Tag Archives: exemption

Constable VAT Focus 28 February 2019

HMRC NEWS

Find Software that is Compatible with Making Tax Digital for VAT

Check which software packages are compatible with Making Tax Digital for VAT.

HMRC Impact Assessment for the Movement of Goods if the UK leaves the EU without A Deal

The impact assessment originally published on 4 December 2018 has been updated to include the impacts on the customs, VAT and excise regulations laid before Parliament in January 2019.

HMRC Impact Assessment for the VAT Treatment of Low Value Parcels

Again, the original impact assessment has been updated.

 

BREXIT ALERT

As the 29 March Brexit date approaches there is still uncertainty around whether there will be any deal in place by then. It is essential that any traders or businesses which may be affected by changes in VAT procedures make plans to ensure a smooth transition.

Businesses trading with the EU need to consider the following:

If goods are moved

  • Getting an EORI number
  • Registering for simplified import procedures

If electronic services are supplied

  • Registering for non-Union MOSS in an EU member state as soon as possible after 29 March if there is no deal.

If goods are supplied to consumers in the EU under distance selling rules

  • Maybe VAT registrations are required in other EU countries?

If VAT is paid in other EU member states

  • Claims for 2018 must be submitted before 29 March 2019
  • How will this VAT be claimed after Brexit?

HMRC has updated its online guidance on the above, which can be viewed here.

Contact Constable VAT if any of the above will affect you or your business, we are happy to advise on any VAT related matter.

 

CONSTABLE VAT NEWS

Remember to enrol for Making Tax Digital on time and during the right enrolment window for your VAT accounting periods. Constable VAT have analysed the enrolment windows and our summary can be found here.

 

CASE REVIEW

CJEU

 

1. The Exemption for Goods Imported to be dispatched to Another EU Member State

This case concerned whether the exemption for import VAT on goods arriving in an EU member state to be dispatched immediately to another EU member state and whether domestic tax authorities can disapply the exemption where tax evasion is involved.

Vetsch is an Austrian company which acted as a tax representative for two Bulgarian companies, “K” and “B”. Vetsch submitted declarations stating that goods imported from Switzerland, by K and B, benefited from the exemption for goods imported for subsequent dispatch. However, the subsequent dispatch did not occur and Vetsch became liable under Austrian law, as representative, for the import VAT which should have been paid.

Vetsch appealed against a decision from the domestic tax authorities to that effect but the appeal was refused. Vetsch brought an appeal on a point of law before the domestic Courts which led to the CJEU referral.

The Court came to the conclusion that, as Vetsch was unaware and there was no evidence to support the idea that it knew or ought to have known about the subsequent evasion that the exemption could not be refused.

Constable Comment: This case shows how at an EU level, the strict interpretation of the law is not always adhered to if it creates inequitable results. In finding that Vetsch did not know and would not have known if carrying on business as a reasonable person would, the Court has upheld the idea of equity.

 

2. Retroactive Application of Implementing Decisions

This case concerned the application of the Decision authorising the Hungarian Government to apply the reverse charge procedure enshrined in EU law. The Hungarian tax authorities were notified of their authorisation in December 2015 but sought to rely on the implemented provision to retroactively assess Human Operator Zrt. for the January 2015 VAT return.

The question before the Court in this instance was whether EU law precludes national legislation from retroactively applying measures authorised in an Implementing Decision where that Decision does not make a comment on the retroactive applicability of that Decision or give a date on which it comes into effect.

The Court gave consideration to the principles of legal certainty and the protection of legitimate interests. They concluded that the requirement of legal certainty must be observed very strictly when it comes to rules liable to entail financial consequences, in order that those concerned may know precisely the extent of the obligations which the rules impose on them. It was also held that these principles must mean that EU law can only apply to situations after they have explicitly come into force.

In the absence of a provision in the Decision suggesting a different date for it to bite, the Court considered that it must be taken to be effective from the date on which it was published.

Constable Comment: This case is a good demonstration of how the CJEU seeks to protect the rights of individuals and businesses against the State. The fundamental principles of the EU and the spirit of the law are given a great degree of influence in the European Courts. This decision has prevented a seemingly unconscionable result.

 

First Tier Tribunal

3. Electric Blinds in a DIY Build

This case concerned the right to deduct input VAT incurred in relation to a DIY house build by Mr David Cosham. Mr Cosham designed an “eco-build” property and sought to recover input VAT on building materials used under the DIY housebuilders scheme. HMRC accepted certain elements of the claim but rejected the element which related to electric blinds installed at the property, asserting that electric blinds are not within the definition of “building materials” for VAT purposes associated with the scheme.

Appealing HMRC’s decision, Mr Cosham claimed that the blinds did fall within the definition as they are “ordinarily incorporated by builders in a building of that description”. He contended that “buildings of that description” should, in this case, be taken to mean “eco-builds”.

Giving some consideration to relevant case law, the Tribunal found that “eco-builds” were a well-established market sector and could be recognised as a distinct type of property. The onus was put on Mr Cosham to show that blinds such as those in question were “ordinarily incorporated” into properties of this description. Mr Cosham could produce no such evidence so his appeal was denied, the Tribunal holding HMRC’s decision to be correct.

Constable Comment: This conclusion drew on previous case law such as Taylor Wimpey and came to the conclusion that “eco-builds” are to be treated as a class of property in themselves. This is interesting as it could be argued that, compared to older housebuilding practices, the vast majority of new build homes are definable as “eco”. This case has opened up the question of what exactly is ordinarily incorporated into an “eco-build”. It is unsurprising that HMRC pursued this point. Blinds more generally are objected to by HMRC despite losing a previous case at the First Tier Tribunal on a related point.

 

4. Deception: A Supply of Goods or Services?

This case concerned Mr Owen Saunders who had been found guilty of taking money in exchange for work he promised to perform but never had the intention of performing. He had been found guilty as a criminal and been sentenced to time in prison as well as having been served a confiscation order for in excess of £60,000. The confiscated funds had been divided equally amongst his victims by way of compensation for their loss.

HMRC contended that Mr Saunders was engaged in a business activity and should have been registered for VAT. The Tribunal believed that the crucial issue was whether or not there had been a supply for a consideration made in the furtherance of business. Giving consideration to the examples of drug dealers (who can pass title in goods) and fences (who cannot as they never gained title) as well as the definition of a supply in accordance with VAT law, the Tribunal held that there was no supply by Mr Saunders for the monies he received.

The assessment and associated penalties against Mr Saunders were quashed, it was held that his conduct had led to a “total failure of consideration” which was evidenced by the fact that 100% of the confiscated money was paid back to the victims.

Constable Comment: This was an interesting case in that it analysed Mr Saunders as akin to a drug dealer or someone fencing stolen goods. A particularly interesting point raised was the fact that a drug dealer can pass title to his goods and thus his turnover represents supplies and consideration so, in turn, could create an obligation to register for VAT. This illustrates the point that a lack of compliance with the law does not discount the supplies made from turnover for VAT purposes.

 

Constable VAT Focus 01 February 2019

HMRC NEWS

Goods or Services Supplied to Charities

Find out when suppliers can apply the VAT zero rate VAT for advertisements and goods used for the collection of donations.

Software Suppliers for Sending VAT Returns

Find out which software packages support the Making Tax Digital pilots.

VAT Supply and Consideration

Payments that are not consideration: Grants. This section of guidance will help you determine whether a payment described as a grant is consideration for a supply of goods or services and will be of particular interest to charities and other not-for-profit organisations in receipt of grant funding.

Customs, VAT and Excise Regulations: Leaving the EU with No Deal

This collection brings together regulations, explanatory memoranda and an impact assessment in preparation for day one if the UK leaves the EU with no deal.

 

CASE REVIEW

 

CJEU

1. The Deductibility of Input Tax Incurred by Branches

This case concerned the Paris branch of Morgan Stanley and whether it was entitled to deduct input VAT it incurred on expenditure relating exclusively to the transactions of its principal establishment in another member state of the EU. The branch carries out banking and financial transaction for its local clients as well as supplying services to the UK principal establishment and had deducted in full the VAT incurred relating to both types of supply. The domestic tax authorities believed that this input VAT should not be fully deductible but that it should be apportioned using the principal establishments input VAT recovery fraction.

The main question which arose before the Court was whether the proportion of recoverable VAT incurred by the branch relating exclusively to the transactions of its principal establishment should be calculated in line with the branches or the principal’s input VAT recovery rate. It was also asked what rules should be applied in relation to expenditure relating to both transactions by the branch and by the principal.

Giving extensive consideration to the wealth of case law surrounding this subject, the Court decided that, in relation to the first question, that neither of the suggested calculations was correct. It was held that in relation to such expenditure, the associated input VAT is deductible in line with a fraction calculated as:

“Taxable transaction which would be deductible if carried out in branches states / Turnover (excl. VAT) made up of those transactions alone”

With regard to the second question of general costs of the branch which are used for both domestic transactions and transactions with the principal branch it was decided that account must be taken, in the denominator of the fraction, of the transactions carried out by both the branch and the principal establishment. The numerator of the fraction must represent the taxed transactions carried out by the branch and the taxed transaction carried out by the principal establishment.

Constable Comment: This confirms that VAT incurred by branches on expenses relating to supporting its head office are recoverable by looking thorugh to the supplies made by the head office. The calculations for the recoverable amount of input VAT are complicated, especially where the look through reveals the head office to be making both taxable and exempt supplies. If your business makes supplies to a head office it would be prudent to seek professional clarification of the correct treatment of input VAT incurred in relation to these supplies. 

 

Upper Tribunal

2. Welfare Services Exemption

The question before the Tribunal in two cases (The Learning Centre Romford & LIFE Services) was whether the UK’s implementation of the VAT exemption for welfare services had been unlawful by infringing the EU principle of fiscal neutrality.

The Learning Centre Romford (TLC) is a private company which provides vulnerable adults with education and entertainment. It also supplies meals and associated palliative care such as assistance with eating and administering medication with the aim of teaching the clients to be independent and to live healthy lives. It takes on as clients only those who have a care plan given by the local authority from which TLC receives funding. TLC had treated these supplies as exempt as the provision of welfare services by a state regulated institution. HMRC believed these supplies to be taxable at the standard rate as they were provided by a private company.

TLC argues that they were state regulated as it was a requirement for them to DBS check staff members and, in any case, the fact that private welfare providers akin to itself are in fact exempt from VAT in Scotland and Northern Ireland. It was contended that this infringed the principle of fiscal neutrality.

LIFE Services provided the same style of care as TLC but as it did not provide care at the client’s home it did not fall within the statutory regulation regime and was therefore not exempt from VAT.

HMRC argued that it was not the UK’s implementation of the exemption which had caused a disparity between Scottish and English welfare providers but that this situation had arisen as a result of the devolved legislature’s actions. The Tribunal agreed with HMRC, finding that in a devolved system it is inevitable that certain matters will diverge and, therefore, the principle of fiscal neutrality was not infringed. In allowing HMRC’s appeal on this ground, both cases were dismissed and the services of both LIFE and TLC were held to be taxable. This overturned the First Tier Tribunal’s previous decision.

Constable Comment: This was an interesting joint case which focussed on an area of disparity between the implementation of EU law in England and other devolved powers such as Scotland and Wales. Whilst there is a difference in the ways in which the law operates in different areas of the UK, the Tribunal found that this is as a result of the devolved powers implementations and not a failure of the UK to adhere to an EU Directive. This decision will also be interesting to charities which may wish to step outside of the VAT welfare exemption. For example, if VAT exempt welfare services supplied by a charity were carried out by a wholly owned trading subsidiary instead, would generating taxable supplies be advantageous?

 

First Tier Tribunal

3. Direct and Immediate Link with Taxable Supplies

This case concerned whether or not there was a direct and immediate link between input VAT incurred by Adullam Homes Housing Association (AHHA) and its taxable supplies of support services. AHHA is a partially exempt business making taxable supplies of support services and exempt supplies of accommodation.

The dispute arose with regard to whether input tax incurred on acquiring, maintaining, repairing and cleaning accommodation can be linked to the taxable supply of support services or if, as HMRC contend, there is no such link and this input VAT is wholly irrecoverable. AHHA sought to argue that the acquisition and maintenance of accommodation was necessary as part of the overall supply made of accommodation based support services.

The Tribunal gave extensive consideration to case law around the issue of attribution of input VAT incurred by a partially exempt business. The conclusion was reached that the costs, whilst related to the provision of accommodation, were incurred in order that the Appellant had clean, safe and secure premises to enable it to bid for accommodation based support contracts. This constituted a direct and immediate link with the provision of support services.

It follows from this conclusion that the inputs incurred by AHHA in relation to maintain the accommodation were residual and fell to be recovered in line with their partial exemption percentage.

Constable Comment: Certain difficulties present themselves when performing partial exemption calculations, one of the most common is in deciding whether particular inputs should be directly attributed to taxable or exempt supplies or if they fall to be apportioned. Where looking through to the recipients onward supplies it can become difficult to ascertain the correct treatment of input VAT in line with the principles highlighted in this case. If your business is partially exempt and the calculations are complicated it is advisable to regularly review the attribution of VAT incurred and to seek professional clarification to ensure compliance if any obligation exists.

 

 

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

Work out the VAT payment deadline for your accounting period. You cannot use this calculator if you make payments on account or use the annual accounting scheme.

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 23 August 2018

HMRC NEWS

Local authorities and similar bodies

Decide which activities are business or non-business for VAT purposes if you’re a local authority or other public body.

Apply for the Fulfilment House Due Diligence Scheme (Notice FH1)

Find out if you need to be registered to store goods in the UK for sellers established outside the EU.

Administrative agreements with trade bodies (VAT Notice 700/57)

Details of administrative agreements relating to VAT on certain specific transactions between members of trade bodies and HMRC.

Software suppliers supporting Making Tax Digital

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

 


CASE REVIEW

CJEU

1. Estonian Sales Tax Illegal?

The issue before the court in this instance was whether Article 401 of the VAT Directive must be interpreted as barring the maintenance or introduction of a local sales tax. The City of Tallinn introduced a 1% local sales tax which affected Viking Motors and other appellants, Viking Motors challenged the legality of this tax on the basis that the EU law on VAT only allows one turnover tax: VAT.

Giving consideration to the nature of VAT and how it is applied, it was concluded that there were sufficient differences between EU VAT and local sales tax for the two to run in tandem. It was held that Article 401 does prevent the introduction of another turnover tax but in this instance, as the cost could be absorbed by the business rather than being passed on to the consumer, the two taxes are sufficiently different to not breach EU law.

CVC Comment: There is a very high degree of scrutiny offered by the Courts when it comes to challenging the legality of domestic laws and taxes under EU law. In this case it was held that the nature of how the tax is applied, despite being materially the same, made the two taxes sufficiently different.

 


2. VAT on Joint Venture Costs

 

TGE Gas Engineering GmbH (TGE) is a company established in Germany which entered into a joint venture with a company called Somague Engenharia SA in Portugal in order to expand a gas terminal in Portugal on behalf of a utility company. TGE obtained a Portuguese tax ID number as a non-established person in that country in order to create an economic interest group to carry out the joint venture.

After this TGE set up a branch in Portugal and obtained another tax ID from the Portuguese authorities. This branch provided services to the joint venture which were charged on to the utility company and it was also invoiced for the costs to TGE in Germany.

The Portuguese tax authorities had previously denied recovery of the input VAT incurred on these costs based on special domestic rules applying to joint ventures. The Court held that Articles 167 and 168 of the VAT Directive and the EU principle of neutrality must be interpreted as preventing domestic tax authorities from regarding a company which has its headquarters in another Member State and the branch which it has in the first of those States as constituting two separate taxable persons. For that reason, they are also prevented from refusing that branch the right to deduct the VAT on the expenses incurred on behalf of the joint venture/parent company.

CVC Comment: The UK tax authorities may view joint ventures as a taxable person in its own right for VAT purposes. In that scenario, it is the joint venture that has the right to recover any VAT incurred, rather than the parties to the joint venture. This serves as a useful reminder that purchase invoices should be addressed to the correct taxable person. The business activities of a joint venture should be considered in its own right, and an obligation for a joint venture to VAT register may arise if the parties arrangements are considered to form a partnership. A joint venture may choose to VAT register voluntarily in order to recover VAT incurred (subject to the usual VAT recovery rules).

 


3. Municipalities: Entitled to deduct?

 

The Polish municipality of Ryjewo constructed a building in Poland and the made a “cultural centre” responsible for the management of the property, allowing them to use the building free of charge. This was allocated as a non-taxable activity for the taxation authorities, despite The Municipalities’ VAT registration, as there was no charge made.

Four years later a part of the building was rented out commercially, The Municipality sought to adjust the deduction of input VAT paid for the building, now attributing this part of the building to a taxable supply. The relevant Polish Minister had reached a decision that VAT was not deductible for The Municipality as the building was not used for an economic activity. This is appealed against.

The Court find in favour of The Municipality, concluding that at the time the building was constructed it was acting in its capacity as a taxable entity and not as a non-taxable Government body. VAT is deductible despite the building having initially been put to 100% non-taxable use by a public body.

CVC Comment: Even though no intention to later use the building to make taxable supplies was declared and there was an argument for no economic activity having previously taken place, the deduction was allowed by the CJEU. This is because the right to deduct input VAT is a fundamental aspect of the VAT system. Ultimately, the first use of the building did not matter as this only determines the initial reclaim, adjustments are to be made in line with changes in taxable/non-taxable use. This case may be of interest to organisations that have made an initial non-business use of capital expenditure on property.

 


First Tier Tribunal

 

4. Gaming Machines and Fixed Odds Betting Terminals

 

The issue before the Tribunal in this instance concerned revisiting the EU principle of fiscal neutrality. The Rank Group (Rank) made supplies of gambling through gaming machines including fixed odds betting terminals (FOBTS) and “casino jackpot machines”. The casino jackpot machines were specifically excluded from the exemption to VAT but FOBTS were exempt from VAT before 6 December 2005 when the definition of “gaming machine” was extended.

Rank made a claim for repayment of VAT which it had charged and accounted for in relation to the jackpot machines on the grounds that the two machines were similar and treating their supplies differently for VAT purposes was contrary to the principle of fiscal neutrality.

After a detailed consideration of relevant case-law and analysing the different types of machines to draw similarities and differences between the two, the Tribunal concluded that, despite certain differences, these differences did not have a significant influence on the average consumer’s decision to use one or the other. The Tribunal found in favour of Rank and allowed the appeal against a decision to deny VAT recovery.

CVC Comment: This case shows that the Tribunal will have regard to how the consumer interprets what he/she is purchasing and the material aspect of the supply. It was observed in the judgment itself that to try to draw distinctions within individual gaming machines and games could lead to absurdities of different rates of tax being applicable to one machine. HMRC will often apply similar tests to that of the Tribunal although when analysing transactions.

 


 

CVC VAT Focus 12 July 2018

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.

VAT treatment of vouchers

Draft legislation about the implementation of an EU Directive of the VAT treatment of vouchers.

VAT Notes 2018 Issue 2

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.


 

 

CVC VAT Focus 11 January 2018

We would like to wish our regular readers and subscribers a happy and prosperous 2018.

HMRC NEWS 

HMRC were busy during the last couple of weeks of 2017. The following documents were published or updated on the gov.uk website:


CVC BLOG

In CVC’s latest blog Helen Carey considers HMRC’s policy on VAT zero-rating and new buildings further to the recent Information Sheet 07/17 issued by HMRC.


CASE REVIEW 

Court of Justice of European Union (CJEU)

1. Special derogating measures – Avon Cosmetics

Avon Cosmetics Limited sells products through independent representatives. Most of these representatives are not VAT registered. Avon sells products to the representatives at a price below the retail price Avon envisage will be achieved. Sales to representatives are subject to VAT. The sales made by the representatives are not subject to VAT. The effect of this business model is that VAT is not accounted for on the difference between Avon’s selling price and the representative’s selling price. To remedy this situation the UK obtained a derogation from the EU to deviate from the standard rule that VAT is charged on the actual sales price. As a result Avon calculates output VAT due based on the representative’s expected selling price. Two adjustments are made to this calculation to take account of the fact that some products are purchased by the representatives for their personal use and some products are sold by the representatives at a discount.

Avon claimed a refund of overpaid VAT in the sum of £14million on the basis that the special derogation does not take account of the VAT incurred by the representatives on demonstration products. According to Avon, these purchases amount to business expenditure and the VAT relating to those purchases would be recoverable if they were VAT registered.

The matter was referred to the EU on the question of whether the derogation and its implementation infringed the EU principles of fiscal neutrality. The CJEU found that the measures implemented as part of the derogation do not infringe the EU principles and the UK is not required to take account of VAT incurred on purchases used for the purposes of the representatives’ economic activity.

CVC comment: this is an interesting case before the CJEU which considered whether a UK derogation infringed the EU principles of fiscal neutrality.


Upper Tribunal

2. VAT exemption for welfare services 

HMRC appealed against the First Tier Tribunal’s (FTT) decision that the UK law was incompatible with the Principal VAT Directive by recognising supplies made by charities as exempt from VAT but not those made by LIFE Services Limited. LIFE is a profit making private organisation which provides day care services for adults with a range of disabilities. Gloucestershire County Council monitors and inspects LIFE’s services which are provided under a formal care plan agreed with the social services department of the Council.

The Upper Tribunal considered that the FTT erred in its decision. The UK has adopted two criteria for determining which non-public law bodies should be entitled to the VAT exemption for welfare services. The first is that the body is regulated. The second is that the body is a charity. To be able to successfully argue UK law breaches the principles of fiscal neutrality LIFE must be able to demonstrate that it falls within the same class as one of the criteria.

The UT found that LIFE cannot equate itself with regulated bodies because, for LIFE, regulation is optional. Similarly, LIFE cannot say it fall within the same class as a charity because it is not subject to the same constraints and regulation as a charity, and it does not operate for the public benefit. HMRC’s appeal was therefore allowed.

CVC comment: this decision by the Upper Tribunal appears to confirm that UK legislation is compatible with the Principal VAT Directive. This decision will be disappointing for private welfare providers that do not fall within the criteria set by the UK for determining which bodies should be entitled to the VAT exemption for welfare services. LIFE is stood behind another case, The Learning Centre (Romford) Limited (TLC), in respect of another issue. TLC have argued that the UK welfare exemption breaches the principles of fiscal neutrality in that bodies making supplies in Scotland and Northern Ireland making identical supplies are granted exemption. 


First Tier Tribunal

3. Whether the construction of a cricket pavilion was zero-rated

Eynsham Cricket Club is a community amateur sports club (CASC). The Club appealed against the decision of HMRC that services supplied to the club in the course of constructing a new pavilion were standard rated for VAT purposes. The club argued that the services were zero-rated because the pavilion was used for a “relevant charitable purpose” (RCP). For the purposes of the VAT zero-rate, RCP use means use by a charity either otherwise than in the course of a business; or, as a village hall or similar.

The Tribunal found that the Club was not established for charitable purposes at the relevant time; therefore, the Club’s appeal failed.

This decision is considered in more detail in our VAT & Charities Newsletter.

CVC comment: this was a revised decision by the Tribunal following review. This case provides an interesting commentary regarding all of the conditions which must be met in order to obtain zero-rating for RCP use. 


4. Whether free admission to events run by a charity are non-business activities and the VAT recovery implications

The Yorkshire Agricultural Society, a charity, carries out a range of activities which include holding events and hiring out facilities. In total there are approximately 700 events each year. No admission fee is charged in respect of two of the charity’s events. HMRC considers that these two events are non-business activities and, as such, disallowed input tax incurred that directly related to these events. The charity appealed this decision.

HMRC’s policy is that the free supply of services by a charity is a non-business activity. VAT incurred which directly relates to non-business activities cannot be recovered.

The charity argued that the events generated taxable income from catering. A third party provides catering services on the site. The charity receives a share of the income generated by the third party. The Tribunal found that there was no direct link between the free events and the charity’s share of catering income. The charity also argued that there are links between the free events and the Great Yorkshire Show (an admission fee is charged). However, the Tribunal was not satisfied that there were sufficient direct and immediate links between the free events and the Show. The costs relating to the free events could not be said to be cost components of the Show or the charity’s other economic activities. The charity’s appeal was dismissed.

CVC comment: the Tribunal did not consider whether input tax incurred on general overheads that could not be directly attributed to any particular activity of the charity could only be partially recovered. 


5. Membership – single or multiple supply

Owners of Harley-Davidson motorcycles may join the Harley Owners Group (HOG). HOG is a business unit of Harley-Davidson Europe Limited (HDE). HDE appealed against HMRC’s decision that supplies made by it to members of HOG in consideration for membership subscriptions constitute a single, standard rated, supply for VAT purposes. HDE contends that it makes a number of distinct supplies to each member and the VAT treatment of each benefit must be determined separately.

Under HMRC’s approach VAT is chargeable on all membership subscriptions regardless of where the members belong. Under HDE’s approach no VAT is chargeable on supplies to members outside the EU (being zero-rated supplies of goods and/or services); and, a substantial proportion of the membership fee paid by EU members relates to zero-rated printed matter.

Benefits received by HOG members include a magazine, patches and pins, maps, e-magazine, museum entry, events and online access.

HMRC’s primary argument was that there was a single principal supply of membership and all other benefits were not ends in themselves but a means of better enjoying the principal element; however, the Tribunal found that members do not join HOG simply for the status of being a member. The typical member wants the individual benefits. In addition, while the Tribunal Judge did consider it relevant that a single price was charged and members did not have the ability to choose what benefits are supplied (suggesting a single supply), it is clear from case law that this is not determinative. The Tribunal concluded that the individual benefits provided are too significant to allow the supply to be characterised as a single supply of membership rather than a number of independent supplies. HDE’s appeal was allowed.

CVC comment: this decision provides interesting commentary regarding the distinction between single and multiple supplies for VAT purposes. This topic has been considered a number of times before the Tribunals and Courts.  


We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email laura.beckett@ukvatadvice.com. If you wish to subscribe to the VAT & Charities newsletter please email sophie.cox@ukvatadvice.com.

Ruling on French Yacht Exemption

The Court of Justice of the European Union has issued its ruling on the infraction proceedings again France in regards of the French exemptions on certain yacht charters. The Court ruled that the French exemption was not compatible with EU legislation as the French rules did not explicitly make the exemption conditional on the vessels’ use for navigation on the high seas.

 Although no official English version is yet available and we await the English version of the ruling for greater clarity, this ruling indicates that the days of the expansive French exemption may be drawing to an end. If you have any queries on how this may affect your business, or your clients, please contact us.