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 check these annual adjustments for businesses if required.
Paragraph 4.12 of this Notice has been updated for styling purposes. There have been no factual changes.
HMRC has issued this Tax Information and Impact Note is about fulfilment and storage businesses that handle imported goods on behalf of third parties located outside the EU.
HMRC has updated its guidance on how to recognise when a contact from HMRC is genuine, and how to recognise phishing or bogus emails and text messages.
In CVC’s latest blog Stewart Henry considers sales of donated goods by charities.
Court of Justice of European Union (CJEU)
A recent Hungarian case (Nagyszénás Településszolgáltatási Nonprofit Kft., C-182/17) before the CJEU concerned supplies between a local government (municipality) and its wholly owned non-profit making organisation (NFP). The NFP, under contract with the municipality, undertook to carry out certain public tasks such as management of housing and other property, management of local public roads etc. The NFP did not issue invoices to the municipality for the services nor did it charge VAT. The NFP argued that the contract did not constitute a contract for the provision of services; furthermore, the NFP argued it was a “body governed by public law” and as such if it is supplying services those services are VAT exempt.
The CJEU found that where a company performs public tasks under a contract with a municipality this constitutes a taxable supply of services subject to VAT. In addition, the NFP did not meet the conditions to be classified as a “body governed by public law”, it has none of the rights and powers of local authority and therefore the services provided do not fall within the VAT exemption for bodies governed by public law.
CVC comment: many local authorities sub-contract various responsibilities to charities and not-for profit organisations. Increasingly, charities enter into service agreements as oppose to receiving grant funding. It is important to consider the VAT implications of such contracts and agreements.
Fortyseven Park Street Limited (FPS) acquired a property, formerly a hotel, and refurbished it in 2002. The property now contains 49 self-contained apartments. FPS sold fractional interests in the property. The agreement under which fractional interests are sold is the Membership Agreement. Members are granted certain occupancy rights and access to exchange programmes. There are three types of occupancy rights: primary use time (up to 21 days in a calendar year) for no rental fee, extended occupancy time (once primary use time has been used, the member can occupy a residence for up to 14 days for a fee), and space available programme.
FPS argued that it supplied VAT exempt licences to occupy land. HMRC argued that members did not acquire the right to occupy property as owner, therefore VAT exemption did not apply. If HMRC failed on its first argument, it contended that the services provided went beyond a licence to occupy land and were therefore standard rated for VAT purposes.
The UT found that the grant of the fractional interest was the grant of a right to occupy a residence and to exclude others from enjoying such a right with no significant added value; therefore, the grant was VAT exempt. The UT also considered whether the licences to occupy were akin to hotel accommodation and standard rated. The UT set aside the FTT’s decision, finding that FPS did not supply accommodation similar to a hotel. FPS’ appeal was allowed.
CVC comment: the UT found that the FTT had erred in law. The FTT focused on the length of the stays, concluding that FPS’ supply was similar to a hotel, rather than on the nature of the right acquired by the members.
First Tier Tribunal
Newcastle Under Lyme College (NULC) applied to the Tribunal for permission to bring a late appeal against a decision of HMRC to deny that construction supplies received during 2009 and 2010 should be treated as zero-rated.
NULC seeks to appeal HMRC’s decision dated 23 September 2014. NULC’s notice of appeal was filed on 6 February 2017, over two years out of time. NULC contends that a portion of the construction services supplied and received should be zero-rated on the basis that a portion of the building was intended for use solely for a relevant charitable purpose (RCP), namely, use by a charity otherwise than in the course or furtherance of business. This is on the basis that income received from ‘part-funded’ students is a non-business activity. There is litigation pending in this area in a number of cases, including Wakefield College which is the subject of an appeal to the Court of Appeal. Both NULC and HMRC agree that the case will be unarguable if the Court of Appeal upholds the Upper Tribunal’s decision in Wakefield College.
The Tribunal took into account the amount of VAT at stake in this appeal, why the delay in appealing occurred, as well as the fact that NULC has not presented a consistent case. The Tribunal made the point that permission to appeal out of time should only be granted exceptionally and it should not be granted routinely. Nevertheless, the Tribunal granted permission to NULC to bring a late appeal. The Tribunal considered this appropriate in order to deal justly with this case.
CVC comment: as the Tribunal has granted permission to bring a late appeal, NULC’s appeal will be stood behind the Court of Appeal’s judgment in Wakefield College. We will keep subscribers updated on the progress of this case.
Dynamic People Limited (DPL) provides domiciliary care to patients in their own home (VAT exempt welfare service) and training (subject to VAT at the standard rate). In 2011 DPL incurred costs associated with the purchase and refurbishment of two properties (Unit 1 and Unit 3). In 2012 DPL applied to HMRC for a Partial Exemption Special Method (PESM). The proposed method was a sectorised method which provided that the VAT recovery of costs associated with Unit 1 and Unit 3 be determined by reference to floor area. The VAT recovery of general (residual) costs would be recoverable according to a turnover calculation akin to the standard partial exemption method. Following a visit to the properties HMRC approved this method as giving rise to a fair and reasonable input VAT recovery.
With effect from 1 April 2014 DPL formed a VAT group registration. The other companies in the VAT group being non-trading companies which did not use Units 1 and 3. DPL, as representative member of the VAT group, was required to submit a new PESM proposal. HMRC rejected the proposed method on the basis that the method must be auditable by HMRC. DPL must be able to evidence the use of the various areas of the property.
The Tribunal found that VAT grouping with non-trading businesses did not result in the method not being fair and reasonable in this case. In addition, the Tribunal considered the proposed PESM to provide a fairer outcome than the standard partial exemption method (despite HMRC’s perceived difficulties in auditing the method).
CVC comment: the Tribunal accepted that the operation and audit of a PESM is relevant to the fairness and reasonableness of the method; however, the Tribunal commented that as the new method was identical to the method accepted by HMRC in 2012 to conclude that VAT grouping with non-trading entities that do not use the properties renders the method unfair and unreasonable is perverse.
Essex International College appeals an assessment for VAT in the sum of £275k. The College is a private limited company that provides tertiary level education courses accredited by Edexcel. The supplies made by the College to students included tuition and books. Students are charged a single fee. The College treated two-thirds of the fees charged to students as standard rated and one-third as attributed to the zero-rated supply of books. HMRC argued that the supplies made by the College constituted a single standard rated supply for VAT purposes.
The Tribunal felt there was insufficient evidence presented before it to reach a firm conclusion. However, based on the fact that students are charged a single fee and there is no opportunity for the student to receive one part of the supply and not the other, the Tribunal found in favour of HMRC that the College made a single taxable supply.
The College put forward additional grounds of appeal. First, that the College’s supplies are VAT exempt on the basis that the College is a university. Second, if the College’s supplies are not exempt under UK law they are exempt under EU law. Finally, the introduction of VAT in 1972 was a breach of the UK’s obligation to provide free education. The Tribunal dismissed all grounds of appeal.
CVC comment: the burden of proof was on the College to provide evidence that it made separate supplies of tuition and books. The College did not provide the Tribunal with evidence of the supplies it made or any marketing materials. The Tribunal was therefore unable to fully consider the issue of whether the College made single or separate supplies. Based on the agreed facts the FTT could only conclude that the College made a single supply.
We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email firstname.lastname@example.org. If you wish to subscribe to the VAT & Charities newsletter please email email@example.com.