CVC VAT Focus 17 November 2017

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Autumn Budget 2017
The Chancellor will be presenting his Autumn Budget on Wednesday 22 November 2017. CVC will update readers on any VAT announcements in its CVC Budget VAT Focus.

Fulfilment House Due Diligence Scheme
HMRC has issued guidance on the Fulfilment House Due Diligence Scheme. If you store goods in the UK for sellers established outside the EU, you may need to apply for the Scheme.

EU VAT Refunds: service availability and issues
The latest updates on the availability and any issues affecting the EU VAT Refunds online service have been published.

VAT Notice 700/62: self billing
This Notice has been updated and guidance added to paragraphs 3.1, to clarify the requirements for self-billing agreements and 6.4 to confirm the self-billee is responsible for accounting for output tax.


Pension Fund update
In CVC’s latest blog Helen Carey considers the latest updates to VAT and pension schemes.

Office of Tax Simplification – Proposals for simplifying VAT
CVC has also commented on the Office of Tax Simplification (OTS) review of VAT and its proposals for simplifying VAT.


Upper Tribunal

1. Distance learning courses 

We have previously reported in the case of Metropolitan International Schools Limited, which found that supplies of distance learning services  to customers should be treated as a single zero-rated supply of books (“the principal issue”).

Following an agreement between HMRC and the School in 1999,  the supplies made by the School to its customers were treated as two separate supplies: one of books (zero-rated); and one of educational services (standard rated). In 2009, following a repayment claim relating to 2006 HMRC withdrew its agreement on the grounds that supplies made by the School should be treated as a single supply of standard rated services. HMRC initially sought to withdraw the agreement retrospectively, although HMRC later conceded that point.

During the FTT hearing the FTT also set out views on two issues that would be relevant if the School’s appeal had failed on the principal issue. Firstly, that the School had a legitimate expectation in respect of the withdrawn agreement with HMRC and secondly, the School was entitled to repayment supplement in relation to payments of VAT for periods prior to 2009 that had been withheld (following HMRC’s initial decision that the agreed method should be withdrawn retrospectively.

HMRC appealed against the FTT decision on the principal issue. If HMRC was successful in this appeal, the School cross appealed against the two later issues. 

The UT found that the provision of manuals, as part of a distance learning package, was a single standard-rated supply and dismissed the School’s cross appeals.

CVC comment: It is important to ensure agreements in place with HMRC are reviewed and refreshed where necessary. 

First Tier Tribunal

2. Deduction of VAT as input tax

MG & ND Storer were in business as partnership operating a seafood takeaway, Gee White Kiosk. The building owned by Mr MG Storer was used as business premises not only for the Kiosk but also Quay Desserts, operated by Mr Storer’s son, and Quay Hole, operated by Mr Storer’s partner.

The building was completely demolished and rebuilt. The rebuilt building again housed all three businesses. Following a repayment verification query, HMRC raised assessments for VAT claimed in relation to refurbishment costs and on the purchase of alcohol. HMRC contended that the VAT was not input tax proper to the Partnership on the basis that the true recipient of the supplies of refurbishment was Mr Storer in his capacity as owner and the true recipient of the supplies of alcohol was Quay Hole.

The Tribunal concluded that input tax incurred on supplies of alcohol to the Partnership was recoverable (subject to the corresponding output tax on supplies to Quay Hole) and with regards to the refurbishment costs, only one third of the input tax is deductible.

CVC comment: The tribunal noted that deduction of input tax should relieve a taxable person entirely of the burden of VAT paid in the course of making supplies which are themselves subject to VAT. It is from this fundamental premise that the Tribunal viewed this case. Businesses should ensure that VAT incurred satisfies all of the conditions to be claimed as input tax.

3. Whether inaccuracy was ‘deliberate’

Mehaffey Ltd received a penalty in the sum of £156,162.72 in respect of VAT returns for the periods 12/09 to 09/13. Mehaffey Ltd sells furniture and the penalty related to sales of goods to customers in another EU member state which had been incorrectly treated as zero-rated.

HMRC contended that the inaccuracies were as a result of deliberate behaviour and Mehaffey knew that it did not have (nor could obtain) valid evidence to support zero-rating. The Tribunal considered a number of submissions from Mehaffey but concluded on a balance of probabilities that the inaccuracy was deliberate.

CVC comment: Whilst the onus is on HMRC to establish a penalty has been applied correctly, the Tribunal emphasised that as a general principle it is the responsibility of every trader to keep appropriate records to evidence its tax position.  

4. Disapplication of the option to tax

PGPH Limited was formed to carry on a property business in the healthcare sector. It acquired a property for 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. As a result, HMRC denied input 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 implications of transactions from the outset.

5. DCM (Optical Holdings) Limited

DCM (Optical Holdings) Limited (“DCM”) is an optical business, specialising in the sale of dispensed spectacles and the provision of refractive eye surgery, operating from 151 stores in four countries.

A  tribunal hearing was arranged in respect of six appeals by DCM, all arising from output tax related issues connected to the operation by DCM of its stores. The appeals have a long  history and have been subject to extensive case management. Although the six appeals were heard together they were not consolidated.

The Tribunal dismissed all six appeals; however, the full case is lengthy covering an array of output tax issues. The decision makes for an interesting read for businesses operating in this sector.