Tag Archives: recovery

Constable VAT Focus 01 February 2019

1st 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 26 July 2018

26th July 2018

HMRC NEWS

HMRC publishes more information on Making Tax Digital

HMRC has published further information on Making Tax Digital to support businesses and agents in the run up to the start of the mandatory Making Tax Digital VAT service from April 2019.

Revenue and Customs Brief 7 (2018): VAT – motor dealer deposit contributions

This brief explains HMRC’s policy on the VAT accounting treatment of promotions where payments are made to finance companies by motor dealers for the customer.

Draft legislation: Amendment of the VAT (Input Tax) (Specified Supplies) Order 1999

This is the consultation on draft amendments to the Specified Supplies Order to address the issue of VAT off-shore looping in the financial services sector.

Registration scheme for racehorse owners (VAT Notice 700/67)

Find out if you can register for VAT under the VAT registration scheme for racehorse owners

Help and support for VAT

Get help with VAT by using videos, webinars, online courses and email updates from HMRC.

 

CASE REVIEW

CJEU

1.Acquisition and holding of shares: An economic activity?

This French referral concerned the letting of a building by a holding company to a subsidiary and whether this would constitute involvement in the management of that subsidiary, giving rise to a right to deduct input VAT incurred on the acquisitions of holdings in the subsidiary. If found to constitute management, the acquisition and holding of shares in the subsidiary would be an economic activity.

Marle Participations (Marle) is the holding company of the Marle Group. It let a building to some of the subsidiaries whose shareholdings it also managed. It conducted a restructuring operation which led to purchases and sales of securities, it sought to recover input VAT incurred in the course of the restructure. During a VAT audit, the tax authorities issued assessments to recover VAT claimed. This was on the basis that the expenditure by Marle was capital in nature and so a right to deduct VAT incurred did not arise. Marle appealed this decision.

The referral from the French court asks whether the VAT Directive must be interpreted as meaning that the letting of a building by a holding company to its subsidiary constitutes involvement in the management of that subsidiary, which must be considered an economic activity.

The CJEU considered case law and the VAT Directive. It was held that the involvement of a holding company in the management of subsidiaries constituted an economic activity where the holding company carries out a taxable transaction. The Court decided that the letting of a building to the subsidiary did constitute an economic activity so there was a right to deduct VAT incurred on expenses relating to the restructuring giving rise to the acquisition of shares in the subsidiary.

However, it was also held that where the holding company is only involved in the management of some subsidiaries but not all, then a fair apportionment method must be used to calculate the amount of input VAT to be recovered.

CVC Comment: This decision is relevant to the recovery of VAT incurred by holding companies. If holding companies make taxable supplies (in this case taxable lettings of buildings to subsidiaries) then, subject to the usual rules, input VAT recovery rights are likely to arise. Restructuring a company and transferring securities can lead to very complex supplies and processes which can be hard to classify. What can, on the face of it, take place as an accounting entry can give rise to a real-life tax liability. Before taking on any restructuring projects professional advice should be sought to provide certainty of compliance.

 

2. Right to deduct: Transactions did not take place

The Court heard two requests for a preliminary ruling concerning the interpretation of the EU law concerning the right to deduct input tax.

The two companies, SGI and Veleriane, are established and operate in France purchasing equipment intended to be leased to operators in France. Following a VAT audit, the tax authorities challenged the right to deduct VAT on various purchases as the invoices did not relate to any particular delivery and issued assessments of VAT to this effect. Both companies claim to have acted in good faith with regard to these transactions but the referring court highlights that the companies could not have been unaware of the fictitious nature of some of the transactions and the associated overcharging.

SGI claims that, in the absence of any serious indication of fraud, it is not obliged to prove to the authorities that the transactions took place and Valeriane claim the referring court did not consider whether the tax authorities had adduced the necessary proof that it knew or ought to have known that the transactions were connected with VAT fraud.

The domestic Court referred the question of whether the EU law must be interpreted as meaning that, in order to deny a taxable person in receipt of an invoice the right to deduct VAT appearing on that invoice, it is sufficient that the authorities establish that the transactions covered by that invoice have not actually been carried out or whether those authorities must also establish that taxable person’s lack of good faith.

Giving consideration to the principles of legal certainty and fiscal neutrality, the Court held that under the EU law it is sufficient for the tax authorities to establish that the transactions have not taken place and there is no requirement to show a lack of good faith when denying the right to recover input VAT on transactions which have not taken place.

CVC Comment: The right to recover input VAT arises when VAT becomes properly chargeable. If no supply can be evidenced to have been made in relation to the invoice giving rise to a claim to deduct VAT then the VAT incurred is not deductible. It is important to be aware of supply chains and to ensure that each transaction actually takes place before submitting a VAT reclaim to avoid unexpected tax assessments.

 

Supreme Court

3. Relying on claims made by a former member of a group VAT registration

This appeal by HMRC concerns the validity and timing of claims for the repayment of incorrectly paid VAT by Carlton Clubs Limited and whether those claims could be relied on by the representative member of a group VAT registration.

HMRC had refused a number of claims for repayment of incorrectly paid VAT made on behalf of Taylor Clark Limited (TCL) by a subsidiary. TCL was the representative member of a VAT group registration which contained Carlton Clubs Ltd (CCL) by whom the claims were made as it carried on the activity of Bingo to which the claims related. TCL contended that these claims should be recoverable by itself as the representative member of the VAT group, highlighting that CCL was no longer in the group.

The FTT held that the subsidiary would have been entitled to the repayment of VAT and TCL could not rely on the claims as they were not made by TCL. The UT found that whilst TCL may have been able to reclaim VAT it did not make a claim for repayment within the time limits allowed, therefore there could be no repayment. The Court of Session, however, ruled in favour of TCL, stating that a claim may be made on behalf of the representative member of a VAT group by a former member and subsidiary.

The Supreme Court has ruled that the Court of Session erred in finding this to be the case. It was held that HMRC’s liability for overpaid output tax is owed to the person who accounted for the VAT (CCL). Unless CCL was acting as an agent to TCL at the time the claims were submitted, the claims cannot be relied upon by TCL now. After extensive consideration of the relationship between TCL and CCL, the conclusion was that CCL was not acting in the capacity of an agent by submitting the claims. The Supreme Court held in favour of HMRC and allowed their appeal.

CVC Comment: This case serves as a reminder of the importance of considering who is entitled to benefit from claims for overpaid VAT in the context of a group VAT registration. A consequence of VAT grouping is that any business activity carried out by a group member is treated as if it is done by the representative member.

 

UTT

4. Direct and immediate link with main economic activity

This appeal concerns whether a company established outside the EU is entitled to recover input VAT on the cost of tools leased to an EU company for no consideration. JDI is incorporated in the Cayman Islands and is part of a group of companies (The Baker Hughes Group). The FTT had previously agreed with HMRC that there was not a sufficient link between the acquisition of the tools by JDI and an economic activity to allow repayment of the VAT incurred.

JDI acquired the tools as part of a company restructure along with the intellectual property rights for the tools, VAT was charged on this supply which JDI sought to recover. The intellectual property gave JDI the right to manufacture further tools and spare parts. Rather than producing the tools itself, it gave out contracts to manufacturing companies to fabricate them. JDI paid the manufacturing companies for this but made no charge to the Baker Hughes Group in the Netherlands when leasing the tools to them. It contended that its main economic activity is the supply of spare parts to companies using the tools and therefore that there is a direct and immediate link between the acquisition of the tools and its main economic activity.

The Upper Tribunal agreed with the FTT and HMRC that the required direct and immediate link had not been established. There was no charge for the leasing of the tools. They were not connected with a taxable supply, VAT incurred was irrecoverable. It was also confirmed that JDI was not, in this capacity, acting as a taxable person.

CVC Comment: This case serves as a reminder of the importance of considering all aspects of arrangements entered into with connected parties. VAT incurred is recoverable to the extent that it relates to taxable business supplies. In this case as there is no charge for the lease of the tools there was no connection with the original purchase of those tools to a taxable supply so input VAT was wholly irrecoverable.

5. Place of supply rules

This appeal concerns the place of supply for the supply made by IC Wholesale Limited (ICW), a UK company, to customers in the Republic of Ireland of cars acquired in Cyprus and Malta. ICW  contended that as it had invoiced the customers in Ireland before the cars left Malta and Cyprus, despite the fact that the cars entered the UK, the supplies took place outside of the UK and therefore should not bear UK VAT.

The FTT found against ICW, concluding that the supplies had taken place in the UK as the cars physically arrived in the UK before being sold. It was also noted that ICW held insufficient evidence to demonstrate that the cars had been removed from the UK.

The UT agreed with the FTT, asserting that ICW used its UK VAT registration number when ordering the cars and the cars physically entered the UK. The suppliers were not informed that the vehicles would be re-sold and, in the absence of sufficient evidence of export, ICW must be treated as acquiring the goods in the UK and therefore the appeal must be dismissed.

CVC Comment: When exporting goods it is essential to retain evidence in order to support zero-rating of the supply. The place of supply rules are also important and should be borne in mind for each transaction involving the movement of goods into and out of the UK. For advice with any place of supply issues please contact CVC as there could be significant financial implications if VAT accounting errors are made.

6. Business/non-business apportionment

The Tribunal considered a claim for repayment of VAT relating to services supplied by NHS Lothian Health Board (LHB) to non-NHS, private customers such as local authorities. It was an agreed fact that VAT had been incurred and paid but not recovered by LHB in the period from 1974-1997.

The FTT originally rejected the claim for repayment on the basis that a business/non-business apportionment had not been calculated to an adequate extent. The FTT gave some consideration to partial exemption and direct attribution. This appeal focussed on whether this was incorrect. The appellants asserted that it was an error to consider direct attribution and partial exemption when all that was required was a business/non-business apportionment.

The UT found that it would have been an error of law for the FTT to rely on partial exemption principles when apportioning business/non-business activities for the purpose of input tax recovery. However, whilst the FTT did discuss partial exemption, the UT was content that the FTT had not relied on it and that they instead relied on the reasonableness of the proposed apportionment.

It was held that the FTT was entitled to find the proposed business/non-business apportionment unreasonable and its decision to reject the claim for input VAT recovery from 1974-1997 stands.

CVC Comment: In this case LHB sought to retrospectively extrapolate a partial exemption recovery percentage from a specific period from 2006 to 1997. Before making a retrospective claim for input VAT recovery it is important to be clear on the appropriate methodology. In cases where the business is not fully taxable an apportionment is required to reflect non-business or VAT exempt business activities. If you think your business or charity may be entitled to a retrospective repayment of VAT incurred on costs that cannot be directly attributed to taxable supplies please do not hesitate to contact CVC to discuss the best strategy for your individual case. Please remember that, if VAT registered, retrospective claims are capped at four years.

 

CVC VAT Focus 26 April 2018

26th April 2018

 

HMRC NEWS

HMRC has updated guidance on its website as follows:

Register for VAT if you own land with another person

Find out if you need to register for VAT jointly or as an individual when you buy, let or develop land with another taxable person.

VAT registration for groups, divisions and joint ventures

Link to VAT registration for people who own land with another person added to ‘Joint ventures and VAT’ section.

Tell HMRC about an option to tax land and buildings

Notification of an option to tax land and or buildings (VAT1614A) form has been updated.

VAT MOSS exchange rates for 2018

Find currency exchange rates for VAT Mini One Stop Shop (VAT MOSS) businesses registered in the UK to complete declarations.

 

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

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. Follow the link to read our most recent blog, by Robert Thorpe, which explains this further.

 

CASE REVIEW

 

CJEU

 

1. Time limits on right of deduction of input tax: Portugal

In Biosafe, there were taxable supplies made in 2011 from one VAT registered trader to another (Flexipiso), in the course of business, with appropriate supporting documentation. Under EU VAT law, this gives rise to a right of deduction of the input tax incurred by the purchaser in the relevant VAT period on purchases which relate to those taxable supplies. Flexipiso recovered the relevant input VAT, charged at the reduced rate of 5%, incurred on purchases from Biosafe. Several years later, Biosafe were subject to a tax inspection which revealed that the reduced rate of 5% had been incorrectly charged. The Portugese authorities assessed that the supplies were subject to the standard rate of VAT of 21% (Portugal) and Biosafe paid over the monies assessed.

Biosafe sought reimbursement from Flexipiso who refused to pay on the grounds that, under domestic law, their right to deduction of input VAT expired four years after the original supply was made. This brought two questions before the CJEU. The first being, does EU law preclude domestic legislation which prevents the four year period during which a right to deduction arises beginning again on the date assessment documents are issued to the supplier. The second being, if the answer to the first question is no, does the EU law preclude domestic legislation which, in the current situation, makes it legitimate for the purchaser to refuse to pay VAT when it is impossible to deduct that additional tax?

In response to the first question, it was held that the Directive does preclude domestic legislation where the right to deduct input tax is refused on the ground that the time limit for that right started to run from the date of the initial invoice. In the light of this response, the Court held that the second question did not require an answer as it follows logically from the first that a taxable person may not be denied the right to recover input tax by domestic time limits.

CVC Comment: This case confirms that where input tax has been deducted at an incorrect rate, the right to recovery by the business incurring the incorrect expense cannot be precluded by domestic time limits on the right to recovery.

 

2. Interpretation of EU Law on deduction adjustment

This case concerning SEB Bankas AB (SEB) was related to a supply made to SEB by VKK Investicija (VKK) of building land. Initially the parties had agreed that the transaction was subject to VAT. Some years later VKK decided that the supply was VAT exempt and raised a credit note to SEB to reflect this. This left SEB owing the authorities the input VAT originally deducted on the transaction. A fine was raised on SEB by the authorities as well as the assessment to tax. After progressing through domestic courts, questions came before the CJEU regarding the interpretation of the EU law on VAT adjustments.

The key questions before the court were; whether the obligation to adjust undue VAT deductions applies where the initial recovery could not have been made lawfully as the transaction was exempt and, if so, whether the mechanism for doing so applies in situations such as those in the main proceedings. The Court held that the EU law does require the adjustments of VAT deductions which should not have arisen because VAT was charged unlawfully.

As regards the date on which the adjustment should be made, the CJEU held that this is for national courts to decide, taking account of the principles of legitimate expectation and legal certainty and that a taxpayer’s deduction of VAT cannot, applying the principle of legal certainty, be open to challenge for an indefinite period.

CVC Comment: Where a deduction of tax has been, mistakenly, unlawfully made in relation to an exempt supply, then there is a duty on the person making the deduction to make an adjustment when this is discovered. Whether or not the obligation arises immediately is a matter which has been left open to domestic interpretation. It appears that UK policies are already in line with this decision insofar as in most cases, after four years, VAT periods are no longer open for a mandatory adjustment.

 

3. Triangulation and EC Sales Lists

Firma Hans Bühler, a limited partnership established and VAT registered in Germany and also identified in Austria for VAT purposes, bought products from suppliers established in Germany. Those products were sold to a VAT registered customer in Czech Republic. The products were dispatched directly from the German supplier to the customer in Czech Republic. The German supplier provided its German VAT registration number and Firma Hans Bühler’s used its Austrian VAT registration number on its invoices provided to the Czech Republic customer. The triangulation simplification was used; as such, the final customer in the Czech Republic accounted for VAT due in the Czech Republic.

The Austrian tax authorities found that Firma Hans Bühler’s supplies were ‘abortive triangular transactions’ because the reference to triangular transactions did not appear on Firma Hans Bühler’s EC Sales List.

The CJEU stated that the triangulation simplification cannot be refused because the EC Sales List has been submitted late. In addition, it is not relevant that Firma Hans Bühler’s Austrian VAT registration number was no longer valid on the date it submitted its EC Sales List (it is relevant that the VAT number is valid at the time of the supply). If the failure to submit correct EC Sales Lists on time meant that the taxpayers could not evidence the conditions for triangulation had been met, the triangulation could not apply.

The CJEU also commented that the benefit of the triangulation simplification cannot be refused on the basis that the intermediate supplier is VAT registered in the member state of dispatch.

CVC comment: the judgment confirms that the triangulation simplification can apply even if the taxpayers EC Sales Lists are not compliant provided the taxpayers can evidence that all of the conditions for simplification are met.

 

First Tier Tribunal

 

4. Sufficiently Self-contained?

This appeal by Colin James Mitchell and Kim Louise Mitchell concerned the recovery of input VAT under the DIY Builders Scheme in respect of the construction of a building in their garden. HMRC had initially refused the recovery on the grounds that not only was the building was not “self-contained living accommodation” but also that the planning consent prohibited the separate use of the building from the house; conditions necessary for a claim under the DIY Builders Scheme.

In order for a refund to be successful the building must be self-contained living accommodation and a key issue between the appellants and HMRC in this case was the absence of a kitchen in the new building. HMRC contended that this meant the building was incapable of being self-contained. The Tribunal agreed, on this point, with the appellant who argued that the ability to install and use a microwave was sufficient for the building to be constituted as self-contained.

The second prong of HMRC’s contention was the prohibition of separate use of the building in the planning permission, “…shall not be used as a separate residential unit at any time” amounts to a prohibition on separate use. They also add that the planning permission for a “garage” cannot be construed as a “dwelling”.

The Tribunal agreed with HMRC on the second point and dismissed the appeal.

CVC Comment: In cases where planning permission specifically forbids separate residential use of a construction then the Tribunal are unlikely to find in favour of the applicant. Prior to any expenditure on development it is vital that the tax implications be considered and this involves detailed analysis of the proposal and planning permission granted.

 

5. Printed matter: Zero-rated goods or standard rated service?

In this instance, The Tribunal had to decide supplies by Paragon Customer Communications Limited (Paragon) to Direct Line Insurance Services (DLIS) amounted to, as Paragon contended, a single supply of booklets comprising of predominantly zero-rated matter or, as HMRC contended, a supply of services, of which booklets were not a predominant element. It is also asserted by HMRC that some of the booklets supplied as zero-rated were in fact not supplies of booklets and so should have been standard-rated.

Paragon supplied various documents in relation to insurance documents for DLIS including advertising, standard Terms and Conditions, appraisals and reminders. The question came before the Tribunal as a result of an assessment on Paragon who HMRC contended was making a single, standard-rated supply of services based on the preparation and packaging involved in the process of supplying the products, the envelopes used and separate documents which were not part of the main supply i.e. the aforementioned appraisals and terms and conditions documents. Paragon appealed this assessment by HMRC on the grounds that the supplies made were one composite supply of zero-rated booklets, this was, in essence, a question of single or multiple supply.

Whilst the Tribunal considered multiple cases, including the single supply criteria in Card Protection Plan and issues of divisibility considered in Levob Verzekeringen BV, the conclusion of the Tribunal was relatively clear; Paragon is successful in its appeal against the assessment. It is held that packaging and delivery of the disputed documents is, in this instance, considered to be a single, zero-rated supply of booklets.  

CVC Comment: this decision may have a wider implication, in particular for charities. Many charities cannot recover VAT incurred because of their non-business and/or VAT exempt activities. HMRC changed its policy some years ago with respect to the VAT liability of direct mailing services (standard rated). This decision may call into questions HMRC’s policy. It will be interesting to see if this decision is appealed by HMRC to the Upper Tribunal.

 

VAT recovery, supplying insurance and the benefits of customer location

20th April 2018

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 22 March 2018

22nd 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

Revenue & Customs Brief 3 (2018): Changes to the VAT exemption for cost sharing groups.
This brief and the related VAT information sheet explain the immediate changes that are taking place in HMRC’s policy following recent judgments

VAT Notes 2018 Issue 1
HMRC has published its 2018 VAT Notes Issue 1.

VAT: businesses that sell goods in the UK using online marketplaces
Updated with changes announced in the Autumn 2017 Budget for sellers that use online marketplaces.

VAT returns and EC Sales Lists Online: VAT
How to use the test service: 4.1 guidance has been updated with version 4.2.

Draft legislation: The Value Added Tax (Amendment) Regulations 2018
Response to consultation has been published.

CVC BLOG

Spring Statement 2018 and VAT

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT. Please see our news item for further information.

CASE REVIEW

Upper Tribunal

1.Planning Permission Post-Sale

Cavendish Green Limited (Cavendish) appealed against a previous decision that the sale of a building did not qualify for zero-rating as the structure present at the point of transfer did not have automatic statutory planning permission and had not received planning permission from elsewhere. In the absence of the necessary planning permission, the sale should have been treated as VAT exempt and Cavendish should not be able to claim back input VAT relating to the project.

The First Tier Tribunal made it clear that planning permission must be sufficient at the time of supply in order for the sale of a building to benefit from zero-rating. In the Upper Tribunal, Cavendish sought to introduce new evidence to show that the structure in question did in fact have statutory planning permission at the time of sale and was thus able to benefit from the zero-rate. The Tribunal refused to admit this evidence as it found the behaviour of Cavendish to be “most unsatisfactory” as it failed to make a formal written application with evidence to support its claims and the addition of new evidence would not be fair and just.

The appeal was dismissed as the taxpayer had no proof to demonstrate that the structure met the conditions for automatic statutory planning permission, this case may have had a different outcome had Cavendish approached the Tribunal differently. 

First Tier Tribunal

2. Sales of properties; TOGCs?

In this case the Tribunal considered whether the sale of four properties by Clark Hill Limited satisfied the necessary criteria to be treated as transfers of going concerns and, therefore, be outside the scope of VAT as neither a supply of goods nor services. The main issue between the parties is the interpretation of “relevant date” in the VAT law.

The Tribunal issued four decisions, relating to one property each. In three from the four transactions before the court, the transfer was held not to be a TOGC as HMRC had not been informed of the exercising of the option to tax by the “relevant date” which is held to be the date on which the deposit is received by the seller’s solicitors. The fourth property transaction presented its own unique circumstances which led to a different conclusion. The deposit was paid to the auctioneers of the property on the 3rd of December, the seller’s solicitors received the funds on the 16th. The point on which this question turns is the capacity in which the auctioneers held the deposit; agent or stakeholder.

HMRC contend that the funds were held by the auctioneers as an agent for the seller and therefore that Clark Hill should be treated as having received the deposit when the auctioneers did, on the 3rd December. Clark Hill refuted this, claiming that there is no evidence to support the claim that the auctioneers were agents. The Tribunal agreed and this transaction was treated as a TOGC.

3. Appealing an assessment out of time

In Homechoice Flooring Limited (HFL), the appellant’s director, Mr. Singh, sought permission to make a late appeal in respect of a VAT assessment. Mr. Singh was over two years late in making this appeal, his explanation being that he believed he had in fact, through his former accountants, lodged an appeal already. He sought to contend that as he believed HFL’s accountants were dealing with the appeal, he had no cause to believe any further action was required on his or HFL’s behalf.

In response, HMRC looked to whether or not there was a reasonable excuse for the delay, arguing that HFL’s contention that an appeal had been made is not supported by any documents and there is no record of an appeal at HMRC in relation to this matter. It was also put forward that as Mr. Singh had changed accountants twice since the assessment, he could reasonably have been expected to make enquiries into the status of the appeal he believed to be ongoing.

As Mr. Singh made no effort to check on the status of HFL’s appeal, the Tribunal found that his excuse could not be seen as reasonable and therefore dismissed his appeal. They also stated that poor trading results do not amount to a reasonable excuse.

4. Bridge between buildings: does it make an annexe?

St Brendan’s Sixth Form College (St. Brendan’s) appealed against a decision made by HMRC that certain construction works carried out for St Brendan’s were liable for VAT at the standard rate, not zero-rated as St Brendan’s believed. A new block was built in order to provide extra space for teaching, a café and a staff room. The question is whether the new building qualified for zero-rating under Item 2, Group 5, Schedule 8 Value Added Tax Act 1994.

HMRC argued that the new building was not a separate building because of a link bridge between the new building and a pre-existing building. It was also contended that as the activities that will take place in the building are similar to those already taking place on the site in other buildings, the new building is actually an extension of the existing buildings. To refute this, St Brendan’s contended that the building is a separate building with its own access and facilities and is a different type of building and constructed of different materials, and serving different purposes.

After considering all points and taking into account the relevant case law, the appeal was allowed on the grounds that the new building was a new building and was not merely an extension of, or annexe to, the pre-existing buildings on site.

5. Zero rating hot food

Pegasus (Manchester) Limited (Pegasus) appealed against a VAT assessment relating to food sales which HMRC deemed to be hot and therefore standard rated. The appellant sold takeaway food in spill-proof containers which were not intended to retain heat. Pegasus contend that the food served is not intended to be hot at all but is served warm as a result of storage at 56C in a bain-marie, in order to comply with  the food safety and hygiene regulations 2013. Before being placed in the bain-marie the food is cooled to 19-20C which is below the ambient temperature of the restaurant which is claimed to be 28-30C.

HMRC submitted that as the cooked food is kept in a bain marie with a temperature of 56C, the food is hot as it is above the ambient temperature; “hot” does not need to mean piping hot. It is also submitted that the main purpose of the bain marie is to sell hot food and moreover that compliance the food safety and hygiene regulations 2013 is only required where food is to be sold as hot. The provision by the appellant of napkins and cutlery to customers imply that the food is to be consumed as it is sold and it is sold as hot food.

The Tribunal found in favour of HMRC in this instance as the food is kept hot before being served and is hot as defined in the relevant legislation when it is supplied. The supply should therefore be standard rated.

6. Default surcharge direct debit not taken

Crown Blinds Limited appeal against a VAT default surcharge relating to late payment of VAT. The appellant does not dispute that the VAT for the relevant time period was paid late but submits that he had a reasonable excuse as he had a direct debit instruction in place for the payment of VAT but HMRC had failed to process this.

The appellant had cancelled the direct debit and reinstated it several times between September 2016 and March 2017 and HMRC had contacted the appellant on each of these occasions to state that if payment of VAT is to be taken by direct debit then a new instruction must be set up online or by sending paper instruction.  Despite an email from the appellant’s bank manager stating that the direct debit had been reinstated on 5th June 2017, the payment was not processed as the instruction was not reinstated on HMRC’s systems. HMRC had already advised that a new mandate would be required in correspondence in March 2017 and submit that a prudent trader would have acknowledged the correspondence and used an alternative method to make payment for the relevant periods.

The Tribunal found in favour of HMRC, stating that the appellant should have paid closer attention to the correspondence from HMRC which made clear that the direct debit was not being processed. The appellant cannot be said to have a reasonable excuse so the penalties were confirmed in full.

 

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.  

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