We would like to wish our regular readers and subscribers a happy and prosperous 2018.
HMRC were busy during the last couple of weeks of 2017. The following documents were published or updated on the gov.uk website:
- VAT Notes 2017 Issue 4
- Revenue & Customs Brief 4 (2017): judgment of the Supreme Court in Investment Trust Companies
- Notice 799: disclosure of tax avoidance schemes for VAT and other indirect taxes
- VAT: apply for Simplified Import VAT Accounting (SIVA)
- Help and support for VAT
- Revenue & Customs Brief 6 (2017): VAT – treatment of sports facilities by local councils
- VAT Information Sheet 08/17: claims by local authorities for overpaid VAT on supplies of sporting services
- VAT Notice 700/8: disclosure of VAT avoidance schemes
- VAT Government Information and National Health Trusts (GIANT): service availability and issues
- VAT Notice 700/56: insolvency
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.
Court of Justice of European Union (CJEU)
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.
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
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.
Owners of Harley-Davidson motorcycles may join the Harley Owners Group (HOG). HOG is a business unit of Harley-Davidson Europe Limited (HDE). HDE appealed against HMRC’s decision that supplies made by it to members of HOG in consideration for membership subscriptions constitute a single, standard rated, supply for VAT purposes. HDE contends that it makes a number of distinct supplies to each member and the VAT treatment of each benefit must be determined separately.
Under HMRC’s approach VAT is chargeable on all membership subscriptions regardless of where the members belong. Under HDE’s approach no VAT is chargeable on supplies to members outside the EU (being zero-rated supplies of goods and/or services); and, a substantial proportion of the membership fee paid by EU members relates to zero-rated printed matter.
Benefits received by HOG members include a magazine, patches and pins, maps, e-magazine, museum entry, events and online access.
HMRC’s primary argument was that there was a single principal supply of membership and all other benefits were not ends in themselves but a means of better enjoying the principal element; however, the Tribunal found that members do not join HOG simply for the status of being a member. The typical member wants the individual benefits. In addition, while the Tribunal Judge did consider it relevant that a single price was charged and members did not have the ability to choose what benefits are supplied (suggesting a single supply), it is clear from case law that this is not determinative. The Tribunal concluded that the individual benefits provided are too significant to allow the supply to be characterised as a single supply of membership rather than a number of independent supplies. HDE’s appeal was allowed.
CVC comment: this decision provides interesting commentary regarding the distinction between single and multiple supplies for VAT purposes. This topic has been considered a number of times before the Tribunals and Courts.
We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email firstname.lastname@example.org. If you wish to subscribe to the VAT & Charities newsletter please email email@example.com.