This VAT & Charities newsletter comments on the following:
- Compound interest claims
- Local Healthwatch campaign by HMRC
- Partial exemption – whether VAT incurred on the refurbishment of a tennis club is recoverable
- Direction for HMRC to pay taxpayer costs
- Cost sharing exemption
- Autumn Budget 2017
Compound interest claims
Many charities have lodged protective compound interest refund claims against HMRC stood behind the Littlewoods case. A number of charities submitted retrospective VAT refund claims which were outside of the current capping provisions (i.e. not limited to four years). These retrospective claims required submission to HMRC no later than 31 March 2009. Where claims were met these VAT repayments were often accompanied by simple interest payments.
The Supreme Court has decided unanimously that Littlewoods is not entitled to compound interest payments totalling £1.25bn. This contradicts the Court of Appeal’s earlier decision. Simple interest is calculated on the original sum of VAT repaid or refunded. Compound interest involves the addition of further interest to VAT refunded and simple interest paid. Compound interest is calculated on an ongoing basis.
The Supreme Court noted that, in accordance with the term “an adequate indemnity” in the Court of Justice of the European Union (CJEU) 2012 decision, the UK’s policy has been the charging of simple interest.
CVC comment: This may be a disappointing outcome for Littlewoods and other taxpayers (including charities) stood behind this lead case. It has been reported that, if HMRC had lost its case, the cost to HMRC could have been between £15bn – £20bn.
Healthwatch campaign by HMRC
Readers may recall the recent First Tier Tribunal 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 have been approached by HMRC questioning the VAT liability of their supplies. Local Healthwatch Organisations should consider the VAT liability of their activities in light of this decision and HMRC’s interest.
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 comments on decisions of the Tribunals and Courts. HMRC has not 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.
Partial exemption – whether VAT incurred on refurbishment of tennis club recoverable.
The Queen’s Club Limited makes exempt supplies of sporting services to its members and taxable supplies of food and drink in its bars and restaurants. The Club renovated its restaurant and bars and recovered VAT on the costs of renovation. HMRC argued that the VAT incurred on the renovation should be recovered using the Club’s partial exemption method. The Club believed that VAT incurred on renovation work related to its taxable supplies and could be recovered in full. Although members benefitted from the renovation, the Tribunal decided that there was not a direct link between the renovation costs and VAT exempt supplies. There was a direct link between the renovation costs and taxable supplies that the Club made. The appeal was allowed.
CVC comment: this case emphasises a fine line in determining whether input tax can be attributed solely to taxable supplies. The key test is to determine if a ‘direct and immediate link’ between an input (cost) and output (supply) exists. In this case the Tribunal found that expenditure incurred on a restaurant refurbishment did not have a direct link to the Club’s exempt supplies to its members but rather its taxable supplies of catering.
Direction for HMRC to pay taxpayer’s costs
HMRC raised VAT assessments in the sum of approximately £1.4million in February 2014. Sussex Cars Association (Sussex Cars) appealed this decision in July 2015 alongside an application to enter Alternative Dispute Resolution (ADR). ADR was ultimately unsuccessful. In November 2016 Sussex Cars submitted a claim for judicial review on the basis of legitimate expectation. HMRC withdrew its defence of the appeal on 14 December 2016. It appears that the reason for HMRC’s withdrawal was that recovering VAT from Sussex Cars was likely to be VAT neutral (Sussex Cars may be able to re-charge VAT to its customer on its supplies; its customers could then reclaim the VAT it incurred from HMRC).
The Tribunal found that HMRC could have withdrawn its appeal much earlier in the appeal process if it had sought legal advice earlier. The Tribunal commented that in a case of this size and complexity it was unreasonable for HMRC to have failed to take legal advice sooner in the appeals process. Therefore, costs were awarded to Sussex Cars.
CVC comment: the Tribunal also commented that the failure by HMRC to send officers to the ADR meeting who were able to engage in the technical subject matter of the case or vary the position of HMRC effectively meant that HMRC failed to engage in the ADR process. This is not reasonable behaviour.
- Cost sharing exemption
The CJEU recently released three judgments concerning the cost sharing exemption: Aviva (C-605/15), DNB Banka (C-326/15) and Federal Republic of Germany (C-616/15).
Aviva planned to create a cost sharing group whose members are insurance businesses. The CJEU found that members must carry on activities in the public interest. Therefore, insurance businesses cannot be included in a cost sharing group and are not entitled to benefit from the cost sharing exemption.
DNB Banka supplies financial services. The CJEU found that activities which are not in the public interest cannot benefit from the cost sharing exemption. Therefore, financial services businesses cannot form a cost sharing group and benefit from VAT exemption.
The Federal Republic of Germany restricts the cost sharing exemption to the health sector. This is an incorrect interpretation of the EU VAT legislation.
CVC comment: the cost sharing exemption has been used by financial and insurance businesses in some member states. These judgments confirm that this is not allowed. The cost sharing exemption is for persons with activities in the public interest (charities, for example).
- Autumn Budget 2017
The Chancellor has announced Wednesday 22 November 2017 as the date for his Autumn Budget. CVC will update readers on any VAT announcements in its CVC Budget VAT Focus.
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 firstname.lastname@example.org, email@example.com and firstname.lastname@example.org. 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.