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CONSTABLE VAT NEWS
COVID-19 VAT reliefs
As the ongoing COVID-19 pandemic continues to impact businesses across the world, many countries are using VAT as a measure to provide reliefs to businesses which are struggling. Our coverage of the measures being taken by different European countries aims to provide a synopsis of the VAT related measures being taken to aid those struggling to meet financial obligations. We continue to update our coverage of this topic which can be read here.
Partial Exemption Annual adjustments
Partly exempt businesses recover VAT incurred provisionally throughout the VAT accounting year. At the end of the VAT year they must perform an annual adjustment calculation to determine the amount of input VAT recoverable in the VAT year. The provisional input VAT deduction is compared with the actual recovery allowed and, if necessary, the position must be adjusted. This adjustment is normally made on the VAT return following a business’ partial exemption year end, although it is possible to make an ‘in year’ adjustment. A business submitting calendar quarterly VAT returns, with a VAT year end of 31 March, usually includes its partial exemption annual adjustment on the VAT return in respect of the VAT accounting period ending 30 June.
Many taxpayers will imminently need to perform their annual adjustment calculations. This can often be a particularly difficult and time-consuming exercise which often poses problems for businesses. It is advisable to seek professional advice when performing partial exemption annual adjustments, particularly at uncertain times such as now where the values of taxable or VAT exempt supplies may have fluctuated unexpectedly. Our coverage of partial exemption can be read in full here. For assistance with any partial exemption query, please do not hesitate to contact Constable VAT.
The European Commission has proposed an extension to a number of deadlines relating to the Directive for Administrative Cooperation. The proposed changes would inter alia defer the deadlines for reporting on cross-border tax arrangements for six months. The proposal also suggests a postponement of the VAT e-commerce package by six months. If approved, the rules will apply from 1 July 2021 instead of 1 January 2021. The proposal can be read here.
Court of Justice of the European Union
This referral concerned a dispute between Dong Yang Electronics sp. Z o.o (DY) and the Polish Tax Authority. DY is a Polish company which has a contract for the supply of assembly services to LG Korea Ltd., a Korean company. Pursuant to this arrangement, materials were sent to Poland and were re-supplied on to DY by a subsidiary of LG Korea, LG Polska. DY performed its assembly services and handed over completed circuit boards to LG Polska which then sent them to LG Display Germany.
DY invoiced LG Korea for these assembly services and treated the supplies as outside the scope of VAT, on the basis that it was a B2B supply of services falling under the general place of supply rules, making the place of supply the country in which the recipient of the services is established. LG Korea had given DY an assurance that it did not have a fixed establishment in Poland, which would be more closely concerned with the supply, confirming that the VAT treatment being applied was correct.
The Polish Tax Authority disagreed with this arrangement, arguing that the personnel and the technical resources of LG Polska are available to LG Korea by virtue of a contractual relationship between LG Korea and LG Poland. It argued that as a result LG Polska constitutes a permanent establishment of LG Korea and DY had made Polish domestic supplies. It also informed DY that it was not entitled to rely on a statement from LG Korea that it had no fixed establishment in Poland and that it should have investigated the contractual position between LG Korea and LG Polska to establish the nature of the relationship.
The question which is referred to the Court is whether the mere fact that a company established outside of the EU has a subsidiary in Poland makes it possible to deduce the existence of a fixed establishment in Poland and, if not, is a third party such as DY required to examine the contractual terms between the other companies involved in a transaction.
In considering this question, the Court observed the meaning of a fixed or permanent establishment for the purposes of VAT place of supply rules. It observed that, in line with the EU Regulations, a fixed establishment is any establishment which has a sufficient degree of permanence and an appropriate level of human and technical resource to enable it to receive and use the services being received. It noted that it is a fundamental aspect of the VAT system that regard must be had to the economic and commercial reality of any situation. Therefore, it was observed that whether a subsidiary constitutes a fixed establishment is a decision which must be taken on the facts of each case and it cannot be concluded that the mere presence of a subsidiary creates a fixed establishment.
With regard to the second aspect of the question, The Court considered that while EU law, specifically Article 22 of the Principal VAT Directive, requires that suppliers consider certain criteria to identify a customer’s fixed establishment it does not require them to examine the contractual relationships between other companies established in other countries and their subsidiaries. The Court also reiterated the opinion of the AG, stating that a requirement to inquire into the contractual relationship between a parent company and its subsidiary cannot be imposed on the service provider when this information is not, in theory, accessible to it.
The Court held that the existence of a subsidiary does not, necessarily, create a fixed establishment and that service providers are not required to inquire into the contractual position of its customers and their subsidiaries.
Constable Comment: The rules relating to VAT and the place of supply of services are complex, with different treatments for business customers and individuals and several exceptions to the general rules. This means this is often an area of contention between supplier and customer and also the tax authorities. Determining which of a customer’s establishments a supply is being made to is a fundamental part of the process of applying the complex place of supply VAT rules relating to supplies of services.
This is a common issue and can lead to errors. It is therefore important to take advice where supplies are being made to a customer with establishments in several different countries to ensure VAT is declared correctly. EU law requires that suppliers consider the nature and use of the service provided alongside contracts, orders and payment mechanisms to determine where a supply is received. However, this case indicates that it is not necessary to delve more deeply into contracts between associated companies to determine which establishment is receiving a supply.
Constable VAT has experience in this area and can advise on transactions where there is uncertainty around the VAT treatment of a supply of services
First Tier Tribunal
This appeal by Mr & Mrs McGarry concerned HMRC’s decision to refuse to repay input VAT under the DIY Housebuilder Scheme on the grounds that the claim was out of time. There is a three-month time limit for submitting a claim under this scheme which runs from the date on which the property in question is complete. This case considers when a property is “complete” for the purposes of the scheme.
Mr & Mrs McGarry submitted a claim dated 30 January 2018, following the receipt of a certificate of completion from the local authority which was dated 3 November 2017; well within the three-month time limit. HMRC denied this claim on the grounds that the property had been occupied for at least a year prior to the issue of the certificate, essentially arguing that the building was complete when occupied. It supported its argument by noting that, in April 2017, Mr McGarry was told that all that was required for the completion certificate to be issued was for him to supply Building Control with energy installation certificates and not to carry out and further works to the property. Observing this and that the property had been occupied since 2014, HMRC denied the claim for repayment of the VAT.
Mr and Mrs McGarry argued that they had followed HMRC’s Guidance and the explanatory notes on all of the relevant paperwork which were clear in informing them to include a copy of a certificate of completion along with the claim and associated invoices. They sought to rely on Farquharson which, whilst not authoritative over the Tribunal, states that the reference to “completion” in the law is referential to the completion certificate and it is only in the absence of such a certificate that other evidence should be considered, such as occupation.
The Tribunal agreed with the decision in Farquharson and noted that Mr and Mrs McGarry had read HMRC’s Guidance and relied on the explanatory notes on the forms which are used to make a claim. This led them to believe that they needed a completion certificate to include with their claim. They had looked into what was required to obtain a completion certificate and had, within a year, obtained this certificate and submitted a claim within three months of this date.
The Tribunal held in favour of the taxpayer and upheld the appeal; Mr and Mrs McGarry will now resubmit their claim for consideration.
Constable Comment: This is an area of the law which is frequently before the First Tier Tribunal, with HMRC often seeking to argue that a certificate of completion is not particularly significant for DIY Housebuilders even though their Guidance and the necessary paperwork for making a claim indicates that it is a necessity for a claim to be successful. Whilst it has been confirmed that alternative evidence can be considered when deciding if a building is complete, this should not be the starting point.
Whilst this is a positive result for Mr and Mrs McGarry, the result does not set a precedent so is not binding on the Tribunal when considering this issue again in the future. There is a wealth of caselaw around this subject which is inconsistent and does not provide a precedent. Which way the Tribunal rules on this question has become something of an unacceptable lottery for taxpayers and clarity on “completion” is urgently needed.
This case concerned Premspec and its sister companies, Dean and Swanson. Premspec applied to recover input VAT on supplies made to it by the other companies, but HMRC denied this claim on the grounds that the consideration for those supplies remained unpaid six months after the “relevant date” for the purposes of input VAT recovery. HMRC argued that the six-month time limit to make a claim for repayment ran from the dates on which supplies were made to Premspec. Premspec argued that, as the payments were not contractually due, the “relevant date” had not been reached.
Premspec was incorporated in 2012 to import electrical goods from China and sell them on to UK wholesalers. As it had a weak credit status when first established, the sister companies, Dean and Swanson, bought goods and services on behalf of Premspec and charged the cost to Premspec without a requirement for immediate payment. The invoices which were raised showed the VAT which was owed but did not expressly state any payment terms.
Relying on oral evidence, Premspec argued that the consideration for the supplies was payable no later than ten years from the commencement of Premspec’s business (July 2013). HMRC emphasised the lack of evidence to support this claim and argued that, in the absence of any evidence to the contrary, the position must be that the time of supply is the “relevant date” for these purposes.
The Tribunal considered that the consideration was payable by Premspec and turned to the question of when the payments were due. In the absence of any documentary evidence, it was considered that no such evidence existed as all three companies were under the common control of Mr Bosely, the director of all three, and it was not necessary to draw up payment terms between the sister companies.
It held in favour of Premspec and asserted that it is entitled to reclaim input VAT relating to supplies received from its sister companies for which it has not yet paid.
Constable Comment: When supplying lines of credit to related companies, even if it is not necessary internally, it is always advisable to document these arrangements. Equally important to the “relevant date” for the consideration falling due is the fact that the consideration is legitimately due. In this case, the Tribunal considered that it was genuinely due as the amounts owed to the sister companies had been entered in their accounts as receivable. However, there have been several instances where the Court and Tribunals have held that charges made by parent companies were never bona fide and should not give rise to input VAT recovery for the recipient as it never intended to pay for those supplies.
This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.