Tag Archives: Property

Constable VAT Focus 30 May 2019

30th May 2019

This VAT Focus provides the usual updates of HMRC news as well as coverage of some of the more recent developments in the Courts including judgments in relation to the liability of the provision of fuel cards to subsidiaries, the exemption for the leasing of immovable property and the VAT liability of non-refundable overpayments.

HMRC NEWS

Notice 742A: Opting to Tax Land and Buildings

HMRC has updated the list of authorised signatories in section 7 to include corporate bodies, overseas entities and powers of attorney.

Notice 701/41: Sponsorship

HMRC has updated this notice with clarification on the treatment of mixed sponsorship and donations.

Help and Support for VAT

HMRC has updated its selection of webinars and online courses.

Making Tax Digital for VAT

The list of software packages which are compatible with Making Tax Digital for VAT has been updated. Make sure you remember your obligations under the new MTD regime. Making Tax Digital is now obligatory for most businesses on monthly VAT returns or calendar quarterly returns VAT returns should be preparing to be MTD ready for submission of the June 2019 VAT returns, unless they have been notified by HMRC that they will benefit from a delayed start of 1 October 2019.

CONSTABLE VAT NEWS

HMRC sees the construction industry as a sector that presents a significant risk to the Exchequer. As a result a reverse charge for building work is due to be introduced, to combat fraud. We have a new blog covering some of the important issues, which can be read here.

The rules will come into place on 1 October 2019, are you ready? If you feel like you will be impacted and require assistance in ensuring compliance from day one of the new rules being in place, do not hesitate to contact Constable VAT.

CASE REVIEW

CJEU

1. The Provision of Fuel Cards: Exempt Supply of Credit

This Polish referral concerned a Polish subsidiary of Vega International (VI), a company which provides transportation services for commercial vehicles, taking them from the factory and delivering them to the customer. To perform these services, VI operated various subsidiaries in different countries including Vega Poland (VP).

VI provides the subsidiaries with fuel cards issued by fuel suppliers, the subsidiaries provide these to drivers in order to get fuel to make the deliveries. The purchases are dealt with centrally by VI who invoice the subsidiaries for their fuel costs with a 2% surcharge for the service.

The question which arose before the Court was whether the service being provided by VI was an exempt provision of credit or a more complex transaction, the main objective of which was the supply of fuel; a supply of standard rated goods.

The Court considered a previous case, Auto Lease Holland in which similar fuel provision agreements had been discussed. The conclusion in this case was that such a fuel management agreement concluded between a leasing company and a lessee is not a contract for the supply of goods but a contract for the lessor to finance fuel purchases; at no point does fuel ownership really pass to the lessor as they do not interact with or choose the use of the fuel.

In concluding, the Court considered that by applying the surcharge, VI was receiving payment for the services provided to VP. These services were described as “financing in advance the purchase of fuel” and it was observed that VI was acting as a credit institute or bank would. The Court therefore held that the supplies by VI to VP were exempt.

Constable Comment: Given the decision in the Auto Lease Holland case, this outcome was not a surprise. Whilst the result does not entirely fit with the way in which fuel management contracts usually operate it provides a more plausible solution to the issue that assuming that VI bought and then resupplied fuel in a complex chain of goods when, in reality, they merely pay up front for fuel and charge for this service.

Court of Appeal

2. The Exemption for the Letting of Immovable Property

This case concerned the VAT liability of supplies of residences made by Fortyseven Park Street Limited (FSPL). FSPL argued their supplies were exempt and HMRC argued they were taxable.

In essence, individuals could purchase a “share” in the property in exchange for the ability to use the rooms and other facilities offered by FSPL; this is referred to as “fractional ownership”. The ownership of such a share confers on the owner the right to occupy the property for 21 nights of Primary Use Time and 14 nights of Extended Occupancy Time. In order to occupy a residence on a particular date the “member” (owner of a fractional share) must reserve a space in advance.

FSPL contended that their supplies were exempt as the letting of immovable property, HMRC sought to argue against this on two grounds; the first that the members were not entitled to occupy the property as if they were the owner and they were not entitled to exclude others, the second being that FPSL were adding significant value to the supplies of hotel-like services and were, therefore, supplying more than merely leases over immovable property.

The Court considered, in relation to the first point, that the underlying supply is of a license to occupy the property; the condition that a reservation is made is not an impediment to access or use a residence but facilitative as a mechanism for exercising the right provided by the licence to occupy. On this point they held in favour of FSPL.

With regard to the second issue, the Court considered the nature of the supplies offered by FSPL. It was observed that the letting of immovable property is a “passive” activity, whereas there was much more active involvement from FSPL. It was stated that significant value is added to the supplies by “hotel-like services” which go beyond the mere leasing of property.

With this in mind it was held that the fractional interest purchased by members was to be seen as a prepayment for such hotel-like services, to be received over a number of years. Therefore the Court held in favour of HMRC; the supplies made by FSPL were taxable at the standard rate.

Constable Comment: This decision overturns the Upper Tribunal which ruled that the supply was an exempt lease of immovable property. It highlights the importance of seeking the highest degree of clarity when seeking to apply a VAT exemption. Exemptions are applied very strictly and in any case, especially where large amounts are involved, it is advisable to seek advice for clarity.

3. No Change Given: Treatment of Excess Payment for Parking

This appeal concerned the VAT treatment of overpayments made by people wishing to park in an NCP car park; HMRC argued they were taxable and NCP contended the excess payment to be outside the scope as an ex gratia payment.

NCP operates pay & display car parks, to make use of one of the spaces a motorist must find a ticket machine and use change to pay, in accordance with the advertised prices, by the hour for parking. The machines state that overpayments are accepted but no change will be given. In essence, the advertised rates are the minimum payment which can be made to park for the corresponding amount of hours. For example, if one hour’s parking is £1.40 and 3 hours are £2.10, a payment of £2.09 will entitle the customer to one hour’s parking and no change; there is an overpayment of 69p.

NCP had accounted for VAT on these overpayments as part of the consideration for a standard rated supply of parking facilities. However, it later sought to recover these amounts as the overpayments were not, it contended, consideration for a supply but payments freely given.

The Court considered the nature of the contracts entered into by NCP and the customer each time a ticket is printed. It was observed that the customer was made aware of the price payable and was warned that no change would be given. The Court suggested that, taken together, the advertised rates and the warning that no change would be given indicated that NCP was willing to grant an hour’s parking for at least the advertised amount. It follows that the prices paid by customers will vary somewhat but ultimately that the money paid by the customer and received by the supplier represents the consideration for that supply.

Therefore the Court held in favour of HMRC and regarded the entire amount received by NCP as consideration for a taxable supply of parking facilities.

Constable Comment: This case was ultimately decided on what counted as consideration for a supply. It serves to highlight that what appears to be a simple, fundamental concept can actually generate complex questions around the nature of individual supplies. The contention that overpayments were ex gratia payments may have been a reach but there are certainly analogies to be drawn with other circumstances.

CVC VAT Focus 23 August 2018

23rd 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 08 March 2018

8th March 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 check these annual adjustments for businesses if required.

HMRC NEWS

VAT Notice 706/2: Capital Goods Scheme

Paragraph 4.12 of this Notice has been updated for styling purposes. There have been no factual changes.

VAT: Fulfilment Business Approval Regulations

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.

Genuine HMRC contact and recognising phishing emails and texts

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.

CVC BLOG

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

In CVC’s latest blog Stewart Henry considers sales of donated goods by charities.

CASE REVIEW

Court of Justice of European Union (CJEU)

1. Whether local authority received services from its wholly owned not-for-profit company

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.

Upper Tribunal

2. VAT liability of timeshare

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

3. Permission to appeal out of time

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.

4. Whether partial exemption special method fair and reasonable

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.

5. Essex International College – VAT liability of supplies to students

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 laura.beckett@ukvatadvice.com. If you wish to subscribe to the VAT & Charities newsletter please email sophie.cox@ukvatadvice.com.

CVC VAT Focus on Land and Property – January 2018

31st January 2018

CVC VAT Focus on Land and Property

HMRC NEWS

Fraud in the provision of labour in the construction sector

We reported in our Spring Budget VAT Focus that the government would consult on a range of policy options to combat supply chain fraud within the construction sector.

Following the consultation, the government announced at the Autumn Budget that it will introduce a VAT domestic reverse charge. This will shift responsibility for paying VAT along the supply chain to remove the opportunity for revenue losses. Changes will have effect from 1 October 2019.

A summary of the responses to the consultation can be found here. It sets out that:

• HMRC will publish draft legislation as part of a technical consultation in Spring 2018
• finalised legislation will be published along with guidance by end September 2018
• legislation will be laid after 1 April 2019

VAT Information Sheet 07/17: construction services and zero-rated relief
HMRC has published an information sheet concerning how VAT is applied to the construction of buildings that keep, or make use of, parts of a building that previously stood on, or were adjacent to, the site where the works of a new construction (dwelling or building to be used solely for a relevant residential or relevant charitable purpose) are taking place. The Information Sheet follows the Upper Tribunal (UT) judgments in Astral Construction, Boxmoor Construction Limited and J3 Building Solutions.

CVC BLOG

HMRC clarifies policy on VAT zero-rating & new buildings
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 UPDATE

Court of Justice of European Union (CJEU)

1. Sale of holiday homes

Three partners; Cussens, Jennings and Kingston, have lost a long running challenge by the Irish Revenue that they set up a scheme to avoid paying VAT on the sale of holiday homes.

The partners jointly owned a development site on which they constructed 15 holiday homes for sale. Before making the sales, they entered into lease and lease back agreements with an associated company, Shamrock Estates Limited. The leases were extinguished by mutual surrender and the partners acquired full ownership of the properties. The properties were then sold to third parties. VAT was not charged on the sale to third parties on the basis that properties had been subject to a first supply (to Shamrock Estates) on which VAT was chargeable when the long lease was granted.

The Irish Revenue contended that the lease and lease back arrangements constituted a first supply artificially created in order to avoid VAT on the subsequent sales to third parties and should be disregarded. The case was appealed to the Supreme Court which decided to stay the proceedings and refer a number of questions to the CJEU. The CJEU considered the judgment in Halifax and held that the principles of abuse of rights must be interpreted as applying to this case.

CVC comment: Although this is not a UK case it acts as a reminder that if HMRC sees arrangements as contrived and for the primary purpose of reducing VAT costs then they might try to reinstate the position that should have applied, the so called “Halifax” or “abuse of rights” anti-avoidance principle.

Upper Tribunal

2. Sale and lease back – Is this a disposal?

We previously reported the FTT decision in the case of Balhousie Holdings Limited (Balhousie). Balhousie operates 25 care homes and forms part of a VAT group registration with Balhousie Care (BC) and three other subsidiaries .

The issue was whether Balhousie was liable to account for VAT on a self-supply that arose as a consequence of BC’s sale of the Huntly care home to a third party Target and the immediate leaseback from Target to BC. Huntly care home had been acquired by BC from a subsidiary of Balhousie not forming part of the BC VAT group. This purchase by BC had been treated as a VAT zero-rated first grant of a major interest in a relevant residential property. BC had entered into the sale and leaseback arrangement as a means of raising finance and HMRC considered that the onward sale had triggered a liability to a self-supply charge to VAT as a result of the change of use. BC argued that the transaction had not involved a disposal of its entire interest in the property and as such there was no VAT charge due.

The UT held that the FTT erred in law in its application of the relevant statutory provisions to the facts and a change of use VAT charge was triggered as a result of the sale and leaseback.

CVC comment: Whilst the FTT had decided that the sale and leaseback had not impacted on the actual use of the building, the UT concluded that this was not the case. BC no longer enjoys any rights flowing from the original zero-rated supply. BC may have a right of occupation but this flows from the lease not the original disposition.

First Tier Tribunal

3. Disapplication of the option to tax

PGPH Limited was formed to carry on a property business in the healthcare sector. It acquired a property from use in that business and exercised the option to tax. PGPH granted a right to use the property to Smart Medical Clinics Limited (SMCL) following which PGPH incurred expenditure on refurbishment works.

HMRC contended that the option to tax did not apply to the grant to SMCL under paragraphs 12 to 17 of Schedule 10 VATA 1994 due to the financing arrangements for the works being via a ‘relevant person’ occupying the property other than for the purpose of making taxable supplies. An individual connected to SMCL had provided a loan to PGPH. As a result, HMRC denied input tax claimed by PGPH in respect of the refurbishment. The Tribunal considered whether PGPH intended or expected the land to be a ‘relevant capital item’ at the date of the grant and whether SMCL would be defined as a ‘relevant person’ for the purposes of the legislation. The Tribunal concluded this was the case and dismissed the appeal.

CVC comment: This case highlights the importance of considering the VAT implication of transactions from the outset.

4. Whether novation of a contract amounted to a VAT exempt supply of land

Hanuman Commercial Limited (HCL) intended to purchase a commercial property and convert it into residential flats. HCL entered into a contract with Sabre Insurance Company Limited (Sabre) to purchase the property for £2.8 million (the “Sabre contract”). Sabre had opted to tax the property so the sale would be subject to VAT. The Sabre contract was conditional on Sabre securing that two of the tenants vacated the property and on HCL obtaining satisfactory planning permission. Prior to completion of the Sabre contract, HCL entered into a contract to sell the property to Connect Centre Limited (CCL) for £5.5 million (the “CCL contract”).

On 16 May 2014, a number of additional agreements were entered into. The net effect of these agreements was that instead of Sabre selling the property to HCL for £2.8 million and HCL selling the property to CCL for £5.5 million, Sabre would sell the property to CCL for £2.8 million (less the deposit already paid by HCL) and CCL would make a separate payment to HCL for £2.7 million less the deposit already paid by CCL.

HCL issued CCL with two VAT invoices. The first being for the sale of the interest in the contract for £2.7 million plus VAT. The second was for varying the contract and was for £25,400 plus VAT. HCL failed to submit a VAT return for the relevant period and also did not seek to recover any VAT incurred in relation to the transactions. HCL decided that VAT had been charged in error and issued credit notes. HCL argued that it acquired an interest in the property which it then sold to CCL, which would be a VAT exempt supply as it had not opted to tax. HMRC contend that HCL did not supply a freehold interest in the property, instead it supplied an unexercised contractual right to purchase the property which is standard rated. The Tribunal agreed with HMRC that HCL had supplied services which were subject to VAT.

CVC comment: This case highlights the need to seek advice when contracts are drafted to ensure such amendments do not have adverse tax implications.

CVC VAT Focus 11 January 2018

11th 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.

CVC VAT Focus 30 November 2017

30th November 2017

HMRC NEWS

Autumn Budget 2017
The Chancellor delivered his budget last week. Please see CVC’s VAT Focus – Autumn Budget 2017 for the VAT highlights.

HMRC’s Help and Support for VAT
The latest webinars about what to do after you’ve registered for VAT and VAT on motoring expenses have been published online.

Policy Paper: VAT threshold maintained for two years
This tax information and impact note confirms the VAT registration and deregistration thresholds announced at Autumn Budget 2017.

Extending joint and several liability for online marketplaces and displaying VAT numbers online
This tax information and impact note deals with the extension of joint and several liability for online marketplaces announced at Autumn Budget 2017. This guidance note has also been published which explains the measure.

Policy Paper: Refunds to combined authorities, fire and rescue authorities
This tax information and impact note deals with refunds to combined authorities announced at Autumn Budget 2017.

Government Information and National Health Trusts (GIANT) online service
Government department, NHS trust or Royal Household can now use the online service to file forms VAT21 and VAT 100.

CASE REVIEW

Court of Justice of European Union (CJEU)

1. Bad debt relief

The recent CJEU case of Mr Di Maura considered whether the Italian authorities were acting lawfully in only allowing a taxpayer to reclaim VAT under Bad Debt rules where its customer was declared insolvent and it was established beyond doubt that a debt would not be paid. The Italian situation differs from the UK position, where it is possible to reclaim VAT paid on unpaid supplies after 6 months, subject to certain conditions.

The CJEU held that current Italian rules breached the fundamental principles of neutrality and proportionality in leading to a position where a taxpayer has paid the authorities VAT that it has not received and is not allowed to correct the position for an unreasonable period of time (insolvency proceedings in Italy can take up to ten years).

CVC comment: the current conditions attached to bad debt relief claims in Italy put businesses in Italy at a cash flow disadvantage compared to businesses trading elsewhere in the EU. This ruling may also impact other Member States that apply similar rules to Italy. The UK’s implementation of the bad debt relief rules appear to be compliant in light of this decision.

2. Content of VAT invoices

The CJEU recently ruled, in the joined cases Finanzamt News (C-374/16) and Igor Butin (C-375/16), that the supplier’s address shown on a VAT invoice does not need to be the address where it carries out its economic activity. In the cases at issue the suppliers had used their postal address on its invoices. The CJEU considered that the purpose of including the supplier’s name, address and VAT registration number is to allow the tax authorities to check whether VAT has been declared and paid. It is implied in the decision that these checks can be done regardless of which of the supplier’s addresses is included on the VAT invoice.

CVC comment: we have not experienced a case where HMRC has refused an input tax claim because the supplier’s address was not the place where their economic activity was carried out; however, if you have had an input tax claim refused on this basis you may wish to re-visit this.

3. Sale of holiday homes

Three partners; Cussens, Jennings and Kingston, have lost a long running challenge by the Irish Revenue that they set up a scheme to avoid paying VAT on the sale of holiday homes.

CVC comment: although this is not a UK case it acts as a reminder that if HMRC sees arrangements as contrived and for the primary purpose of reducing VAT costs then they might try to reinstate the position that should have applied, the so called “Halifax” or “abuse of rights” anti-avoidance principle.

First Tier Tribunal

4. Default surcharge appeal allowed

Stylographics Limited (SL) appealed against a default surcharge on the basis it had a reasonable excuse for making a late payment in respect of its VAT return for the quarter ended 31 December 2016. The amount payable to HMRC was much larger than SL was used to. The payment was processed by SL on the due date at 4pm; however, the bank did not process the payment because there was a transaction limit on the account of £250,000 which could not be uplifted in time. The bank recommended that SL split the payment over two amounts, which SL did; however, this was done at 5.55pm on the due date for payment and the bank’s cut off time for processing same day payments is 5.45pm.

The Tribunal found that there was a series of unforeseen unfortunate events outside of the taxpayer’s control which prevented payment from reaching HMRC by the due date. The appeal was allowed and the default surcharge discharged.

CVC comment: it is unusual for default surcharge appeals to be allowed. This case demonstrates an example of a ‘reasonable excuse’.

5. eBay trader – penalty for failure to notify liability to be VAT registered

Ms Parminder Kaur sold goods on eBay in the period June 2010 to July 2011. In February 2015 HMRC commenced an investigation into Ms Kaur’s tax affairs. Ms Kaur stated in a letter to HMRC dated 3 October 2015 “…I had made no profit no money from the venture. I did not know or was aware that I had to keep any paperwork or accounts, as I did not, so I do not know what my liability will be as I made nothing from it.”

HMRC analysed a sample of 3,983 feedback postings on Ms Kaur’s eBay account to estimate the turnover of the business. Ms Kaur objected to the sampling methodology so HMRC calculated the sales on all 20,574 feedback postings. The turnover in the period was approximately £278,000 with sales in Sterling, Euros, US Dollars and Australian Dollars. HMRC concluded that Ms Kaur was liable to be registered for VAT from 1 December 2010 and ceased trading on 17 July 2011. The VAT liability was assessed at £27,632.98 and a failure to notify penalty of £14,507.31 was applied. Following formal review HMRC reduced the penalty to £6,908.24.

The Tribunal found that the VAT liability calculation by HMRC was performed to HMRC’s best judgement and agreed with HMRC’s penalty calculation. The taxpayer’s appeal was dismissed.

CVC comment: the penalty regime is based on the taxpayer’s behaviour. Penalties may be mitigated if the taxpayer tells HMRC about the error, gives HMRC reasonable help to resolve the matter and allow HMRC access to records where necessary. We would always encourage pro-active behaviour. HMRC is paying particular attention at the moment to transactions taking place on online marketplaces such as eBay and Amazon.

6. Zero-rating and input tax denied

C F Booth (CFB) is in the business of metal recycling and metal ingot manufacturing in Rotherham. HMRC denied a claim (in the sum of £160,281.50) by CFB to zero-rate eight supplies of metal to a Belgium registered trader on the basis of CFB’s failure to produce satisfactory export evidence. HMRC also denied input tax in the sum of £2,607,776 on the basis that 655 purchases of various metals were connected to the fraudulent evasion of VAT and that CFB knew or should have known the connections. CFB appealed both decisions and these were heard together before the Tribunal.

A vast amount of information was put before the Tribunal. Documentary evidence was contained in 23 lever arch files and evidence was heard from 19 witnesses. The Tribunal dismissed the appeal holding that CFB cannot have either acted in good faith or taken every reasonable measure not to become a participant in any fraud. Therefore, even if export evidence had been satisfactory, HMRC would have been entitled to deny zero-rating. Additionally, given its standing and history in the sector, its experience and financial strength (taking account of CFB’s £21 million overdraft facility) CFB must have known of the connection to fraudulent evasion of VAT.

CVC comment: This case highlights that it is not enough for businesses to obtain satisfactory evidence to support a particular VAT treatment. Businesses must take reasonable steps to ensure that it does not become a participant in VAT fraud.