HMRC NEWS
VAT grouping eligibility criteria changes
This latest measure will allow certain non-corporate bodies to join VAT groups. For example a charitable trust which is VAT registered as a partnership may now be able to form a group VAT registration with its wholly owned trading subsidiary.
Draft legislation about the implementation of an EU Directive of the VAT treatment of vouchers.
This note explains how to receive payments by Bankers Automated Clearing System (BACS) and applications to the Fulfilment House Due Diligence Scheme.
Revenue and Customs Brief 4 (2018)
This brief sets out HMRC’s policy on the changes to the time limits for VAT refund schemes if you are a local authority, police or similar body.
HMRC and online marketplaces agreement to promote VAT compliance
Find out more about the agreement and how it will help build collaborative relationships. The list of signatories has been updated.
OTHER NEWS
CVC advises many charities. Our clients include a number who offer support to vulnerable people and those with disabilities. The recent decision in Sandpiper Car Hire Limited saw the Tribunal criticise HMRC’s approach to dealing with disabled people.
This article by one of our partners, Stewart Henry, gives an engaging analysis of the Court’s criticisms of HMRC and how it struggles to handle some of the challenges presented when dealing with more vulnerable members of the public.
CASE REVIEW
CJEU
1. Transfer of immovable property from a Municipality to the Treasury
This referral from the Polish Court asked whether the transfer of ownership of immovable property owned by the Municipality for compensation constitutes a taxable transaction for VAT purposes where the property continues to be owned by the Municipality as a representative of The Treasury.
In this case the State acquired, by compulsory purchase, immoveable property in order to develop a new national road from the Municipality. Concluding that the Municipality is a taxable person, the Court went on to outline three criteria necessary for a taxable supply to have arisen; a transfer of a right of ownership, made in the name of or by order by a public authority and there must have been payment.
On analysis of the circumstances in the case, it was concluded that there was a transfer of legal title of the property. With regard to the compensation received, as this was a State purchase of a Municipality piece of land, the purchase was handled as an internal accounting entry which it was argued prevented it being seen as payment for a taxable supply. The Court held that it was irrelevant as there had been consideration for a taxable supply of immoveable property; internal accounting or not.
In summary, the CJEU held that in circumstances where there is compensation given in exchange for immoveable property between taxable persons there is a taxable supply for VAT purposes even where the compensation is by way of an internal accounting entry.
CVC Comment: A supply of immovable property in exchange for consideration will constitute a taxable supply, even where the consideration is made purely by way of an internal accounting entry. A transfer is a transfer and the Court will be reluctant to read into supplies that they are not taxable transactions in the absence of any substantive evidence to the contrary. Before making any transfer of a significant value, or where operating in a grey-area, then it is always prudent to seek professional advice.
2. Buying back shares by transferring immovable property: A taxable supply?
The CJEU has responded to a Polish referral asking if the transfer by Polfarmex, a limited company, to one of its shareholders of immovable property as consideration for shares in that limited company by way of a share buy-back constitutes a taxable supply. Polfarmex argued that the plan was to restructure the share capital of the company by buying shares back and it was therefore not subject to VAT as the transaction did not form part of its business activities.
The Court stated as common ground that the transaction proposed by Polfarmex and the shareholder would lead to the transfer of the right of ownership of immovable property and that Polfarmex is a taxable person in Poland. In the absence of any place of supply issues, the main question looked at by the Court is when a supply of goods is made for “consideration”. It was held that a supply is made for consideration only where there is a legal relationship between both parties which requires reciprocal performance.
It was concluded that if the transfer of the immovable property to buy-back shares in Polfarmex would be subject to VAT if the actions by Polfarmex are ruled by the referring Court to constitute a part of its economic activity. The Court did not give direction on this topic.
CVC Comment: When restructuring companies and acquiring shares, complex VAT issues arise, as is demonstrated by this case. Before taking on the challenge of restructuring a company it is vital that professional advice is sought in order to ensure the highest degree of compliance is maintained.
3. Exemption on imported goods subsequently despatched to a taxable person different to that named on the invoice for the supply.
This decision relates to Enteco Baltic (EB), a Lithuanian wholesaler of fuel who imported fuel from Belarus free of VAT as it was to be sold onto third parties in other European Union member states.
Complying with relevant EU and domestic rules, EB provided the tax authorities with their own, the supplier’s and the purchaser’s VAT registration numbers and certificates of origin within the relevant time limits prior to import. However, EB’s intended supplies did not go ahead and the fuel was subsequently sold to businesses in other EU Member States. In order to remain compliant and to continue to benefit from the exemption for import VAT when an onward supply to a taxable person in another member state, EB declared this to the tax authorities with the VAT registration numbers of the new intended recipients. Whilst initially the tax authorities accepted this, an inspection in 2014/15 led to a discovery that the recipients’ VAT registration numbers declared on the initial import document did not correspond with those of the actual recipients.
In reaching a conclusion, the CJEU held that the exemption from VAT applying in the present circumstances is available where three core criteria are met;
- The supplier has the right to dispose of the goods,
- The supplier establishes that those goods are shipped to another Member State
- As a result of the despatch the goods physically move out of the territory.
The inclusion of the purchasers VAT registration number on the invoice for the supply is not, therefore, essential, especially in situations such as those in these proceedings where the tax authorities were informed of the situation. It was held that application of the relevant exemption cannot be prohibited unless the supplier intentionally is participating in tax evasion.
CVC Comment: This complicated set of circumstances came down to a three-point test by the Court in order to reach a conclusion. The judgment reached shows that the Court will have regard to the economic reality of the transactions taking place where rigorous application of the law results in an unfair result.
Court of Appeal
4. VAT is not recoverable on supplies incorrectly treated as exempt by UK law
Here The Court of Appeal considered a question of whether the appellant, Zipvit, was entitled to deduct input tax on services received from Royal Mail which were treated as exempt by UK law at the time of supply but which should have been treated as standard rated according to EU law.
Royal Mail believed its supplies to be VAT exempt and it did not issue VAT invoices to Zipvit, nor pay over VAT to HMRC. The contract between the two parties made no comment with regard to VAT. Zipvit contended that it had a right to deduct VAT that should have been charged and should be deemed to be included in the invoices it had already received.
Two main issues fell before The Court; was VAT due or paid on the supplies by Royal Mail and whether the lack of VAT invoices barred any input VAT recovery by Zipvit anyway. Ultimately, the decisions of the FTT and UT were upheld by the Court; no VAT was paid over by Royal Mail and no right to deduct had arisen for Zipvit. The judgment focussed particularly on the importance of the lack of VAT invoices issued to Zipvit which ultimately ensured that no right to deduct had arisen.
CVC Comment: Zipvit has been a lead case and it will be interesting to see if it is appealed further as there have been many cases “stood behind” this judgment. Whilst this is a disappointing result for the appellants and others, it serves as an important reminder to always give consideration to VAT when drafting contracts in order to avoid complex and potentially costly situations such as the one at hand arising. The decision also emphasises the importance of obtaining correct evidence to support a right to deduct VAT incurred.
First Tier Tribunal
5. Failed zero-rating of a disposal of a renovated property
This case concerned an appeal against a decision reducing the input tax claim of a property development company.
Fireguard Developments Limited (Fireguard) renovated and subsequently sold a property (the property), believing the house had been vacant for ten years making the onward supply zero-rated. To reflect this Fireguard sought to reclaim the VAT incurred on the renovation in respect of the VAT accounting period ending 31 December 2016 on its VAT return. HMRC contended that the property had not been vacant for ten years prior to disposal and therefore that the supply was exempt meaning recovery of input VAT should be restricted.
The FTT found in favour of HMRC who submitted PAYE records and electoral role entries to support its position that the property had not been vacant for ten years prior to the refurbishment and disposal. As the property was found not to have been empty for ten years immediately prior to its sale the disposal was exempt and directly attributable input VAT was therefore irrecoverable.
CVC Comment: In cases where a business is seeking to benefit from a reduced or zero-rate of VAT it is essential to ensure that all material facts are known. The rules around when the reduced and zero-rates of VAT apply are complex and before taking on any significant or high value land or property related projects it is safest to seek professional advice.