Tag Archives: apportionment

Constable VAT Focus 10 January 2019

HMRC NEWS

 

VAT MOSS Exchange Rates

December 2018’s VAT MOSS Exchange Rates have been published

VAT Payment Deadline Calculator

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Flat Rate Scheme for Small Businesses

Find out how to use the Flat Rate Scheme, who can us it and how to apply to join the scheme.

Importing Goods for Disabled People Free of Duty and VAT

This notice explains how to import goods specially designed for disabled people free of duty and VAT.

 

CASE REVIEW

 

CJEU

 

1. Special Scheme for Travel Agents

This case concerned the supply of holiday residences rented by Alpenchalets Resorts GmbH (Alpenchalets) and subsequently let in its own name to private customers as holiday rentals. Alongside the supply of holiday rental property, Alpenchalets also provided cleaning services and, in some cases, a laundry and “bread roll” service.

Alpenchalets calculated its VAT liability on the basis of profit margin as permitted by the special scheme for travel agents. In 2013 Alpenchaltes wrote to the German tax authorities requesting that it be allowed to apply the reduced rate of VAT (7%). This permission was refused so Alpenchalets brought proceedings before the German Courts which referred the issue to the CJEU for a ruling on whether the supply of a service which is essentially holiday accommodation is subject to the special margin scheme for travel agents and, if so, if that supply could also be liable to the reduced rate of German VAT.

The first question asked whether the activity of supplying holiday accommodation, alongside ancillary services such as cleaning, could still benefit from the special margin scheme where the agent (Alpenchalets) provided its own services as well as the accommodation bought in from third parties. The Court considered that as the mere supply of accommodation by an agent is covered by the scheme, the ancillary services do not have a bearing on the scheme’s applicability to the supply.

With regard to the second question, The Court found that single services provided by travel agents are not described within the legislation allowing certain supplies the reduced rate of VAT. The supplies made by Alpenchalets were subject to the standard rate of VAT.

Constable Comment:  This case confirms that under EU law, the supply of holiday accommodation on its own is capable of being caught by the Tour Operators Margin Scheme; it is not necessary for other supplies alongside the accommodation. The Tour Operators Margin Scheme is simple in theory but can often cause problems when it comes to practical application. If you are, or think you may be entitled to be, operating a margin scheme then it is prudent to seek professional advice to ensure compliance.

 

2. The VAT Liability of Royalties

This case concerned the VAT liability of royalties payable to an author of an original work of art on the basis of the resale right.

The European Commission contended that royalty payments should not be liable to VAT as they are not payment in exchange for goods or services. The State of Austria sought to argue that such payments should be liable to VAT on the basis that just because the author of a work of art does not take part in the agreement between the buyer and seller of the art, does not preclude taxation of that payment.

In essence, Austria argued that the payment was in exchange for goods or services; the author has created a work of art and has profited from its supply thus establishing a direct link between service supplied and the value given in return.

The Court considered that a supply of goods or services is made for consideration only if there is a legal relationship between the supplier and the customer, in the context of which there is reciprocal performance; the remuneration received by the supplier constituting the value actually given in return for the goods or services supplied. Whilst The State of Austria contended that the royalty payable constituted consideration for an exchange of services giving rise to a legal relationship.

In concluding, the Court ruled that a legal relationship arises only between the buyer and seller of a piece of art, if the sale is a resale then the only legal relationship created is between the supplier and the customer; the artist is not a party to this relationship. Therefore there should be no VAT payable on royalty sums received.

Constable Comment: Giving consideration to some of the fundamentals of the VAT system and contract law was helpful in this case. This case is useful as a demonstration of how the European Commission can seek to enforce a uniform interpretation of the VAT law.

 

Upper Tribunal

 

3. Exemption for Management of Special Investment Funds

This appeal by Blackrock concerned the VAT exemption for the supply of management services which relate to special investment funds (SIFs) and whether a single supply of management services to Blackrock could be apportioned between SIF and non-SIF to reflect that exemption.

The Tribunal gave consideration to whether the supply to the SIFs could be seen as one of management services, asserting that it would only be possible to consider apportionment if there was anything to be apportioned: the European exemption applies specifically to management of SIFs, not merely a supply of services to a SIF. Relying on a rich tapestry of case law, the Tribunal concluded that the services supplied to Blackrock were management services and were therefore capable of exemption.

Having decided that the supplies were capable of benefiting from the exemption, the Tribunal turned to the question of whether the single supply to Blackrock was capable of being apportioned in line with its use by Blackrock as relating to SIFs and non-SIFs; non-SIF management being a taxable supply. Blackrock sought to argue that, in order to give effect to the exemption from which the supplies benefited it was necessary to allow apportionment of the supply. This argument had been rejected by the FTT on the ground that if apportionment were to be allowed then a precedent could be set allowing apportionment in relation to other composite supplies where the ancillary element is exempt.

After a length consideration of case law and relevant EU legislation, The Tribunal concluded that it is equally arguable that apportionment of the services should be allowed and that it should not, no conclusion was reached on this topic. The Tribunal stayed the appeal in order to seek guidance from the CJEU.

Constable Comment: This case gave a long and considered analysis of what can and cannot be regarded as management services for the purpose of the exemption in question. Whilst a conclusion was not reached around the apportionment issue, the clarification offered by the considerations given in regard to the first question is no doubt of use to any business supplying management services and seeking to benefit from the exemption. We await a CJEU decision on whether or not apportionment of these supplies is acceptable.

CVC VAT Focus 26 July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

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Revenue and Customs Brief 7 (2018): VAT – motor dealer deposit contributions

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Draft legislation: Amendment of the VAT (Input Tax) (Specified Supplies) Order 1999

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Registration scheme for racehorse owners (VAT Notice 700/67)

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Help and support for VAT

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CASE REVIEW

CJEU

1.Acquisition and holding of shares: An economic activity?

This French referral concerned the letting of a building by a holding company to a subsidiary and whether this would constitute involvement in the management of that subsidiary, giving rise to a right to deduct input VAT incurred on the acquisitions of holdings in the subsidiary. If found to constitute management, the acquisition and holding of shares in the subsidiary would be an economic activity.

Marle Participations (Marle) is the holding company of the Marle Group. It let a building to some of the subsidiaries whose shareholdings it also managed. It conducted a restructuring operation which led to purchases and sales of securities, it sought to recover input VAT incurred in the course of the restructure. During a VAT audit, the tax authorities issued assessments to recover VAT claimed. This was on the basis that the expenditure by Marle was capital in nature and so a right to deduct VAT incurred did not arise. Marle appealed this decision.

The referral from the French court asks whether the VAT Directive must be interpreted as meaning that the letting of a building by a holding company to its subsidiary constitutes involvement in the management of that subsidiary, which must be considered an economic activity.

The CJEU considered case law and the VAT Directive. It was held that the involvement of a holding company in the management of subsidiaries constituted an economic activity where the holding company carries out a taxable transaction. The Court decided that the letting of a building to the subsidiary did constitute an economic activity so there was a right to deduct VAT incurred on expenses relating to the restructuring giving rise to the acquisition of shares in the subsidiary.

However, it was also held that where the holding company is only involved in the management of some subsidiaries but not all, then a fair apportionment method must be used to calculate the amount of input VAT to be recovered.

CVC Comment: This decision is relevant to the recovery of VAT incurred by holding companies. If holding companies make taxable supplies (in this case taxable lettings of buildings to subsidiaries) then, subject to the usual rules, input VAT recovery rights are likely to arise. Restructuring a company and transferring securities can lead to very complex supplies and processes which can be hard to classify. What can, on the face of it, take place as an accounting entry can give rise to a real-life tax liability. Before taking on any restructuring projects professional advice should be sought to provide certainty of compliance.


 

2. Right to deduct: Transactions did not take place

The Court heard two requests for a preliminary ruling concerning the interpretation of the EU law concerning the right to deduct input tax.

The two companies, SGI and Veleriane, are established and operate in France purchasing equipment intended to be leased to operators in France. Following a VAT audit, the tax authorities challenged the right to deduct VAT on various purchases as the invoices did not relate to any particular delivery and issued assessments of VAT to this effect. Both companies claim to have acted in good faith with regard to these transactions but the referring court highlights that the companies could not have been unaware of the fictitious nature of some of the transactions and the associated overcharging.

SGI claims that, in the absence of any serious indication of fraud, it is not obliged to prove to the authorities that the transactions took place and Valeriane claim the referring court did not consider whether the tax authorities had adduced the necessary proof that it knew or ought to have known that the transactions were connected with VAT fraud.

The domestic Court referred the question of whether the EU law must be interpreted as meaning that, in order to deny a taxable person in receipt of an invoice the right to deduct VAT appearing on that invoice, it is sufficient that the authorities establish that the transactions covered by that invoice have not actually been carried out or whether those authorities must also establish that taxable person’s lack of good faith.

Giving consideration to the principles of legal certainty and fiscal neutrality, the Court held that under the EU law it is sufficient for the tax authorities to establish that the transactions have not taken place and there is no requirement to show a lack of good faith when denying the right to recover input VAT on transactions which have not taken place.

CVC Comment: The right to recover input VAT arises when VAT becomes properly chargeable. If no supply can be evidenced to have been made in relation to the invoice giving rise to a claim to deduct VAT then the VAT incurred is not deductible. It is important to be aware of supply chains and to ensure that each transaction actually takes place before submitting a VAT reclaim to avoid unexpected tax assessments.


 

Supreme Court

3. Relying on claims made by a former member of a group VAT registration

This appeal by HMRC concerns the validity and timing of claims for the repayment of incorrectly paid VAT by Carlton Clubs Limited and whether those claims could be relied on by the representative member of a group VAT registration.

HMRC had refused a number of claims for repayment of incorrectly paid VAT made on behalf of Taylor Clark Limited (TCL) by a subsidiary. TCL was the representative member of a VAT group registration which contained Carlton Clubs Ltd (CCL) by whom the claims were made as it carried on the activity of Bingo to which the claims related. TCL contended that these claims should be recoverable by itself as the representative member of the VAT group, highlighting that CCL was no longer in the group.

The FTT held that the subsidiary would have been entitled to the repayment of VAT and TCL could not rely on the claims as they were not made by TCL. The UT found that whilst TCL may have been able to reclaim VAT it did not make a claim for repayment within the time limits allowed, therefore there could be no repayment. The Court of Session, however, ruled in favour of TCL, stating that a claim may be made on behalf of the representative member of a VAT group by a former member and subsidiary.

The Supreme Court has ruled that the Court of Session erred in finding this to be the case. It was held that HMRC’s liability for overpaid output tax is owed to the person who accounted for the VAT (CCL). Unless CCL was acting as an agent to TCL at the time the claims were submitted, the claims cannot be relied upon by TCL now. After extensive consideration of the relationship between TCL and CCL, the conclusion was that CCL was not acting in the capacity of an agent by submitting the claims. The Supreme Court held in favour of HMRC and allowed their appeal.

CVC Comment: This case serves as a reminder of the importance of considering who is entitled to benefit from claims for overpaid VAT in the context of a group VAT registration. A consequence of VAT grouping is that any business activity carried out by a group member is treated as if it is done by the representative member.


 

UTT

4. Direct and immediate link with main economic activity

This appeal concerns whether a company established outside the EU is entitled to recover input VAT on the cost of tools leased to an EU company for no consideration. JDI is incorporated in the Cayman Islands and is part of a group of companies (The Baker Hughes Group). The FTT had previously agreed with HMRC that there was not a sufficient link between the acquisition of the tools by JDI and an economic activity to allow repayment of the VAT incurred.

JDI acquired the tools as part of a company restructure along with the intellectual property rights for the tools, VAT was charged on this supply which JDI sought to recover. The intellectual property gave JDI the right to manufacture further tools and spare parts. Rather than producing the tools itself, it gave out contracts to manufacturing companies to fabricate them. JDI paid the manufacturing companies for this but made no charge to the Baker Hughes Group in the Netherlands when leasing the tools to them. It contended that its main economic activity is the supply of spare parts to companies using the tools and therefore that there is a direct and immediate link between the acquisition of the tools and its main economic activity.

The Upper Tribunal agreed with the FTT and HMRC that the required direct and immediate link had not been established. There was no charge for the leasing of the tools. They were not connected with a taxable supply, VAT incurred was irrecoverable. It was also confirmed that JDI was not, in this capacity, acting as a taxable person.

CVC Comment: This case serves as a reminder of the importance of considering all aspects of arrangements entered into with connected parties. VAT incurred is recoverable to the extent that it relates to taxable business supplies. In this case as there is no charge for the lease of the tools there was no connection with the original purchase of those tools to a taxable supply so input VAT was wholly irrecoverable.


5. Place of supply rules

This appeal concerns the place of supply for the supply made by IC Wholesale Limited (ICW), a UK company, to customers in the Republic of Ireland of cars acquired in Cyprus and Malta. ICW  contended that as it had invoiced the customers in Ireland before the cars left Malta and Cyprus, despite the fact that the cars entered the UK, the supplies took place outside of the UK and therefore should not bear UK VAT.

The FTT found against ICW, concluding that the supplies had taken place in the UK as the cars physically arrived in the UK before being sold. It was also noted that ICW held insufficient evidence to demonstrate that the cars had been removed from the UK.

The UT agreed with the FTT, asserting that ICW used its UK VAT registration number when ordering the cars and the cars physically entered the UK. The suppliers were not informed that the vehicles would be re-sold and, in the absence of sufficient evidence of export, ICW must be treated as acquiring the goods in the UK and therefore the appeal must be dismissed.

CVC Comment: When exporting goods it is essential to retain evidence in order to support zero-rating of the supply. The place of supply rules are also important and should be borne in mind for each transaction involving the movement of goods into and out of the UK. For advice with any place of supply issues please contact CVC as there could be significant financial implications if VAT accounting errors are made.


6. Business/non-business apportionment

The Tribunal considered a claim for repayment of VAT relating to services supplied by NHS Lothian Health Board (LHB) to non-NHS, private customers such as local authorities. It was an agreed fact that VAT had been incurred and paid but not recovered by LHB in the period from 1974-1997.

The FTT originally rejected the claim for repayment on the basis that a business/non-business apportionment had not been calculated to an adequate extent. The FTT gave some consideration to partial exemption and direct attribution. This appeal focussed on whether this was incorrect. The appellants asserted that it was an error to consider direct attribution and partial exemption when all that was required was a business/non-business apportionment.

The UT found that it would have been an error of law for the FTT to rely on partial exemption principles when apportioning business/non-business activities for the purpose of input tax recovery. However, whilst the FTT did discuss partial exemption, the UT was content that the FTT had not relied on it and that they instead relied on the reasonableness of the proposed apportionment.

It was held that the FTT was entitled to find the proposed business/non-business apportionment unreasonable and its decision to reject the claim for input VAT recovery from 1974-1997 stands.

CVC Comment: In this case LHB sought to retrospectively extrapolate a partial exemption recovery percentage from a specific period from 2006 to 1997. Before making a retrospective claim for input VAT recovery it is important to be clear on the appropriate methodology. In cases where the business is not fully taxable an apportionment is required to reflect non-business or VAT exempt business activities. If you think your business or charity may be entitled to a retrospective repayment of VAT incurred on costs that cannot be directly attributed to taxable supplies please do not hesitate to contact CVC to discuss the best strategy for your individual case. Please remember that, if VAT registered, retrospective claims are capped at four years.