Tag Archives: indirect tax

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.

 

 

CVC VAT Focus 31 May 2018

HMRC NEWS

Imports and VAT (Notice 702)

One must now report imports that are over £873 in value on a Single Administrative Document.

 

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.

 

CVC BLOG

VAT recovery, supplying insurance and the benefits of customer location

VAT exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to input VAT recovery may be ‘specified’ to do so when the customer is located outside the EU. Follow the link to read our most recent blog, by Robert Thorpe, which explains this further.

 


CASE REVIEW

CJEU

1. Retrospective application of VAT exemption schemes

In this matter, the domestic Courts of Hungary ask whether EU law precludes national legislation prohibiting retroactive application of a special VAT exemption scheme for small traders to an eligible, taxable person but who did not declare the commencement of his taxable activities and did not, therefore, opt for the application of that scheme.

 

In the main proceedings, Mr. Dávid Vámos had made taxable supplies from 2007 until January 2014 seeking to support his usual income. However, he failed to register this activity with the tax authorities, also failing to raise invoices and keep receipts. Following an investigation into his tax affairs, Mr Vámos registered for VAT on 22 January 2014 and opted for application of the exemption. A secondary investigation by the domestic tax authorities revealed a VAT debt. The tax authority took the view that national law did not allow retrospective application of the option to be exempt from VAT and so imposed the relevant penalties.

 

The question before the Court is whether national legislation preventing the retrospective application of a VAT exemption scheme is contrary to EU law. Mr Vámos contended that he should have been asked if he wished to retrospectively exercise the option when he registered as he was eligible for the scheme.

 

The Opinion of the Court in this instance is that, given exemption can lead to mixed results for businesses, it cannot be assumed that all taxable persons entitled to an exemption intend to opt for it. Taking into account the effect retrospective application of the exemption would have on previous transactions and other businesses, the Court held it reasonable that the domestic tax authorities require taxable persons to make an express choice of the VAT regime they wish to have applied if it is different to the default regime.

 

The Court also agreed with Hungarian tax authorities that allowing taxable persons who failed to declare the commencement of their activities to retrospectively exercise that option would give an unfair advantage, distorting competition in their favour, breaking the principle of fiscal neutrality. Concluding, it is asserted that EU law does not preclude national legislation prohibiting retrospective application of special exemption schemes, even in cases where the taxable person fulfils all the material conditions for using the scheme.

 

CVC Comment: This case should serve as a reminder of the importance of considering tax and legal obligations before, as opposed to after, beginning to carry on what is or could be considered to be a trade.


2. Divergent criminal thresholds for taxation

Mauro Scialdone

This request for a preliminary ruling concerned interpretation of the EU law relating to criminal penalties for failing to pay VAT within the time limit prescribed by domestic (Italian) law. The General Provisions of the PFI Convention provide that in cases of serious fraud involving more than €50,000, penalties including imprisonment must be available to Member States.

 

Italian law provided for the penalty of imprisonment in cases where the taxpayer failed to pay, within the relevant time limits, any VAT owed over €50,000. The same penalties applied to other taxes such as income tax. Subsequent updates to Italian law saw the threshold for imprisonment increase for failure to pay VAT to €250,000.00 and for income tax to €150,000.00.

 

Whilst much consideration was given to other issues, the questions relating to VAT before the CJEU concerned whether EU law precludes domestic legislation from prescribing different thresholds for criminalising failure to pay VAT and income tax. Consideration was given to the principles of effectiveness and equivalence. The Italian authorities contended that as the two taxes have different collection and administrative regimes and differing degrees of identifiability of fraud, the distinction in penalties was justified.

 

It was held that neither principle precludes domestic legislation such as that in the main proceedings which provides that failure to pay, within the given time limit, the VAT resulting from the annual tax return constitutes a criminal offence only when the amount of unpaid VAT exceeds €250,000.00 whereas a threshold of €150,000.00 applies to failure to pay income tax.

 

CVC Comment: This case makes clear that seriously non-compliant taxpayers can face custodial sentences as well as fines. It highlights some of the differences between direct and indirect tax regimes and the judgment reflects an understanding of this.


Upper Tribunal

 

3.Student Accommodation: Zero-rating Certificate

This appeal concerned the liability of supplies made by Summit Electrical Installations Limited (Summit) as a sub-contractor to a development of student accommodation. Create Construction (Create) had appointed Summit after receiving a zero-rating certificate from the developer stating that the development was for a relevant residential purpose (RRP). As the certificate stated RRP, HMRC contended that only supplies by Create to the developer could be zero-rated and Summit’s supplies should be standard rated as they were sub-contractors. Summit refuted this stating that they could rely on zero-rating provisions as the supplies were made in the course of the construction of a building designed as a number of dwellings.

 

The FTT agreed with Summit, also considering an issue of planning conditions which HMRC contended prohibited zero-rating; as the buildings must be let to students of certain Universities, there was a prohibition of separate use or disposal of the flats. The FTT dismissed this as the flats could be sold separately so long as students lived in them.

 

HMRC appealed to the Upper Tribunal (UT) against the decision in relation to the prohibition of separate use or disposal, asserting that the development failed to qualify as “dwellings” due to the alleged prohibition on separate use or disposal. The UT found that, in accordance with case law, for there to be a prohibition on separate use for the purposes at hand there must be a prohibition on the use of the premises separate from the use of some other specific land, a connection to the Universities mentioned in the planning consent was not sufficient. The UT upheld the decision of the FTT and dismissed HMRC’s appeal, allowing Summit’s supplies to be zero-rated as in the course of construction of a building to be used as a number of dwellings.

 

CVC Comment: This is a positive result for Summit as well as, potentially, for other sub-contractors appointed by Create. This judgment shows the importance of planning before taking on any development projects. Had the Tribunal found differently, Summit and other contractors may have been burdened with a VAT debt.

 


First Tier Tribunal

 

4. Adjustments, agreements and time limits

HMRC sought here to strike out an appeal by Buckingham Bingo Limited (BBL) on the grounds that BBL were appealing against a letter from HMRC which did not contain any appealable decision. In 2012, BBL submitted a VAT return which included a reclaim for £1,616,384.44 overpaid output VAT. HMRC promptly issued a decision denying this reclaim and BBL did not appeal on the basis of costs.

 

Following developments in case law (KE Entertainments Ltd) BBL wrote to HMRC seeking to recover the original amount. HMRC replied on 5 January 2017 stating that they had already ruled on this matter and that BBL had decided not to appeal. It was also noted that there are time limits on adjustments to VAT returns, out of which BBL found itself.

 

The FTT agreed with HMRC that the time limits relating to adjustments applied and that the letter dated 5 January 2017 did not contain an appealable decision but more reaffirmed an earlier one. BBL argued that it would be unfair if it were not allowed to make an adjustment in the same way as Carlton Clubs and KE Entertainment Limited and so should be granted an extension to make an appeal. The Tribunal dismissed this, placing great weight on the need for finality in decisions and stressing that BBL had already stated in 2012 that it would not appeal the original decision based on costs.

 

The Tribunal agreed with HMRC, on all grounds, and BBL’s appeal was struck out. It is not granted any extension to amend its notice of appeal.

 

CVC Comment: It is essential to be aware of all relevant time limits when it comes to making adjustments to VAT returns. This case shows that the Tribunal takes due process seriously and will not agree with the taxpayer because their position might seem unfair. It is also a useful reminder to make sure all communications should be carefully and appropriately worded to prevent interpretive issues arising.

 


5. Appeal by post: letter not received by Tribunal

This decision relates to an appeal made by Porter & Co (Porter) challenging VAT surcharge liability for VAT periods 05/13 and 11/13, of which it was informed on 4 March 2014. Porter was originally given the right to appeal the surcharge notices within 30 days of receipt.

 

Porter apparently responded with a notice of appeal on 2 April 2014, however the Tribunal has no record of having received this letter. Indeed, a notice was received but on 31 July 2017. As well as relevant case law, legislation dictates that when “serving” something by post, the service takes place at the time of postage so long as the postage is done correctly. Whilst the appeal was not sent tracked or special delivery, this is not a legal requirement. On the balance of probabilities, the Tribunal found in favour of Porter but in determining when this would have been received, it was concluded that the appeal, had it arrived, would have arrived a day out of time anyway.

 

The Tribunal needed to consider, therefore, whether permission should be given for the notice of appeal to be given late. As it was only one day out of time and in the interest of not offering prejudice to HMRC, the Tribunal were inclined to give permission for the late notice and held in favour of Porter.

 

CVC Comment: The Tribunal gave this ruling a caveat that, had they not found the original notice for appeal was only one day out of time, it would not have been inclined to give permission. Had the Tribunal ruled it received the notice on 31 July 2017 then it would have been three years late and this would have been too long. This is a demonstration that the Tribunal will take timing and intention into account when dealing with taxpayers.


 

VAT recovery, supplying insurance and the benefits of customer location

Introduction

Normally the terms insurance and VAT recovery do not go hand in hand. Insurance is VAT exempt under Schedule 9, Group 1 of the VAT Act 1994. Exempt supplies do not normally provide a right to reclaim VAT on costs incurred in making such supplies. However, certain supplies that would ordinarily give no right to VAT recovery may be ‘specified’ to do so when the customer is located outside the EU.

Supplies of insurance that allow VAT recovery

The Specified Supplies Order 1999/3121 gives a VAT recovery right in relation to supplies of insurance intermediary services such as brokers when the customer is based outside the EU. Additionally, in relation to intermediaries, a right to reclaim VAT on business costs exists when they arrange a supply of insurance to a non-EU person. In practical terms, this means that many UK based insurers and agents and brokers with an international aspect to their customer base do have the right to partial recovery.

If such supplies are made the VAT recovery position should be considered, particularly where these form a material portion of the business’ supplies.

Are my customers outside the EU?

It is easy to overlook that some European locations are not part of the European Union. Supplies of insurance or insurance intermediation services could still provide a VAT recovery right. For example:

• Jersey
• Guernsey
• The Canary Islands
• Gibraltar
• Norway
• Iceland

It is worth reviewing customer location or the location of underlying supplies if they involve these locations as a potential VAT recovery benefit might not be recognised.

Insurance for export of goods to outside the EU

Supplies of insurance related to export of goods from the EU may also allow VAT recovery. Where:

• goods are being exported by the recipient of the insurance;
• insurance is directly linked to the specific goods being exported, and
• the insurance covers the risks of the person who owns the goods or is responsible for their export.

This would also be a supply of insurance specified to allow a right to VAT recovery.

Assistance

VAT recovery and customer location may provide significant opportunities to companies offering insurance. The interaction of location and the partial exemption rules adds complexity and this may be when professional expertise becomes invaluable in realising an opportunity. CVC has assisted many businesses in this sector to improve their position in relation to VAT whilst also ensuring that this is within a compliant, logical and workable framework.

If you would like to discuss this area please contact Dean Carey or Robert Thorpe on 01206 321029.

CVC VAT Focus 12 April 2018


PARTIAL EXEMPTION

It is around this time of year that those businesses that are partially exempt are required to calculate their annual adjustment.  This adjustment must be made in the VAT return period ending June/July or August but can be made in the prior period (March/April/May) if a business wishes.  CVC is able to calculate or review these annual adjustments for clients if required.


HMRC NEWS

VAT: road fuel scale charge tables

VAT Updated Valuation Table: Road Fuel Scale Charges effective from 1 May 2018 added to the page.

VAT Notice 700/11: cancelling your registration

This notice tells you when and how to cancel your VAT registration.

VAT Notice 700/1: should I be registered for VAT?

This notice cancels and replaces Notice 700/1 September 2016.

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

Page updated with link to new application service and further information what information needed to apply to register.


 CVC BLOG

Sale of donated goods by a charity – an opportunity to reclaim VAT incurred

 

Where certain conditions are satisfied, the sale of donated goods by a charity is zero-rated for VAT purposes. This can be beneficial because no output VAT is due on the income generated by these sales but a right to input VAT recovery on associated costs arises.


CASE REVIEW

First Tier Tribunal

 

1. Reasonable Excuses?

 

In this instance the Tribunal heard an appeal from an individual, Mr. Phillip Ashley Legg against HMRC’s decision to impose various surcharges ranging from VAT accounting periods 12/05 to 12/14.
During this period, Mr Legg only made two payments from 14 September 2006 and 29 June 2012. Mr Legg sought to contend that he had a reasonable excuse for his behaviour in that he had contacted HMRC to establish a payment plan for the surcharges and by 2014 he had cleared all actual VAT arrears. Mr Legg relied heavily on the fact that his profits took a large drop in the period in question, owing to a rapid decline in his area of business.
Whilst the Tribunal accepted a sharp decline in the business had taken place, it still held that this was not a reasonable excuse as the down-turn took place over a number of years and Mr. Legg should have, as a prudent businessman, made adaptations to evolve and fortify himself against changing market conditions. The Tribunal were more sympathetic towards Mr Legg’s catastrophic hard drive errors which led to a severe loss of data. They also took into account that during the period in question, Mr Legg’s father was ill and Mr Legg played a large role in his care.
The important test in relation to a ‘reasonable excuse’ relates to whether or not the taxpayer has behaved reasonably in his or her circumstances. Whilst the Tribunal confirmed that a down-turn in business could not constitute a reasonable excuse, the death of a close relative and fatal computer crashes losing to loss of accounts can. For these reasons, the Tribunal allowed the appeal in half, cancelling a selection of those surcharges not relating to the decline in business activity.


2. Supply or unsolicited delivery

 

This appeal related to whether the applicant, Quality Engines Direct Ltd (QEDL), supplied silver ingots to Microring, a potential purchaser of the company. Whilst in the process of dealing with a transfer of his business, the proprietor (Mr. Rafiq) engaged with a purchaser (Mr. Healey) who immediately began treating the business as his own; making deposits and withdrawals and using the business address. HMRC questioned two invoices relating to the sale of silver from Mr. Rafiq to Mr. Healey which took place before the transfer of QEDL. The veracity of these invoices was denied by Mr. Rafiq, who denied any supply of silver was made to Microring or to Mr. Healey, or that QEDL makes supplies of silver at all, and that he owes no VAT on this alleged supply. He contended that the invoices raised by Microring are not genuine and there had been no silver trade activity with Microring at all.

Mr. Rafiq claimed that delivery of the silver to his business address was not sanctioned, the packages remained unopened as they were unsolicited and he informed Mr. Healey to remove the packages, which he did.

The Tribunal agreed on appeal with Mr. Rafiq that the delivery of silver was unsolicited, the invoices had been recreated by Mr. Healey on behalf of Microring. The Tribunal found that as the packages of silver were unsolicited, unopened and removed as a matter of urgency, that QEDL had not made a supply to Microring and Mr. Healey had in fact made the order.


3. Omitted sales and disallowed input tax

 

In this case, Mr. Paul Shore, trading as “DP Contractors”  disputed a decision by HMRC in relation to his 04/11 VAT return. Mr Shore submitted that in this period of trading he was owed a £3,025.60 VAT repayment. HMRC submitted that due to under-declared output VAT of £16,599.40 and over-declared input VAT, Mr. Shore in fact owed £14,605.52 to HMRC.

Mr. Shore traded as DP Contractors which he claimed HMRC had confused with D&P Contractors, a separate firm to which he was a partner alongside Mr. David MacMillan. D&P Contractors had tendered for a contract with Southern Electrical Contracting Limited (SEC) using Mr Macmillan’s VAT registration number as Mr. Shore was not, himself, registered for VAT. Whilst Mr Macmillan was taken ill, Mr. Shore continued to trade using the VAT number of D&P Contractors whilst establishing himself as a sole proprietor “DP Contractors”.

Mr MacMillan played no role in the business being done for SEC by Mr. Shore and ceased to trade with D&P Contractors owing to injury and received no payment from Mr. Shore for on-going work. D&P Contractors issued over 190 invoices to SEC without declaring these on VAT returns and could offer no reasonable explanation for this. Mr. Shore attempted to highlight some discrepancy between the names of the firms but, as the Tribunal found, the same VAT registration number and bank account were used in continuing the trade by Mr. Shore and that the suppressed sales were correctly assessed on Mr. Shore, despite his pleas that Mr. Macmillan was jointly responsible.

Irrecoverable input tax which had also been deducted by Mr. Shore for items such as power showers were also disallowed and a forgery was uncovered for the purchase of a lorry. The Tribunal dismissed all appeals by Mr. Shore and upholds the assessments in full in relation to the suppressed sales.

 



 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

2018 Spring Statement and VAT

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT.

VAT threshold

One of the conclusions of a recent Office of Tax Simplification (OTS) report regarding UK VAT was that the relatively high VAT registration threshold has a distortionary impact on business growth. The OTS recommended that the ‘government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism’. As a result the government has now published a call for evidence.

This call for evidence is split into three chapters.

  • the first explores in more detail how the threshold might currently affect business growth
  • the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
  • the third considers possible policy solutions, based on international and domestic examples

Responses to the questions raised by the consultation should be submitted by 11:59pm on 5 June 2018

Split Payment Method of VAT collection

HMRC is also consulting on an alternative method of VAT collection to help combat VAT losses arising as a result of the expansion of e-commerce. A split payment method would see VAT separated and paid at the time of the transaction, rather than on a periodic basis via the VAT return process. Through this consultation, HMRC are asking for views on potential options for a split payment mechanism, whilst also further assessing the overall viability of split payment by seeking the views of a wider range of stakeholders.

Responses to the questions raised by the consultation should be submitted by 11:45pm on 29 June 2018

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.