Liability of colouring and dot-to-dot books
There is now a wide range of colouring and dot-to-dot books on the market. Many of these are specifically labelled as suitable for children and/or adults. Revenue and Customs Brief 17/16 announces HMRC policy in respect of the VAT treatment of these publications which is effective from 1 April 2017. This will be of interest to any business selling these products. HMRC has also updated its notice 701/10 to reflect these changes.
HMRC accept that colouring or dot-to-dot books are VAT zero-rated unless one of the following applies. The books are:
- marked as suitable for adults or grown-ups
- held out for sale in retail shops together with other adult books that are unsuitable for children or are not appropriately marked as suitable for children when for sale on a website
- contain images reflecting profanity, pornography, violence and illegal acts
If the book meets any of the three conditions above, it will be a standard rate supply.
HMRC has stated that it will consider claims for overpayment of VAT in the following circumstances:
- the business has declared VAT on colouring books suitable for children under the age of 18 years old
- HMRC has raised an assessment of tax for colouring books suitable for children under the age of 18 years old.
First Tier Tribunal
Whether a Jersey company had a fixed establishment in the UK
This appeal by Multimedia Computing Limited (MCL) and Deed Poll Services Limited (DPSL) concerned the issue of whether DPSL had a fixed establishment in the UK. DPSL (a Jersey company) made supplies of deed poll services to customers in the UK. DPSL outsourced much of the work to MCL (a UK company). DPSL treated its supplies to UK customers as outside the scope of UK VAT (B2C supplies taxable where the supplier belongs). MCL treated its supplies to DPSL as outside the scope of UK VAT (B2B supplies taxable where the customer belongs). HMRC disagreed with this analysis of the arrangements. HMRC was of the view that DPSL had a fixed establishment in the UK with the consequence it should have been VAT registered in the UK. DPSL should charge UK VAT to its customers. MCL should charge VAT on its supplies to DPSL.
The Tribunal found that DPSL could not have made any supplies without the support of MCL. All of the resources necessary to make supplies of deed poll services were in the UK. The Tribunal judged, using the criteria identified by the Court in the DFDS case, that at all material times DPSL had a fixed establishment in the UK. The human and technical resources necessary for the making and receiving of supplies were in the UK. The appeals were dismissed.
Constable VAT comment: the place of supply is important as it determines where the supply is subject to VAT. The place of supply rules can be complex. The basic rules are:
- B2B (business to business) taxable where the customer belongs.
- B2C (business to consumer) taxable where the supplier belongs.
However, these rules are subject to several exceptions. We would recommend taking professional advice in cases where the position is not clear, particularly if large sums are involved.
This case serves as a reminder that third parties can create a fixed establishment. Particularly if a business is reliant on the third party’s human and/or technical resources to either make or receive a supply.
Whether spa pools were correctly zero-rated as ‘appliances designed solely for use by a disabled person’
Wearside Civil Engineering Limited (WCEL) appealed against a VAT assessment raised by HMRC on the basis that certain sales (hydrotherapy pools) made by WCEL which it had zero-rated should have been standard rated. HMRC argued that WCEL was supplying a pool (a container for water) that could be enjoyed by anyone, whether disabled or not.
The Tribunal found that WCEL worked with architects to design a hydrotherapy suite for each disabled customer. The Tribunal was of the view that the supplies were of more than just a mere container of water. The supplies are pools together with other features. It is a feature of all of the hydrotherapy pools that the ambient temperature must be maintained at 32C and have non-slip floor tiles. A hoist was also provided in several cases. The Tribunal said that an examination of the features that are supplied with the pool is required to determine if it amounts to a supply of appliances designed solely for use by a disabled person.
The Tribunal concluded that there is a single supply of a complete hydrotherapy suite. The separate features of the pools cannot be properly regarded as individual separate supplies. The features are an intrinsic part of what has been designed as a whole for each individual disabled customer to meet that particular customer’s needs. The hydrotherapy suites are ‘equipment designed solely for use by a disabled person’ and therefore zero-rated. The appeal was allowed.
Constable comment: HMRC’s VAT Notice 701/7 provides a list of features which may indicate whether a hydrotherapy pool is designed solely for us by a disabled person. This case clarifies that an examination is required to find if the features together with the pool amount to a supply designed solely for a disabled person. It is not necessary for ‘all or most’ of the features listed by HMRC to be present in order to qualify for zero-rating. Whether the feature is required or not dependent on the nature of the disability is an important consideration. The supplier must keep evidence to support zero-rating, such as a declaration by the customer that they are entitled to the VAT relief.