Revenue & Customs Brief 14 (2020)
HMRC has released this new Brief which discusses changes to the methods used by opticians and sellers of hearing aids to account for VAT on their supplies. The changes described take place on 1 October 2020. Businesses which are affected need to familiarise themselves promptly.
Revenue & Customs Brief 11 (2020)
HMRC has released this brief which explains how changes to existing leases are treated for VAT and Stamp Duty Land Tax (SDLT) purposes. As a result of the current COVID-19 pandemic, many tenants are suffering a loss of income and want to vary the terms of their lease with their landlord. This brief has guidance on the appropriate VAT and SDLT treatment of the most common lease variations.
Help & Support for VAT
HMRC will hold a live webinar about how to apply the domestic reverse charge, registration for this webinar is now open. The domestic reverse charge for construction services comes into effect on 1 March 2021. Those businesses operating in the construction sector may want to consider attending this webinar. Those unfamiliar with the domestic reverse charge which will come into effect may wish to consider reading our coverage of the topic which can be found here.
Transfers of Going Concerns: Reallocation of VAT Registration Number
HMRC has updated its Guidance to include an extra condition that the transferor in such a situation should have no VAT debt.
CONSTABLE VAT NEWS
Following The Chancellor’s recent announcement, we have released our coverage of the VAT related measures. These include the extension to the temporary reduced rate for hospitality and tourism and businesses being given extra time to pay any VAT debt which has been deferred during the Coronavirus outbreak. Read in full here.
We have received enquiries from many businesses asking about how the temporary reduced rate of VAT for certain supplies of hospitality, hotels and holiday accommodation applies to their operations. One of the most common areas of confusion is in relation to wedding packages. Readers may wish to see our coverage of how the temporary reduced rate of VAT interacts with wedding packages here.
Following HMRC’s announcement in R&C Brief 13 (2020) that its policy regarding early termination fees has changed, to now regard these fees as taxable in line with the main contract, we have drafted the following piece which aims to assist businesses in determining the key points to consider and whether they need to take any action. Any organisations which is concerned that this policy change may affect it should contact Constable VAT. Read in full here.
1. Capital Goods Scheme Adjustments
This case concerned the Capital Goods Scheme (CGS) as it applies to immovable property. The request to the CJEU has been made in Dutch proceedings between Stichting Schoonzicht (SS) and the Secretary of State for Finance concerning single step CGS adjustments. Such adjustments must be made where input VAT has been recovered in full in relation to a property the first use of which is VAT exempt.
SS constructed a block of flats comprising seven residential apartments. At the time of construction, SS intended for the whole development to be used to generate taxable supplies and recovered the input VAT associated with the build in full in 2013. From 1 August 2014, SS made VAT exempt leases of four out of the seven apartments. Owing to the VAT exempt first use of these apartments, SS was required to adjust its input VAT deduction and to pay, in a single step, the entire portion of that tax attributable to those four apartments, amounting to slightly less that €80,000.
SS argued that the Dutch legal provision requiring such an adjustment was contrary to the Principal VAT Directive (PVD). The PVD states that input VAT attributable to immovable property should be recovered in line with intention and is then to be adjusted over a period of no fewer than five years. Therefore, the question which was referred to the CJEU was whether the PVD precludes national CGS adjustment regimes which require a single step adjustment, where the first use of the property in question means that the initial deduction which was made is no longer accurate.
The Court considered the various provisions of the PVD which create the CGS and concluded that the PVD states that a Member State may provide that the adjustment period for the CGS begins with the first use of the capital goods in question, and the period must be no fewer than five years up to a maximum of twenty years. It commented that the two types of adjustment were distinguishable – the PVD requires Member States to adjust input VAT recovery based on changes in use once the terms of the CGS “bite” but it is up to Member States to implement provisions which deal with changes of intention prior to first use of the capital goods.
The PVD states that Member States must implement their own rules to govern the scheme. The Court concluded that requiring a single step adjustment where the first use of the capital goods differed from the intent on which a deduction was made is within the discretion afforded to Member States by the PVD.
Constable Comment: Put simplistically, this case confirms that Member States are permitted to require that the adjustment period for the Capital Goods Scheme only begins after the first use of the capital goods in question. A business cannot construct a property with an intention to use it for taxable purposes and recover all the VAT incurred only to make VAT exempt leases of the property and then be given up to twenty years to pay the VAT back. This would create an unfair advantage, essentially giving property developers the option to take up interest free VAT credit from the State.
First Tier Tribunal
2. Roof Insulation or Something More?
This appeal concerned supplies of insulated roof panels being made by Greenspace Ltd which it treated as reduced rated for VAT. HMRC disagreed with this analysis, believing that the supplies were standard rated. Therefore, HMRC assessed Greenspace for £2,581,092 of VAT relating to the periods from 12/17 – 12/19. Greenspace appeal against that assessment.
UK VAT law affords a reduced rate of VAT (5%) to the installation of energy saving materials. The explanatory notes to Schedule 7A, VATA explain that this includes insulation for walls, floors, ceilings, roofs and lofts. Greenspace believed that it was supplying roof insulation and so charged the reduced rate of VAT to its customers.
HMRC disagreed with this technical analysis. HMRC suggested that Greenspace was supplying more than insulation as it was selling roof panels which, whilst made to improve insulation, represented more than a supply of merely energy saving materials and amounted to the supply of a new roof. The supply of a new roof on an existing building does not benefit from the reduced rate of VAT.
In considering the dispute, the Tribunal turned to previous case law which has considered this area such as Pinevale which considered the supply of energy efficient roof panels. That case concluded that supplies of such panels are standard rated as they were used to form the roof itself rather than to insulate an existing roof. Arguments about the aim of the customer in fitting the panels were not taken into account as it is the underlying supply, and not the intent of the consumer, which must be assessed for VAT purposes in a case such as this.
Greenspace sought to differentiate this case from its own, claiming that the panels in Pinevale were not comparable as they did not have the same extensive insulating properties as Greenspace’s. It suggested that the primary purpose of a Pinevale style panel was to cover the roof, whereas the enhanced properties of a Greenspace panel meant that the primary purpose of fitting one would be to gain the insulative benefit.
The Tribunal rejected this argument, noting that, in form, what is supplied by Greenspace is a form of roof covering and not merely insulation for an existing roof. In order to benefit from the reduced rate, suppliers must supply insulation to existing roofs and not essentially replace the roof with new panels, regardless as to how insulative the new panels may be. The appeal was dismissed and the VAT assessments are upheld.
Constable Comment: This case serves as a reminder of the principle that VAT exemptions and reduced rating provisions must always be interpreted strictly. Greenspace sought to distinguish a “strict” interpretation from a “restrictive” interpretation. This argument was perhaps unlikely to be successful as it was not providing insulation for roofs, it was supplying insulated roof panels. The two products are distinct from each other and would be in the eyes of a typical consumer, so it does not seem restrictive to regard the two as different for VAT classification purposes. Any organisation which is applying a VAT exemption or reduction needs to ensure that it is entitled to do so in order to avoid a situation such as that in this case where Greenspace owe over £2million in VAT assessments.
This article is intended to give general guidance only and cannot be relied on in respect of any individual business. The facts may change as more information on the application of the reduced rate in particular circumstances is issued by HMRC. If you require advice specific to your business please contact Constable VAT or your usual adviser.