Tag Archives: LIFE

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 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.  


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