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HMRC has reviewed the guidance in this area, this brief should be read by mail order retailers and anyone supplying goods delivered on approval.
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OTHER VAT NEWS
We understand that HMRC has begun to contact firms directly regarding the VAT treatment of electronic searches following the Brabners LLP VAT case summarised on our website. The Law Society has issued guidance which can be viewed here.
The CJEU has responded to the requests from German courts to rule on whether the deduction of input tax on a payment made on account is blocked where the ultimate supply is not made. In the two combined cases in question (Kroloβ and Wirtl), both companies ordered combined heat and power stations from G-GmbH (GA) and agreed to make payments on account to cover the cost, including the VAT element of the purchase. Ultimately GA became insolvent and delivery of the units never took place.
Both Kroloβ and Wirtl sought a deduction of input VAT incurred on these payments on account only to have the claims rejected. After successfully appealing these decisions, the German court asks whether the requirement as to the certainty that a supply will take place, as a condition of the deduction of input tax on a payment on account, is to be determined purely objectively or from the point of view of the person making the payment. It was also asked if the competent tax office must refund VAT to that person where it cannot be recovered from the recipient of that payment.
The CJEU concluded that a potential buyer may not be refused the right to deduct VAT in situations such as those in the main proceedings where all the relevant information concerning the future supply was known or should have been known by the buyer and the supply appeared to be certain.
CVC Comment: It is important to make sure before agreeing to a purchase that customers are aware of the position of the supplier and the likelihood of their insolvency or failure to carry out the order. The Court stressed that a potential buyer may not be refused the right to deduct VAT relating to a payment on account only when, at the time the payment was made, all the relevant information concerning the future supply could be regarded as known by the buyer and the future supply appears to be certain.
This case concerned the classification for VAT purposes of a product offered by Wetheralds Construction Limited (Wetheralds) which is designed for conservatory insulation. The First Tier Tribunal (FTT) agreed with Wetheralds on its assertion that the supply being made was a single supply of the installation of energy saving materials and therefore attracted the reduced rate of 5%. HMRC disputed this decision, claiming that the installation amounted to more than energy saving materials and should be regarded as a supply of a new roof as new tiles were put down, meaning the supply was standard rated as more than merely insulating material was supplied.
The case before the Upper Tribunal (UT) in this instance is whether the FTT erred in its application of relevant case law and principles.
The UT concluded that the FTT had failed to consider, in enough detail, the extent to which the supply was a roof rather than an addition of energy saving materials to the pre-existing roof. In this vein it was also considered how customers interpreted the supply being made to them, the UT deciding that the supply would be taken by consumers to be an energy efficient replacement roof rather than insulation. A replacement roof is not an energy saving material, it is a roof and thus the supply should have been standard rated. It is stated that what should have been considered by the FTT is whether or not the supply was confined to a supply of energy saving materials, not whether it included a supply of this nature.
The UT agreed with HMRC and set aside the decision of the FTT, allowing HMRC’s appeal.
CVC Comment: When making supplies which could benefit from the reduced or zero rates of VAT, it is essential to know how to categorise the goods or services in order to prevent mistakes. If incorrectly applied to supplies, the reduced rate or zero-rate could leave businesses owing HMRC substantial amounts in respect of retrospective sales. HMRC may also apply penalties in respect of VAT accounting errors. HMRC can charge a 30% penalty of the VAT due for a failure to take reasonable care.
The Upper Tribunal heard an appeal by Redwood Birkhill Limited (Redwood) which owns and manages public houses and hotels. In the course of this business it negotiates discounts with brewers by combining the buying force of Redwood and a number of publicans.
Paid back to Redwood as a rebate, the discounts were passed on to each publican in proportion in accordance with their agreement with Redwood. Redwood retained a proportion of the rebates paid over to it, amounts of which neither the publicans nor the brewers were aware. The issue before the UT in this scenario was whether the amounts retained by Redwood were consideration for supplies made to the publicans. HMRC had contended that taxable supplies were taking place, a position with which the FTT agreed. Redwood sought to argue that no supply was made and that the economic reality of the situation was that the publicans agreed to transfer their right to claim a discount to Redwood in exchange for the payments made to them by Redwood.
The UT disagreed with this, stating that the economic and commercial reality of the circumstances dictated that the supply should be characterised as a supply of services consisting of negotiating and administrating an arrangement with the Brewers. The purchases made by Publicans were aggregated with the effect of achieving higher discounts.
CVC Comment: When carrying on any business activity it is important to ensure that you are aware of any activity carried on which may be constituted as a taxable supply. Arranging rebates or discounts and acting as a ‘middle-man’ receiving commissions can be particularly complicated. Any businesses using this style of model should be aware of the potential VAT implications.