially exempt and the calculations are complicated it is advisable to regularly review the attribution of VAT incurred and to seek professional clarification to ensure compliance if any obligation exists.

Constable VAT Focus 10 January 2019

10th January 2019

HMRC NEWS

VAT MOSS Exchange Rates

December 2018’s VAT MOSS Exchange Rates have been published

VAT Payment Deadline Calculator

Work out the VAT payment deadline for your accounting period. You cannot use this calculator if you make payments on account or use the annual accounting scheme.

Flat Rate Scheme for Small Businesses

Find out how to use the Flat Rate Scheme, who can us it and how to apply to join the scheme.

Importing Goods for Disabled People Free of Duty and VAT

This notice explains how to import goods specially designed for disabled people free of duty and VAT.

CASE REVIEW

CJEU

1. Special Scheme for Travel Agents

This case concerned the supply of holiday residences rented by Alpenchalets Resorts GmbH (Alpenchalets) and subsequently let in its own name to private customers as holiday rentals. Alongside the supply of holiday rental property, Alpenchalets also provided cleaning services and, in some cases, a laundry and “bread roll” service.

Alpenchalets calculated its VAT liability on the basis of profit margin as permitted by the special scheme for travel agents. In 2013 Alpenchaltes wrote to the German tax authorities requesting that it be allowed to apply the reduced rate of VAT (7%). This permission was refused so Alpenchalets brought proceedings before the German Courts which referred the issue to the CJEU for a ruling on whether the supply of a service which is essentially holiday accommodation is subject to the special margin scheme for travel agents and, if so, if that supply could also be liable to the reduced rate of German VAT.

The first question asked whether the activity of supplying holiday accommodation, alongside ancillary services such as cleaning, could still benefit from the special margin scheme where the agent (Alpenchalets) provided its own services as well as the accommodation bought in from third parties. The Court considered that as the mere supply of accommodation by an agent is covered by the scheme, the ancillary services do not have a bearing on the scheme’s applicability to the supply.

With regard to the second question, The Court found that single services provided by travel agents are not described within the legislation allowing certain supplies the reduced rate of VAT. The supplies made by Alpenchalets were subject to the standard rate of VAT.

Constable Comment: This case confirms that under EU law, the supply of holiday accommodation on its own is capable of being caught by the Tour Operators Margin Scheme; it is not necessary for other supplies alongside the accommodation. The Tour Operators Margin Scheme is simple in theory but can often cause problems when it comes to practical application. If you are, or think you may be entitled to be, operating a margin scheme then it is prudent to seek professional advice to ensure compliance.

2. The VAT Liability of Royalties

This case concerned the VAT liability of royalties payable to an author of an original work of art on the basis of the resale right.

The European Commission contended that royalty payments should not be liable to VAT as they are not payment in exchange for goods or services. The State of Austria sought to argue that such payments should be liable to VAT on the basis that just because the author of a work of art does not take part in the agreement between the buyer and seller of the art, does not preclude taxation of that payment.

In essence, Austria argued that the payment was in exchange for goods or services; the author has created a work of art and has profited from its supply thus establishing a direct link between service supplied and the value given in return.

The Court considered that a supply of goods or services is made for consideration only if there is a legal relationship between the supplier and the customer, in the context of which there is reciprocal performance; the remuneration received by the supplier constituting the value actually given in return for the goods or services supplied. Whilst The State of Austria contended that the royalty payable constituted consideration for an exchange of services giving rise to a legal relationship.

In concluding, the Court ruled that a legal relationship arises only between the buyer and seller of a piece of art, if the sale is a resale then the only legal relationship created is between the supplier and the customer; the artist is not a party to this relationship. Therefore there should be no VAT payable on royalty sums received.

Constable Comment: Giving consideration to some of the fundamentals of the VAT system and contract law was helpful in this case. This case is useful as a demonstration of how the European Commission can seek to enforce a uniform interpretation of the VAT law.

Upper Tribunal

3. Exemption for Management of Special Investment Funds

This appeal by Blackrock concerned the VAT exemption for the supply of management services which relate to special investment funds (SIFs) and whether a single supply of management services to Blackrock could be apportioned between SIF and non-SIF to reflect that exemption.

The Tribunal gave consideration to whether the supply to the SIFs could be seen as one of management services, asserting that it would only be possible to consider apportionment if there was anything to be apportioned: the European exemption applies specifically to management of SIFs, not merely a supply of services to a SIF. Relying on a rich tapestry of case law, the Tribunal concluded that the services supplied to Blackrock were management services and were therefore capable of exemption.

Having decided that the supplies were capable of benefiting from the exemption, the Tribunal turned to the question of whether the single supply to Blackrock was capable of being apportioned in line with its use by Blackrock as relating to SIFs and non-SIFs; non-SIF management being a taxable supply. Blackrock sought to argue that, in order to give effect to the exemption from which the supplies benefited it was necessary to allow apportionment of the supply. This argument had been rejected by the FTT on the ground that if apportionment were to be allowed then a precedent could be set allowing apportionment in relation to other composite supplies where the ancillary element is exempt.

After a length consideration of case law and relevant EU legislation, The Tribunal concluded that it is equally arguable that apportionment of the services should be allowed and that it should not, no conclusion was reached on this topic. The Tribunal stayed the appeal in order to seek guidance from the CJEU.

Constable Comment: This case gave a long and considered analysis of what can and cannot be regarded as management services for the purpose of the exemption in question. Whilst a conclusion was not reached around the apportionment issue, the clarification offered by the considerations given in regard to the first question is no doubt of use to any business supplying management services and seeking to benefit from the exemption. We await a CJEU decision on whether or not apportionment of these supplies is acceptable.

Constable VAT Focus 13 December 2018

13th December 2018

HMRC NEWS

Refunds of VAT in the UK for non-EU businesses

This brief explains changes for verifying claims for VAT refunds submitted by non-EU businesses under the Overseas VAT Refund Scheme.

Software suppliers for VAT returns and the EC Sales List

Find recognised suppliers and software for filing your VAT returns online.

VAT when you buy a vehicle to sell on

VAT registered motor dealers can reclaim the VAT charged and shown on the invoice when they buy vehicles to sell on.

CASE REVIEW

CJEU

1. Restrictions on Bad Debt Relief

This case concerned a Portuguese company, Tratave, which was refused the right to adjust the amount of VAT previously paid in relation to supplies to eight companies which are now insolvent. Following an inspection by the tax authorities, the adjustment was disallowed on the ground that Tratave had failed to notify the insolvent companies of its intention to seek bad debt relief against supplies made to them.

The requirement to notify the insolvent companies is a Portuguese restriction which gave rise to the question before the Court; does the principle of fiscal neutrality and relevant EU law preclude national legislation which denies the adjustment of VAT in the event of non-payment where the supplier has not notified its insolvent customer?

The Court posited that the relevant EU law around bad debt relief gives member states discretion as to the requirements they may impose on businesses seeking bad debt relief for VAT. This discretion is to allow member states to effectively combat tax evasion but any extra requirements must not have a significant impact on the VAT system or make it unnecessarily difficult for businesses to recover VAT.

In coming to a conclusion, the Court considered that the obligations imposed were not excessive and did not distort the system of VAT. Tratave had failed to comply with a reasonable domestic requirement for bad debt relief for VAT and, therefore, the Court held that the principle of neutrality and relevant EU law do not preclude national laws akin to those in the present case.

Constable Comment: This case shows that Member States of the EU are given some discretion, albeit not unfettered, in how they apply VAT law. As each country deals with different issues and cultures it is necessary to afford some leeway so the VAT system can be effectively enforced in each domestic region.

Upper Tribunal

2. Best Judgment Assessments

DCM Optical Holdings Ltd (DCM) appealed against an FTT decision dismissing DCM’s claims that, inter alia, HMRC had acted outside of its authority by retrospectively amending VAT returns which were out of time for assessment. The appeal also concerns assessments made on ‘best judgment’ of underpaid output tax for four VAT periods prior to February 2004.

DCM submitted VAT repayment returns for multiple periods including 07/05 and 12/08 which are the returns in question. HMRC contended that mistakes had been in calculating these returns and amended the returns to reflect the correct calculation of VAT due. It was HMRC’s belief that the method of apportionment used by DCM between taxable/exempt supplies was not appropriate.

DCM asserted at the Tribunal that these returns were out of time for assessment and that HMRC could therefore not refuse the repayments retrospectively. DCM also highlighted that all of the periods prior to February 2004 were out of time for assessment and these should not have been issued.

The Upper Tribunal allowed DCM’s appeal in part, holding that the assessments relating to periods before February 2004 were out of time. However, it upheld the FTT’s decision that there was no time bar preventing HMRC from retrospectively amending a reclaim VAT return. It was stressed that the time limits only apply to the power to assess, not the power to investigate and decide if a repayment claim was correct when submitted. HMRC is allowed, by virtue of section 73(6) VATA 1994, in this case, to raise a VAT assessment one year after evidence of facts

Constable Comment: Opticians supply a mixture of exempt supplies of medical services and taxable supplies of glasses frames. This has given rise to multiple input and output VAT issues for DCM but also for others operating in the same sector. In areas of uncertainty it is essential to seek professional advice when classifying supplies and establishing a method of calculating a businesses’ partial exemption percentage to minimise the risk of any mistakes which could give rise to assessments and penalties.

Constable VAT Focus 29 November 2018

29th November 2018

HMRC NEWS

Declaration on Future EU/UK Relationship

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

HMRC has released its monthly exchange rates for 2018

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

Help and support for VAT

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

MAKING TAX DIGITAL UPDATE

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

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

CASE REVIEW

CJEU

1. The Right to Deduct Input Tax

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

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

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

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

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

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

2. Calculating Taxable Turnover by Extrapolation

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

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

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

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

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

Upper Tribunal

3. Unjust Enrichment of HMRC

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

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

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

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

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

4. Legitimate Expectation – Judicial Review

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

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

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

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

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

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

Constable VAT Focus 15 November 2018

15th November 2018

This VAT Focus provides the usual updates of HMRC news, in particular updates on the availability of certain HMRC services in the upcoming planned downtime. We also cover some of the most recent developments from the Tax Tribunal and Court of Justice of the European Union including the decision in the C&D Foods Acquisitions ApS case.

HMRC NEWS

Service Availability of VAT Mini One Stop Shop

Check for any issues and service availability of the VAT Mini One Stop Shop.

Service Availability of EU VAT Refunds online

Check for any issues and service availability of EU VAT Refunds online.

Service Availability of VAT online

Check for any issues and service availability of VAT online.

Service Availability of EC Sales List

Check for any issues and service availability of ECSL.

Service Availability of Reverse Charge Sales List

Check for any issues and service availability of Reverse Charge Sales List

CASE REVIEW

CJEU

1. Holdings Companies Recovering VAT

C&D Foods Acquisition ApS was the Danish parent company in the Arovit group which included Arovit Holdings. Arovit Holdings controlled Arovit Petfood which, in turn, owned other companies within the group. C&D Foods provided management and IT services to Arovit Petfood in exchange for a fee to which VAT was added.

The Arovit group failed to repay a loan received from Kaupthing Bank so the group was acquired for EUR1 by the bank. The bank then entered into a number of consultancy agreements on behalf of C&D Foods in relation to selling the shares in Arovit Petfood to satisy the outstanding debt. Having paid the money over for the consultancy, C&D sought to recover the input VAT on the fees.

The Danish tax authorities refused this claim on the grounds that the expenditure by C&D did not relate to their taxable supplies or exhibit any connection with them at all.

The Court held that owing to the fact that there is no connection between the taxable activities of the company being sold and the input VAT incurred on consultancy relating to that company’s sale, the transactions are themselves outside the scope of VAT and, therefore, no right to deduct the VAT ever arose.

Constable Comment: This decision gave much consideration to the rules of holding companies seeking to recover VAT on activities other than purely holding and acquiring shares which is outside the scope of VAT. The rules are complicated and can easily lead to mistakes and there is significant case law relating to holding companies recovering VAT. It is always prudent to seek professional advice before making a VAT reclaim using a holding company involved in a complex business structure.

Upper Tribunal

2. Exemption for Supplies Closely Linked with Supplies of Education

This appeal concerned whether sales of goods by a student’s union can benefit from the VAT exemption for supplies closely associated with education. The FTT had previously ruled in HMRC’s favour, holding that the supplies did not benefit from the exemption.

The Upper Tribunal considered that Loughborough Student’s Union (LSU) could constitute an eligible body for the purposes of the exemption as it is a registered charity and any surplus cash generated is assigned to the continuance of its own, charitable activities.

However, despite being an eligible body, the Court considered that in order for the exemption to take effect the supplies being provided must be closely related to a supply of VAT exempt education. As LSU does not make supplies of education and does not make its supplies to an education provider but rather to individual students, it will not be able to benefit from the exemption.

The UT concluded that the supplies made by LSU were not closely linked to education in any event as the supplies of education provided by the University would be just as good without the supplies of household goods made by the SU. Other supplies which could be associated with education such as stationery were not shown adequately by LSU to benefit from the exemption.

The appeal was dismissed.

Constable Comment: This case demonstrates that a mere association with an eligible body such as a University does not mean that educational VAT exemptions extend to all supplies made by affiliates of that body. Interestingly there was some consideration given to supplies of art materials by LSU which could be associated with education and therefore benefit from the exemption, however LSU failed to show this to any substantial degree.

3. Amending Grounds of Appeal

This decision relates to an application by Ballards of Finchley Plc (Ballards) to amend its grounds of appeal relating to a historic Fleming claim for overpaid output VAT.

Ballards submitted a claim in 2003 claiming repayment of VAT overpaid during the period from 1 April 1973 to May 1999. Following the decision in Fleming, HMRC wrote in 2017 agreeing to pay part of the total amount claimed subject to certain confirmations and that, if the House of Lords were to overrule Fleming, an agreement to pay back the money to HMRC.

There was correspondence between the parties during which the accountants of the appellant wrote to HMRC seeking to adjust the amount of the reclaim, asserting that the retail price index used by HMRC failed to take into account times of great inflation. It was on these grounds that Ballards sought to amend their appeal. HMRC sought to deny the amendment on the grounds that the claims had already been settled and could, therefore, no longer be subject to the Tribunal’s discretion.

Giving consideration to case law, this decision revolved around whether the claims could be regarded as “completed” by the agreement in 2007. It is an established principle that where a claim has been paid in full the Tribunal has no jurisdiction to amend the grounds of appeal since it can no longer hear the appeal.

The Tribunal decided that, despite the fact that Ballards may have to pay the money back, the claims are to be seen as settled and there is no right to amend their grounds of appeal. The Tribunal also refused to employ discretion in this case on the grounds that “…it would be to no avail.”

Constable Comment: Legislation and case law both dictate that once a claim has been settled or “completed” then it is no longer within the jurisdiction of the Tribunal to analyse that claim. In this instance Counsel for the appellant sought to increase the value of a claim by asserting that incorrect inflation calculations had been performed when calculating the initial claim. This case reaffirms that once an agreement is reached between HMRC and the taxpayer, that agreement is, in most cases, conclusive.

Constable VAT Focus 1 November 2018

1st November 2018

This VAT Focus provides the usual updates of HMRC news, in particular some of the issues presenting themselves and hindering the implementation of the VAT Mini One Stop Shop and Making Tax Digital. Some of the most recent developments from the Tax Tribunal and Court of Justice of the European Union including the decision in the Volkswagen Financial Services UK case and the Ryanair decision are also considered.

HMRC NEWS

Brexit Update

HMRC has issued a partnership pack designed to help support businesses preparing for day one in the event of a “no deal” Brexit. This includes detailed information about importing and exporting goods in the event of a “no deal” Brexit alongside advice and guidance letters to traders and technical notices to support communications between businesses and their customers. We recommend that you read this pack to be best prepared for the event of “no deal”.

Software suppliers supporting Making Tax Digital

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

VAT Mini One Stop Shop (MOSS): Service availability and issues

Check the availability and any issues affecting the VAT Mini One Stop Shop (MOSS) online service.

VAT Government Information and National Health Trusts (GIANT): service availability and issues

Check the availability and any issues affecting the VAT GIANT online service.

Making Tax Digital for VAT: service availability and issues

Check the availability and any issues affecting Making Tax Digital for VAT.

Making Tax Digital for VAT change of business details: service availability and issues

Check the availability and any issues affecting Making Tax Digital for VAT change of business details service.

CVC NEWS

Our coverage and analysis of the Budget is found on our website. The last Budget announcement before the UK is scheduled to leave the EU took place on 29 October 2018 but is of particular interest given the current lack of clarity around the UK’s future trading position with the EU. Constable VAT will offer continued coverage of all VAT related issues and updates in the run up to the UK’s scheduled exiting of the EU.

CASE REVIEW
CJEU

1. The recoverability of input VAT incurred in a failed takeover bid

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

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

Giving regard to previous case law and relevant EU law, the Court agreed with the previous Opinion of the AG that the activity of preparing for a takeover is a taxable activity giving rise to a right to deduct input VAT incurred, even where the takeover did not take place, when the intent of the acquiring company is to make taxable supplies with the company being acquired.

Constable Comment: Whilst this decision works in favour of Ryanair immediately, it will be interesting to see how HMRC interpret and legislate this. It seems from this decision that the right to deduct input tax may apply in such instances where input VAT is incurred in relation to intended taxable supplies which never actually take place.

2. Method of attribution of input VAT in hire purchase agreements

This referral from the UK Supreme Court concerned the correct method of attribution of VAT on overhead costs associated with the provision of hire purchase cars.

Volkswagen Financial Services (VWFS) is a UK company which makes supplies of cars on hire purchase terms, this type of transaction is regarded as two supplies; one taxable supply of goods and another exempt supply of credit. The dispute arose between VWFS and HMRC around the extent to which ‘residual’ input tax related to taxable supplies and, therefore, was recoverable by VWFS.

HMRC contended, in line with its policy, that the overheads must be built into the price charged for the supply of credit as VWFS made no profit on the sale of the actual car itself (it sold the car at cost only additionally charging for credit), therefore residual input tax was irrecoverable as it was directly attributable to an exempt supply of credit. VWFS sought to apply a 50% recovery rate to the residual input VAT by giving equal weight to the two parts of the transaction using a partial exemption special method.

The Court held that there are two supplies in hire purchase agreements such as those in the proceedings, a point which was never in dispute. However, it was found that VWFS should be entitled to recover a proportion of the residual input VAT on the basis that it related to a hire purchase agreement as a whole which is, by its nature, a supply of both taxable and exempt supplies. It suggested that the best method of calculating the recovery percentage for residual input VAT is a turnover based partial exemption calculation and this should only be deviated from where a different method guarantees a more accurate result.

Constable Comment: HMRC have historically not allowed recovery of input VAT which cannot be associated with the price of a taxable output. In this case the taxable output was zero as there was no profit margin on the sale of the car by VWFS. This judgment will be of relief to hire purchase providers of cars who have now received some clarification around their position in terms of residual input VAT recovery.

First Tier Tribunal

3. Place of supply issues with non-business activities

This was an appeal against HMRC’s decision to refuse claims for repayment of overpaid VAT to Wellcome Trust Limited (WTL) amounting to £13,113,822. WTL is the sole trustee of a charitable trust which makes grants for medical research in the UK, the majority of these grants are given from investment funds.

The question at hand related to a place of supply issue, HMRC contending that WTL was liable to account for output VAT in the UK under the reverse charge provisions on investment management services they had received from non-EU suppliers and WTL arguing that the place of supply of was not the UK and, therefore, that no output VAT should have been accounted for.

There was no dispute of facts in this hearing and the result focussed entirely around the meaning of “acting as such” within the EU law which states that “The place of supply of services to a taxable person acting as such shall be the place where that person has established his business”. HMRC’s contention was that WTL were acting in a taxable capacity whilst WTL argued that the investment management services were provided in relation to its non-economic activity of grant distribution meaning that the place of supply, pursuant to the EU law, would be outside the UK.

The FTT gave much consideration to EU legislation as well as case law and concluded that WTL was not liable to account for VAT on the supplies received under the reverse charge procedure as it was not receiving the services in connection with any taxable activity, the place of supply rule determined by where the supplier belongs rather than WTL.

Constable Comment: This case is likely to escalate further up the Tribunal and Court system as the amounts involved are substantial. Any businesses who incur irrecoverable VAT on supplies received from overseas in relation to economic but non-business activities should consider the potential impact of this judgment on their potential to make a historic reclaim of overpaid VAT.

4. Reasonable excuses for failure to pay

This appeal is against a VAT default surcharge for Chameleon Technology’s failure to submit payments of VAT due by the relevant due dates. Chameleon lacked funds to make the payments which, whilst not a reasonable excuse in itself, case law has established a principle that the underlying cause of an insufficiency of funds may constitute such a reasonable excuse.

Chameleon did not dispute its payments being late but claimed that their application for “Time to Pay” was not considered by HMRC which meant it did not have an opportunity to discuss the cash flow issues or agree a payment plan.

The cause of Chameleon’s cash flow issues were unforeseeable and uncontrollable, the first being Typhoon Nida, a sever tropical storm which caused manufacturing in China as well as local supply chains to halt for an extended period. The second was Apple “block-booking” air freight from China to the UK in preparation for release of the iPhone 7 which presented a further breakdown in the supply chain outside of Chameleon’s control. HMRC sought to argue that insufficiency of funds was not a reasonable excuse for late payment.

The Tribunal established that the reasons for Chameleon’s late payment were two unforeseeable and unexpected events outside of their own control. Chameleon had done everything in its power to be compliant and exercise reasonable foresight and, therefore, the surcharge was dismissed.

Constable Comment: There are well established reasonable excuses that are regarded as acceptable and insufficiency of funds is specifically not included in the list of allowable excuses. However, this case shows that where events entirely out of a business’s control lead to an insufficiency of funds then there is a need to look through the facts to the causes.

Constable VAT Budget Focus: Autumn 2018

30th October 2018

Philip Hammond has delivered the last Budget before the UK leaves the EU in March 2019. He has based the Budget on an assumption of an average free trade deal being struck between the UK and the EU. However, if no agreement can be reached between the two parties, the Chancellor has stated that a different strategy would be necessary and the UK has been working on contingency plans for different possible Brexit negotiation outcomes. Here we look at the key VAT issues which have been covered in the announced Budget issued but will provide continued coverage of any progression in line with Brexit negotiation results.

VAT registration and deregistration thresholds

The VAT registration threshold of £85,000 has stayed at the same level again in this Budget, as has the de-registration threshold of £83,000. It has been confirmed that these will stay in place for the next two years. The effect of this measure, when inflation is factored in, is that there will be an increased number of smaller businesses that are required to register for VAT.

VAT grouping eligibility to be extended

The Government has announced that it will extend the eligibility to join a VAT group to certain non-corporate entities in the Finance Bill 2018-19. This extension will allow partnerships and sole traders to benefit from VAT grouping provided the entry criteria are met.

The treatment of vouchers from 1 January 2019

The Government intends to introduce legislation to give effect to an EU Directive in the UK providing for the VAT treatment of vouchers issued on or after 1 January 2019. It will impact vouchers for which payment has been made and which will be used to make a purchase.

The aim of the measure will be to harmonise the rules for the taxation of vouchers within the EU and, ideally, to prevent any non-taxation or double taxation of goods or services. This is not a true Budget measure as the new rules were agreed sometime after extensive discussions within the EU.

Specified Supplies Order

For a brief summary and an analysis of the Specified Supplies Order, we recently provided coverage of the issues presented by Brexit and the Specified Supplies Order on our website. There has been some clarification around some of the issues associated with the Order offered as part of the Budget 2018. In essence, the Order allows companies who export certain financial services from the EU to third countries to reclaim input VAT on what would normally be an exempt supply giving no right to recovery.

HMRC believe the Order is currently being abused by companies who form agreements with associates located outside the EU and re-supply those services back to UK consumers meaning that the company can reclaim the input VAT on the specified supply and gain a VAT advantage. This measure seeks to prevent “looping” by restricting the applicability of the Order to cases where the final consumer is not in the UK. We are not convinced that either existing UK measures or the proposed measures are compliant with the EU VAT directive and, were the UK to remain in the EU, we would be surprised to find that the proposed measure is not challenged in the Courts. Brexit may nullify this consideration.

VAT reverse charge anti-avoidance amendment

A measure has been introduced which allows for the disapplication of the existing anti-avoidance provision in relation to any specified reverse charge. Originally the provisions were introduced to prevent criminals avoiding reverse charge measures by supplying non-VAT registered businesses instead and charging VAT. This measure will allow regulations to be made to prevent unintended consequences for small businesses who trade below the VAT threshold which will remain at £85,000.

VAT and higher education

It has been announced that the Government will amend VAT law to enable bodies registered with the Office for Students, in the approved (fee cap) category, to exempt supplies of education. This is a measure aimed at ensuring continuity of VAT treatment for English higher education providers following the Higher Education and Research Act 2017. Constable VAT will follow the development of this policy, if your business is likely to be affected then please do not hesitate to contact Constable VAT.

Unfulfilled supplies and prepayments

HMRC’s policy around the VAT treatment of prepayments where customers have been charged for a supply but have failed to collect or use what they have paid for and have not received a refund. These prepayments will be brought into the scope of UK VAT from 1 March 2019 and VAT will be due on the prepayment.

Increase or decrease in consideration after supply (Regulation 38)

Regulation 38 requires businesses to adjust their VAT account where there has been a change in the value of the supply on which VAT is due, and a corresponding change in the amount of VAT charged.

It has been announced that legislation will be introduced to ensure that a credit note is issued to customers who receive a discount to ensure a higher degree of transparency with businesses, ensuring that they do not benefit by reclaiming VAT that should be refunded to either the customer or paid to HMRC.

Alternative method of VAT collection for online sales

Following a recent consultation, the Government is considering introducing a split payment model for collecting VAT on sales made online by overseas sellers. An industry Working Group is to be set up by HMRC to work with relevant stakeholders to consider this further.

The effects

If you require further information or assistance on any of the points raised above, please speak with your usual Constable VAT contact.

CVC VAT Focus 18 October 2018

18th October 2018

HMRC NEWS

HMRC are having difficulty dealing with DIY Housebuilder VAT refund claims and that some claims are being approved and paid up to four months later than the usual 30 days. If you are a housebuilder or are considering submitting a VAT refund claim, in order to mitigate any cash flow issues which may arise as a result of this, please call Constable VAT to see if there is anything we can do to help your particular case.

VAT MOSS exchange rates for 2018

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

Charity funded equipment for medical and veterinary uses (VAT Notice 701/6)

HMRC has updated its guidance regarding zero-rated supplies of medical and research goods and services that have been funded by charities.

Making Tax Digital Update

Making Tax Digital for VAT will now not be mandatory until 1 October 2019 for businesses falling into one of the following categories considered by HMRC to be ‘more complex’ businesses. Additionally HMRC has issued more guidance on making Tax Digital for VAT. The businesses regarded as complex and a list of the new guidance can be found on our website.

CONSTABLE NEWS

Brexit Blog

We have a new article about the potential impact of Brexit on VAT recovery for businesses in the financial services and insurance sectors. In this piece we ask the question “If you had to make a guess on whether your business will be allowed to reclaim more VAT or less VAT if the UK leaves the EU without a withdrawal agreement what would you say?” Consideration is given to The VAT Specified Supplies Order 1999. If you are impacted by this legislation then this will be of particular interest to you.

Opinion of Advocate General

The Advocate General (AG) has handed down his opinion in the Morgan Stanley CJEU case, which considers VAT recovery rules for costs incurred by overseas branches. Our coverage of this opinion can be found on our website.

This opinion adds another dimension to Brexit planning, which can involve creating new EU businesses with multiple establishments as well as longstanding multi-establishment arrangements. Whilst the CJEU decision need not follow the opinion of the AG, in most cases it does.

If you operate using overseas branches then you should consider your input VAT recovery position now. Constable VAT will be happy to assist in this exercise.

CASE REVIEW

CJEU

1. Refusal of right to deduct input VAT by the tax authorities

This referral concerned whether EU law on VAT precludes tax authorities from refusing the right to deduct input VAT on the grounds that the company in question failed to submit VAT returns for the period in which the right to deduct VAT arose.

The company, Gamesa, was declared an “inactive taxpayer” by the Romanian tax authorities as it did not submit VAT returns for a six month period in 2011. In 2015 Gamesa was subject to a VAT inspection and was issued with an assessment for the output VAT which should have been declared on the missing VAT returns. The assessment did not allow the deduction of the relevant input tax. Gamesa alleged that this practice infringed the principle of proportionality and the principle of neutrality of VAT.

Giving regard to these principles and the relevant EU legislation on the matter, the Court reduced the issue to one question: is it permissible for the tax authorities to refuse, on account of a failure to submit tax returns, a taxable person the right to deduct input VAT? This was answered succinctly, “As the Court has repeatedly pointed out the right of deduction […] is an integral part of the VAT scheme and in principle may not be limited.”

The Court held in favour of Gamesa and stated that the relevant EU law precludes tax authorities from using this practice.

Constable Comment: This case illustrates the fundamental nature of the right to deduct input VAT in the EU VAT system. It confirms that even if a business has made VAT accounting errors or failed to disclose certain sales, a VAT assessment can be mitigated by demonstrating, accurately, the amount of input tax incurred in the period being assessed which relates to taxable supplies. If you have received a VAT assessment and are concerned about the amounts involved or the entitlement to deduct input VAT has not been taken into account, do not hesitate to contact Constable VAT.

First Tier Tribunal

2. HMRC Best Judgment

This case was an appeal by Derbyshire Motors Ltd (DM) against a best judgment VAT assessment issued by HMRC and a civil penalty for dishonesty. The appellant had declared taxable motor repair services as MOTs which are outside the scope of VAT. DM admitted that this had taken place after initially denying the wrongdoing, albeit not convincingly.

DM was struggling to stay afloat when the “credit crunch” began to take serious hold of the UK economy in 2008/09. Owing to a lack of capital reserves no more money could be pumped into DM to keep it going. Mr Derbyshire, the director and owner, made the decision to treat some repair works as MOT tests to improve the cash position of the business. When HMRC discovered this in 2014 DM no longer had VAT records for the relevant period. HMRC therefore relied on figures from later years to calculate the assessment for underpaid VAT. DM submitted that HMRC had not used best judgment as the assessment was based on material relating to other years.

Analysing previous case law and relevant tests for the application of best judgment were considered and the assessment was upheld. The penalty was also upheld in full.

Constable Comment: This demonstrates well that simply not having records and not being compliant for years does not mean that tax evasion is untraceable. If taxpayers discover any irregularities or suppressed sales it is always best to be honest and notify HMRC. If you co-operate fully and make an un-prompted disclosure then penalties can be mitigated. Attempting to hide from and mislead HMRC is likely to result in the highest possible penalty being applied. Please contact Constable VAT if you are worried about notifying a disclosure to HMRC, we will be happy to be of assistance.

3. Calculating VAT when prompt payment discount is offered

Virgin Media Limited (VML) made supplies of telecommunications to its domestic customers. 95% of these customers paid a monthly subscription fee, the remaining 5% paid one lump sum for a 12 month subscription which amounted to less than 12 monthly instalments. Output VAT was calculated for all customers using the lower price based on the suggestion that if a “prompt payment discount” is offered then output VAT should be calculated using the discounted amount even if the customer did not take advantage of this discount.

HMRC disagreed with this assertion and stated that output VAT may only be accounted for on the discounted amount where this sum is paid within a specified time period and is taken to satisfy the full amount.

The FTT considered that VML’s supplies could, in theory, benefit from this prompt payment discount pricing. However it was considered that VML, in reality, makes two different supplies at different amounts albeit of the same services. It was not disputed that where the prompt payment discount is taken by customers that this is the value which should be used for calculation of output VAT. However, since the change in the rules around prompt payment discounts in 2015 it is no longer permissible to account for VAT based on the reduced price unless taken within the time period specified.

Constable Comment: It used to be the case that offering a prompt payment discount allowed businesses to account for output VAT on the reduced price even if this were not taken by the customer. This has since changed and now the discount must be taken in order to account for VAT on the lower amount. If your business offers prompt payment discounts you should consider how to reflect these when accounting for VAT.