Author Archives: Sophie Cox

CVC VAT Focus 22 March 2018

22nd March 2018

PARTIAL EXEMPTION

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

HMRC NEWS

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

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

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

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

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

CVC BLOG

Spring Statement 2018 and VAT

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

CASE REVIEW

Upper Tribunal

1.Planning Permission Post-Sale

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

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

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

First Tier Tribunal

2. Sales of properties; TOGCs?

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

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

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

3. Appealing an assessment out of time

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

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

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

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

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

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

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

5. Zero rating hot food

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

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

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

6. Default surcharge direct debit not taken

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

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

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

 

CVC VAT Focus 08 March 2018

8th March 2018

PARTIAL EXEMPTION

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

 

HMRC NEWS

 

VAT Notice 706/2: Capital Goods Scheme

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

 

VAT: Fulfilment Business Approval Regulations

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

 

Genuine HMRC contact and recognising phishing emails and texts

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

 

CVC BLOG

 

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

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

 

CASE REVIEW

 

Court of Justice of European Union (CJEU)

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

 

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

 

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

 

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

 

Upper Tribunal

 

2. VAT liability of timeshare

 

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

 

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

 

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

 

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

 

 

First Tier Tribunal

 

3. Permission to appeal out of time

 

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

 

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

 

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

 

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

 

 

4. Whether partial exemption special method fair and reasonable

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

 

  

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

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

8th March 2018

Many charities sell goods donated by supporters via a network of charity shops. A number of charities are increasingly relying on platforms such as eBay to sell donated goods. Where certain conditions are satisfied, the sale of donated goods is zero-rated for VAT purposes. This can be beneficial because no output VAT is due on the income generated by these sales; however, VAT incurred which directly relates to those zero-rated supplies is recoverable in full. In addition, a proportion of VAT incurred on overhead expenses can be reclaimed. 

1. What supplies does VAT zero-rating cover?

VAT zero-rating applies to the sale of any goods donated to a charity or a taxable person who is a ‘profits-to-charity’ person (i.e. wholly owned trading subsidiary) in respect of the goods. The zero-rating also extends to the letting or hire of any donated goods.

2. What are ‘goods’?

In this context, the definition of ‘goods’ is the normal sense of the word. It does not include services, for example. If a charity were to receive donated land or buildings which it then sold this would not be zero-rated under this heading of VAT law.

3. When will zero-rating apply?

Zero-rating applies where the goods have been made available for purchase (or hire) usually in a shop, charity auction or online to the general public or two or more disabled people or to those entitled and in receipt of means tested benefits.  This second test applies when charities restrict the sale of donated goods to certain sections of the community and is probably most common with charities selling second-hand furniture.

4. When does zero-rating not apply?

If any sale or letting of donated goods arises as a result of any arrangements entered into by the donor or charity, and before the goods were made available to the public, the supply is not zero-rated.

5. What about poor quality goods charities cannot sell?

On occasion, well-meaning supporters may donate goods to a charity which are of poor quality and not suitable to be made available to the general public. This may include second-hand electrical goods, toys and clothing. Many charities will have arrangements in these circumstances to sell, say clothing, to rag merchants. Extra Statutory Concession (ESC) 3.21 allows these sales to also qualify for zero-rating.

6. Why is this relief important?

The zero-rating of the sale of donated goods by a charity is important for two reasons:

  • Zero-rated sales must be monitored because these supplies contribute towards the compulsory VAT registration threshold and may trigger a VAT registration requirement.
  • VAT incurred which directly relates to zero-rated supplies is recoverable in full. This means that if a charity incurs VAT on fit out costs of a shop, VAT on rent paid to landlords or even cleaning or repairs these costs are recoverable in full if a charity chooses (or is legally required) to VAT register or is already VAT registered.

Charities making zero-rated supplies below the compulsory VAT registration threshold are entitled to VAT register on a voluntary basis. A VAT registration may be beneficial in order to recover VAT incurred; however, this needs to be balanced against the administrative requirements of maintaining a VAT registration. A voluntary VAT registration may be backdated up to four years with HMRC’s agreement.

CVC advises many charities which make zero-rated sales of donated goods.  We have recently carried out some work for a new client which operates a network charity shops.  The charity should have VAT registered fifteen years ago (the value of zero-rated supplies exceeded the compulsory VAT registration threshold in 2003) and we were able to agree a significant retrospective refund of input VAT on the charity’s behalf with HMRC.

If you would like to discuss the contents of this blog or any other VAT matters please do not hesitate to contact Stewart Henry, Laura Beckett, Sophie Cox or your usual contact at CVC.

CVC VAT Focus 22 February 2018

22nd February 2018

HMRC NEWS

‘Reasonable care’ guidance

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

CVC BLOG

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

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

CASE REVIEW

First Tier Tribunal

1. Construction of clubhouse is zero-rated

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

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

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

Stewart Henry considers this decision in detail in his blog.

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

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

 

Upper Tribunal

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

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

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

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

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

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

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

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

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

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

4. Branches found to be independent for VAT purposes

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

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

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

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

5. Whether HMRC assessment made to best judgment

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

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

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

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

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

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

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

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

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

 

 

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

 

 

 

 

 

 

 

 

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

13th February 2018

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

1. Background

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

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

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

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

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

2. GFC’s position

The charity’s position is as follows:

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

3. HMRC’s position

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

4. Decision

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

5. Overview

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

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

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

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

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

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

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

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

CVC VAT Newsletter for Charities – February 2018

9th February 2018

money-gold-coins-finance

 

 This VAT & Charities newsletter comments on the following:

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

 

  1. Local Healthwatch Organisations campaign by HMRC

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

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

 

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

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

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

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

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

 

 3.VAT exemption for welfare services

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

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

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

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

  

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

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

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

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

 

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

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

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

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

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

 

6.Supplies of membership services – single or multiple supply

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

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

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

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

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

 

 

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

 

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

 

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

 

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

CVC VAT Focus on Land and Property – January 2018

31st January 2018

CVC VAT Focus on Land and Property

HMRC NEWS

Fraud in the provision of labour in the construction sector

We reported in our Spring Budget VAT Focus that the government would consult on a range of policy options to combat supply chain fraud within the construction sector.

Following the consultation, the government announced at the Autumn Budget that it will introduce a VAT domestic reverse charge. This will shift responsibility for paying VAT along the supply chain to remove the opportunity for revenue losses. Changes will have effect from 1 October 2019.

A summary of the responses to the consultation can be found here. It sets out that:

• HMRC will publish draft legislation as part of a technical consultation in Spring 2018
• finalised legislation will be published along with guidance by end September 2018
• legislation will be laid after 1 April 2019

VAT Information Sheet 07/17: construction services and zero-rated relief
HMRC has published an information sheet concerning how VAT is applied to the construction of buildings that keep, or make use of, parts of a building that previously stood on, or were adjacent to, the site where the works of a new construction (dwelling or building to be used solely for a relevant residential or relevant charitable purpose) are taking place. The Information Sheet follows the Upper Tribunal (UT) judgments in Astral Construction, Boxmoor Construction Limited and J3 Building Solutions.

CVC BLOG

HMRC clarifies policy on VAT zero-rating & new buildings
In CVC’s latest blog Helen Carey considers HMRC’s policy on VAT zero-rating and new buildings further to the recent Information Sheet 07/17 issued by HMRC

CASE UPDATE

Court of Justice of European Union (CJEU)

1. Sale of holiday homes

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

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

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

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

Upper Tribunal

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

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

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

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

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

First Tier Tribunal

3. Disapplication of the option to tax

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

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

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

4. Whether novation of a contract amounted to a VAT exempt supply of land

Hanuman Commercial Limited (HCL) intended to purchase a commercial property and convert it into residential flats. HCL entered into a contract with Sabre Insurance Company Limited (Sabre) to purchase the property for £2.8 million (the “Sabre contract”). Sabre had opted to tax the property so the sale would be subject to VAT. The Sabre contract was conditional on Sabre securing that two of the tenants vacated the property and on HCL obtaining satisfactory planning permission. Prior to completion of the Sabre contract, HCL entered into a contract to sell the property to Connect Centre Limited (CCL) for £5.5 million (the “CCL contract”).

On 16 May 2014, a number of additional agreements were entered into. The net effect of these agreements was that instead of Sabre selling the property to HCL for £2.8 million and HCL selling the property to CCL for £5.5 million, Sabre would sell the property to CCL for £2.8 million (less the deposit already paid by HCL) and CCL would make a separate payment to HCL for £2.7 million less the deposit already paid by CCL.

HCL issued CCL with two VAT invoices. The first being for the sale of the interest in the contract for £2.7 million plus VAT. The second was for varying the contract and was for £25,400 plus VAT. HCL failed to submit a VAT return for the relevant period and also did not seek to recover any VAT incurred in relation to the transactions. HCL decided that VAT had been charged in error and issued credit notes. HCL argued that it acquired an interest in the property which it then sold to CCL, which would be a VAT exempt supply as it had not opted to tax. HMRC contend that HCL did not supply a freehold interest in the property, instead it supplied an unexercised contractual right to purchase the property which is standard rated. The Tribunal agreed with HMRC that HCL had supplied services which were subject to VAT.

CVC comment: This case highlights the need to seek advice when contracts are drafted to ensure such amendments do not have adverse tax implications.

 

CVC VAT Focus 26 January 2018

26th January 2018

HMRC NEWS

 Revenue and Customs Brief 1 (2018): VAT – treatment of affiliation fees for sports clubs

This brief is about the withdrawal of the concession that allows sports clubs treat affiliation fees as exempt from VAT.

Revenue and Customs Brief 2 (2018): VAT – treatment of Advanced Learner Loans

This brief explains HMRC’s view on the tax treatment of receipts of payments of Advanced Learner Loans from Student Finance England by educational bodies.

Serial Tax Avoidance Regime guidance

HMRC has issued guidance about the Serial Tax Avoidance Regime (STAR) legislation.

VAT partial exemption

HMRC has published research which explores the knowledge and use of VAT partial exemption among businesses in 17 industry sectors.

Notice 143: a guide for international post users

This notice explains what happens when you import or export goods by post using Royal Mail or Parcelforce Worldwide. The Customs Duty waiver and VAT relief on multi-gift packages has been updated. The section 4.5 link to Notice 203a has also been replaced with Notice 204b.

VAT Mini One Stop Shop: register and use the service

HMRC has updated guidance on how to register and use the VAT Mini One Stop Shop (VAT MOSS) to report and pay VAT due on sales of digital services to consumers in the EU.

VAT Notice 744B: freight transport and associated services

VAT Notice 744B has been updated to take account of developments in policy and changes in the law since the December 2010 edition.

CASE REVIEW

 Court of Justice of European Union (CJEU)

1. Combined stadium and football museum tours

Stadion Amsterdam CV operates the Amsterdam Arena, home to AFC Ajax and The AFC Ajax Football Club Museum. Stadion Amsterdam rents the stadium to third parties for sports competitions and performances. When events are not held at the arena, it operates guided tours of the stadium and its facilities as well as a guided tour of the AFC Museum, called “World of Ajax”.

In the Netherlands, museum admissions are taxed at a reduced rate of 6%, whereas stadium tours are taxed at the standard rate of 21%. During the period at issue it was not possible to visit the AFC Museum without taking part in the guided tour of the stadium. It had already been established that Stadion Amsterdam provided a single supply of admission, the question for the CJEU was whether this composite supply was subject to the reduced or standard rate of rate. The CJEU held that access to the museum was ancillary to the main supply of the arena tour, as such the whole ticket price was subject to VAT at the standard rate.

CVC comment: This case provides interesting narrative surrounding the issue of taxation of composite supplies and may have implications for other operators of similar venues throughout the EU.

Court of Appeal

2. VAT recovery position of a retail bank

ING Intermediate Holdings Limited (ING) carried on a retail banking trade, receiving deposits from private individuals and acquiring bonds and securities with this money, in exchange for higher interest rates than many competitors. ING achieved this by offering only deposit accounts and not having any walk-in branches. Customers did not receive a cheque book, overdraft or debit card and could not make payments to third parties. Based on this, ING sought to argue it was making no primary supplies and that the relationship with the customer was one of lender/borrower, the customer being the lender.

This contention was dismissed by both Tribunals and the Court of Appeal as ING could not demonstrate that it merely took deposits without providing reciprocal banking services and could not show that transactions should be ignored for VAT purposes. ING also argued that any services they did provide were for no fee. Whilst the FTT found that there was indeed no express fee, it also found that the interest rate on the deposit accounts contained some deduction for services provided by IDUK. This indicated that there was a supply of services for a consideration. ING argued that this consideration could not be expressed in a monetary form, an argument dismissed by UT and Court of Appeal.

The Court of Appeal upheld the decisions of the FTT and the UT – that ING provided exempt banking services and was therefore not permitted to recover associated input tax.

CVC comment: Whilst ING’s business model is notably different than traditional banks, HMRC argued successfully that ING does supply the provision of banking services.

 First Tier Tribunal

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

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

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

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

CVC comment: With crowdfunding sites proving increasingly popular for start up businesses, this case highlights the need for businesses to consider the potential requirement for VAT registration from the outset.

 4. Default surcharge – Reasonable excuse?

Jonathan Skuce received a default surcharge to the sum of £5,922.10 at the 15% rate for VAT period 03/17. The VAT liability for the period was uncommonly large, being over three times the average VAT return liability for the business. During the period the business was due payments from a major customer for a contract with a net value of £174,000. The customer was in financial difficulty and Mr Skuce was unable to secure payment. To meet the forthcoming liability Mr Skuce mobilised all of his workforce to bring forward another contract in order to obtain payment. On completion of this job a cheque of £72,000 was lodged; however, Mr Skuce incorrectly believed the cheque would fall within his banks new faster clearing regime. On 11 May Mr Skuce became aware of the late payment and reauthorised another payment. The Tribunal ruled Mr Skuce had a reasonable excuse and allowed the appeal. The Tribunal considered that “what Mr Skuce did was a reasonable thing for a responsible trader, conscious of and intending to comply with his obligations regarding tax, to have done”.

Design Rationale received a default surcharge in the sum of £1,345.08 at the 2% rate for the VAT period 02/17. Design Rationale carries on a business of design and manufacture of interior fittings and is also a sub-contractor within the Construction Industry Scheme (“CIS”). The 02/17 VAT return was submitted on time; however, the return was unpaid until it was credited by HMRC by way of an offset of a CIS repayment due to Design Rationale. A similar situation occurred with the 11/16 VAT return which lead to Design Rationale entering the default surcharge regime. HMRC imposed the surcharge advising that the business should not withhold a payment of a return, even if it is anticipating a refund from HMRC, as such an offset is a discretionary action by HMRC. Design Rational contended it had a reasonable excuse as it could not pay the VAT due because of the huge overpayment held by HMRC. They had paid VAT on time for as long as they could, borrowing heavily to do so. The Tribunal had no difficulty in finding that Design Rationale had a reasonable excuse, it held that the circumstances were undoubtedly something that stopped the business from meeting a tax obligation that it took reasonable care to meet. The surcharge notices for both 11/16 and 02/17 were deemed not to have been served.

CVC comment: The tribunal in both cases referred to the Court of Appeal decision in Steptoe which established the principle that insufficiency of funds can never of itself constitute a reasonable excuse, but that the cause of that insufficiency, i.e. the underlying cause of the default, might do so.

 5. Whether novation of a contract amounted to a VAT exempt supply of land

Hanuman Commercial Limited (HCL) intended to purchase a commercial property and convert it into residential flats. HCL entered into a contract with Sabre Insurance Company Limited (Sabre) to purchase the property for £2.8 million (the “Sabre contract”). Sabre had opted to tax the property so the sale would be subject to VAT. The Sabre contract was conditional on Sabre securing that two of the tenants  vacated the property and on HCL obtaining satisfactory planning permission. Prior to completion of the Sabre contract, HCL entered into a contract to sell the property to Connect Centre Limited (CCL) for £5.5 million (the “CCL contract”).

On 16 May 2014, a number of additional agreements were entered into. The net effect of these agreements was that instead of Sabre selling the property to HCL for £2.8 million and HCL selling the property to CCL for £5.5 million, Sabre would sell the property to CCL for £2.8 million (less the deposit already paid by HCL) and CCL would make a separate payment to HCL for £2.7 million less the deposit already paid by CCL.

HCL issued CCL with two VAT invoices. The first being for the sale of the interest in the contract for £2.7 million plus VAT. The second was for varying the contract and was for £25,400 plus VAT. HCL failed to submit a VAT return for the relevant period and also did not seek to recover any VAT incurred in relation to the transactions. HCL decided that VAT had been charged in error and issued credit notes. HCL argued that it acquired an interest in the property which it then sold to CCL, which would be a VAT exempt supply as it had not opted to tax. HMRC contend that HCL did not supply a freehold interest in the property, instead it supplied an unexercised contractual right to purchase the property which is standard rated. The Tribunal agreed with HMRC that HCL had supplied services which were subject to VAT.

CVC comment: This case highlights the need to seek advice when contracts are drafted to ensure such amendments do not have adverse tax implications.

 6. Is bicarbonate of soda zero-rated?

Phoenix Foods Ltd (Phoenix) appealed HMRC’s decision that its supplies of bicarbonate of soda attract VAT at the standard rate of 20%. Phoenix contended its supplies were “food of a kind used for human consumption” and therefore zero-rated.

The Tribunal allowed the appeal, holding that the bicarbonate of soda supplied by Phoenix is in a form which is primarily intended for use as a baking ingredient is a supply of food and therefore subject to the zero-rate. The Tribunal accepted that bicarbonate of soda had many uses; however, this can also be said of other food products, such as vinegar.

CVC comment: In this case the supplies made by Phoenix were clearly intended to be used primarily as a baking ingredient, they were packaged in small tubs, consistent with the principal use being home baking and it was sold to retailers for sale in their home baking section.

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

 

CVC News

17th January 2018

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CVC VAT Focus 11 January 2018

11th January 2018

We would like to wish our regular readers and subscribers a happy and prosperous 2018.

HMRC NEWS 

HMRC were busy during the last couple of weeks of 2017. The following documents were published or updated on the gov.uk website:

CVC BLOG

In CVC’s latest blog Helen Carey considers HMRC’s policy on VAT zero-rating and new buildings further to the recent Information Sheet 07/17 issued by HMRC.

CASE REVIEW 

Court of Justice of European Union (CJEU)

1. Special derogating measures – Avon Cosmetics

Avon Cosmetics Limited sells products through independent representatives. Most of these representatives are not VAT registered. Avon sells products to the representatives at a price below the retail price Avon envisage will be achieved. Sales to representatives are subject to VAT. The sales made by the representatives are not subject to VAT. The effect of this business model is that VAT is not accounted for on the difference between Avon’s selling price and the representative’s selling price. To remedy this situation the UK obtained a derogation from the EU to deviate from the standard rule that VAT is charged on the actual sales price. As a result Avon calculates output VAT due based on the representative’s expected selling price. Two adjustments are made to this calculation to take account of the fact that some products are purchased by the representatives for their personal use and some products are sold by the representatives at a discount.

Avon claimed a refund of overpaid VAT in the sum of £14million on the basis that the special derogation does not take account of the VAT incurred by the representatives on demonstration products. According to Avon, these purchases amount to business expenditure and the VAT relating to those purchases would be recoverable if they were VAT registered.

The matter was referred to the EU on the question of whether the derogation and its implementation infringed the EU principles of fiscal neutrality. The CJEU found that the measures implemented as part of the derogation do not infringe the EU principles and the UK is not required to take account of VAT incurred on purchases used for the purposes of the representatives’ economic activity.

CVC comment: this is an interesting case before the CJEU which considered whether a UK derogation infringed the EU principles of fiscal neutrality.

Upper Tribunal

2. VAT exemption for welfare services 

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

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

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

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

First Tier Tribunal

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

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

The Tribunal found that the Club was not established for charitable purposes at the relevant time; therefore, the Club’s appeal failed.

This decision is considered in more detail in our VAT & Charities Newsletter.

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

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

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

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

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

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

5. Membership – single or multiple supply

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

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

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

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

CVC comment: this decision provides interesting commentary regarding the distinction between single and multiple supplies for VAT purposes. This topic has been considered a number of times before the Tribunals and Courts.  

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

HMRC clarifies policy on VAT zero-rating & new buildings

11th January 2018

HMRC has recently issued an Information Sheet (07/17) explaining how VAT applies to projects where a building is being constructed that makes use of or retains parts of a building that previously stood on the site, in particular where the building being constructed is designed as a dwelling (or number of dwellings) or is intended for use solely for a relevant residential or relevant charitable purpose.

The policy outlined in the Information Sheet impacts on the VAT liability of the supply of the services of constructing the building and the first grant of a major interest of the property constructed.

Previously, HMRC policy has been that any existing building must have been demolished completely to ground level in order for the construction of its replacement to be treated as construction of a building and for any zero-rated relief to apply on the works or the onward supply of the building. There was some relaxation of the law to allow zero-rating where there was a legal requirement to retain part of a building (for example a façade being retained as part of planning consent).

Three VAT cases have led to HMRC reconsidering its position and clarifying this in the Information Sheet.

The Information Sheet outlines the background to three cases: Astral, where a church was redeveloped into a much larger building designed as a nursing home; Boxmoor, where a house was almost completely demolished before a new house was constructed; and J3BS, where a coach house was redeveloped into a dwelling incorporating several exterior walls of the existing building.

HMRC has clarified that in situations similar to Astral where the works are so extensive that they cannot be described as works of alteration then zero-rating may still apply. It should be noted that the important factor here is that after the completed works the size and function of the building were very different from the original.

In cases similar to Boxmoor and J3BS, where parts of walls are retained, HMRC will still normally require that the retention is an explicit condition or requirement of Statutory Planning Consent, or similar, unless the planning documents make clear the work will be carried out in accordance with plans in which the retention of the façade is clearly shown.

It may be worth revisiting the VAT treatment of any buildings where zero-rating was not available as a result of the retention of part of an existing building where the size and use of the building changed significantly or the plans clearly showed the retention of part of the existing building.

A to Z of VAT for Charities

11th January 2018

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

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

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

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

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

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

CVC VAT Focus 14 December 2017

14th December 2017

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

Christmas Greetings

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

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

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

HMRC NEWS 

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

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

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

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

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

CVC BLOG

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

CASE REVIEW 

Court of Appeal

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

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

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

2. Whether appeal is time-barred 

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

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

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

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

Upper Tribunal

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

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

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

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

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

First Tier Tribunal

4. Is a powdered food supplement zero-rated?

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

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

5. Default surcharge appeal allowed

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

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

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

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

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

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

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

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

Christmas parties, gifts & VAT

1st December 2017

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

Staff Parties

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

What about guests?

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

Gifts

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

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

Entertaining customers

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

CVC VAT Focus 30 November 2017

30th November 2017

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

HMRC NEWS 

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

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

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

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

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

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

CASE REVIEW 

Court of Justice of European Union (CJEU)

1. Bad debt relief

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

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

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

2. Content of VAT invoices

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

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

3. Sale of holiday homes

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

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

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

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

First Tier Tribunal

4. Default surcharge appeal allowed

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

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

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

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

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

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

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

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

6. Zero-rating and input tax denied

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

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

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