Tag Archives: single supply

Constable VAT Focus 13 June 2019

13th June 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 certain salary sacrifice schemes, payroll services supplied to vulnerable people and the recoverability of VAT on development costs where there could be one supply of a development project or two supplies of individual buildings.

HMRC NEWS

Changes to the VAT MOSS rate for other countries

HMRC has released information about changes to the rates for VAT Mini One Stop Shop (VAT MOSS) for other countries.

Domestic reverse charge for building and construction services

HMRC has released further information about the VAT domestic reverse charge for building and construction services that starts on 1 October 2019.

Constable VAT has covered this topic in a recent blog which can be viewed here. This will be of interest to anyone operating in the construction industry.

CONSTABLE VAT NEWS

We recently circulated a new VAT & Charities Newsletter which is available to read on our website.

In this publication we cover some of the most important and interesting areas of VAT for charities. Whilst some of the issues and cases have been discussed in our VAT Focuses, the charity edition of the newsletter aims to give a more directly relevant summary for those operating in the third sector.

If you would like to receive email notifications when there is a new VAT & Charities Newsletter then please reply to this email.

CASE UPDATE

Upper Tribunal

1. Leasing of Cars Under a Salary Sacrifice Scheme

This case concerned the Northumbria Healthcare NHS Foundation Trust (NHT). HMRC refused a claim for repayment of input VAT made by NHT. NHT had incurred this input VAT in respect of leased and maintained cars which it acquired for the purpose of providing them to NHS employees under a salary sacrifice scheme. Under UK law, where cars are leased to employees under such a scheme, not for the purposes of the employer’s business, there is no supply of goods or services by virtue of the “De-Supply Order”. Whilst there is deemed to be no supply, UK legislation (s43 VATA) entitles the employer to recover input VAT in relation to such car schemes supplied by Government bodies such as the NHS.

NHT contended that this order applied whilst HMRC argued that the car scheme was a business activity carried on by NHT and, therefore, that input VAT was restricted to 50% as the business was leasing vehicles. In support of its claim, NHT argued that the car scheme was operated so as to facilitate a more efficient delivery of the statutory obligations (non-business activities) of the Trust: to provide healthcare. HMRC observed that there is no actual restriction placed on the use of the cars by the employees and, therefore, that the De-Supply Order was not applicable.

The Tribunal observed that the key question, given the circumstances, was whether the car scheme operated by NHT is an “economic activity” within the meaning of EU law. If it is an economic activity then the De-Supply Order would not apply and, therefore, input VAT recovery on the cars would be restricted by virtue of the Blocking Order.

The Tribunal considered that the De-Supply Order meant that there was no supply of services in this instance and therefore that there was no economic activity being pursued by NHT with regard to the car scheme so there was no taxable supply. Therefore, NHT was entitled to recover all of the VAT incurred on the supplies of leased and maintained cars.

Constable Comment: This case was complex and reflects a problematic area of the law. The result has essentially led to a situation in which the NHS receives and subsequently makes a supply which is not a supply but it can recover 100% of the input VAT incurred in making that supply. This area of VAT is particularly difficult to deal with and anyone operating similar structures should seek VAT advice for clarity.

2.The Glasgow School of Art: Input Tax Recovery on Property Development

This appeal concerned the Glasgow School of Art (GSA) which contested a decision by HMRC to deny 100% input VAT recovery in relation to a refurbishment project on some campus buildings. The FTT had previously found in favour of HMRC’s original decision.

The GSA refurbished three buildings; the Assembly Building, the Foulis building and Newbery Building. The buildings were all adjacent and on one site, the refurbishment project took place at the same time in relation to all of the buildings. The Foulis and Newbery buildings were demolished and replaced with the Reid building which was “wrapped around” the Assembly building. The whole project was contracted as a single development.

The GSA initially treated the input VAT on invoices from the contractor undertaking the project as residual and recovered in line with its partial exemption percentage. However, it later sought to change its argument and claimed that two distinct buildings had been built and that GSA was making a wholly taxable supply by leasing the Assembly Building to the GSA Student’s Association whilst the input VAT relating to the development cost of the new Reid Building was recoverable in line with the partial exemption percentage. GSA therefore sought to recover the input VAT which it had previously not done so under its partial exemption calculation. It submitted a significant VAT refund claim.

The FTT had previously dismissed this appeal on the grounds that there was, materially, only one supply by the contractor to the GSA and, therefore, that the input VAT had correctly been treated as residual. The Tribunal in this instance agreed with the FTT and dismissed the appeal, concluding that the original invoicing arrangement gave the best reflection of the economic reality of the situation.

The UT also agreed with the FTT that GSA was not carrying on an economic activity. The rent paid by the student’s union was set at a level which it could afford and it would take 500 years for the charity to recoup its outlay. This is not an economic activity.

Constable Comment: In order to support the claim that there were two separate supplies received by GSA, the School went back to the contractor and split the development and invoicing into two sections and two distinct buildings. This case shows that, whilst important, contracts and invoicing arrangements are not the ultimate deciding factor; regard will always be had to the commercial and economic reality of the situation.

First-Tier Tribunal

3. Welfare Exemption: Supplies Closely Connected

This appeal concerned Cheshire Centre for Independent Living (CCIL) and the liability of its supplies of payroll services to individuals with disabilities, which it believed to be VAT exempt. HMRC had ruled that the payroll services did not qualify for exemption as they were not closely associated with the provision of welfare services so they were liable to VAT at the standard rate.

Certain disabled persons may be eligible for financial assistance in order to facilitate their independent living. Some of the funding is handed to disabled individuals directly in order for the individual to take control of and pay for their own care and support services. Where a disabled individual receives these payments and uses them to pay assistants they become an employer of that person with all the relevant obligations for direct tax purposes.

CCIL offer a payroll service whereby it enters into contracts with local authorities and individuals and deals with issues such as PAYE and NIC on behalf of clients. CCIL contended that this supply should benefit from VAT exemption as it is closely associated with a supply of welfare services. HMRC believed that this supply was secondary to a supply of welfare services and, therefore, should be standard rated. This would, of course, have taken away 20% of the payments made to disabled individuals to support their independent living. Simply put, the individuals would have been left with less money to spend on receiving the support they need.

CCIL submitted that the services supplied were in the context of a supply by a charity to a disabled person whose needs had been formally assessed under the Care Act 2014, meaning that they were exempt.

The Tribunal considered that the payroll service, whilst not being an end in itself, is a means for enabling the support of disabled individuals through the services of assistants as a part of the care plan for that individual. Therefore it allowed the appeal and stated that the services in question were indeed exempt as they were services closely connected with a supply of welfare services.

Constable Comment: Interestingly this case focuses on funding provided directly to the disabled person but it acknowledges at least two other ways in which these funds are distributed; the money is held and distributed by the NHS or, alternatively, by an independent third party. The VAT liability of similar services provided in these circumstances is not commented on in this case. The treatment of such supplies and what constitutes “closely linked with a supply of welfare services” now requires clarification as it could have wide ranging impacts on a variety of service providers dealing with welfare. This case also serves as a reminder that HMRC construes the welfare exemption very narrowly.

CVC VAT Focus 27 September 2018

27th September 2018

HMRC NEWS

Trading Goods Regulated Under the “New Approach” if There Is No Brexit

How trading in harmonised goods regulated under the New Approach would be affected if the UK leaves the EU with no deal.

Software Suppliers Supporting Making Tax Digital for VAT

Find out which software suppliers HMRC is working with to produce suitable Making Tax Digital for VAT software for businesses and their agents.

Customs Declaration Service

The Customs Handling of Import and Export Freight (CHIEF) process is being replaced by CDS, a modern and flexible system that can handle anticipated future import and export growth.

CHANGE OF WEBSITE AND EMAIL ADDRESSES

Constable VAT Consultancy is in the process of updating its website to make it easier to access information about our services and to keep you up to date all the upcoming changes in VAT. The first step in this process is a change in our website and email addresses from ukvatadvice.com to constablevat.com. You don’t need to do anything to continue to access our website or your usual contacts, all mail and website traffic will automatically be rerouted. However, you will notice that emails coming to you will show our new email addresses. If you are in any doubt at any time as to whether an email you receive from us is genuine please call our office on 01206 321029.

CASE REVIEW

Upper Tier Tribunal

1. Splitting Single Supplies

This appeal concerns whether the VAT legislation allows application of a reduced rate of VAT to a component of what is, for VAT purposes, otherwise regarded as a single, standard rated supply. The Appellant had received assessments from HMRC for underpaid output VAT owing to the fact that single supplies were being split between standard and reduced rates of VAT.

A N Checker supplied and installed boilers along with energy-saving materials in domestic properties. The question before the Tribunal was whether the supplies were single supplies subject to either one or two rates of VAT. A N Checker did not argue that the whole supply should benefit from the reduced rate because of the reduced-rated component of the supply but that the reduced-rated component should benefit from the reduced rate despite being part of a single, standard rated supply of the installation of boilers.

The Tribunal found that, in the absence of a legislative provision for apportionment, a component of a single supply does not benefit from a reduced rate when forming part of a single, standard rated supply. It was asserted that, despite ambiguity in the construction of the legislation, there is no presumption in favour of a more liberal application or interpretation of the reduced rating provisions. The appeal was dismissed.

Constable Comment: Whilst certain supplies may be clearly defined and their treatment definitively described in VAT legislation, there are businesses which may make complex supplies of combined goods and services. In light of this decision, these businesses may wish to refresh existing practices and seek professional advice around the VAT treatment of their supplies.

First Tier Tribunal

2. Alteration or Annexe

This decision concerned the VAT liability of construction works undertaken at a church building, the Roman Catholic Diocese of Westminster sought to argue that the construction of a new hall attached to the old building after the remodelling of the church constituted an annexe to an existing building and should qualify for zero-rating. HMRC argued that the new hall constituted an alteration, enlargement or extension and was excluded from the zero-rate.

Prior to the construction, the Church had been separated into two areas, a worship area and a hall. The two were distinct from each other. The new hall had its own doors and was kept separate from the Churches area of worship; the hall being used for social events such as whist drives. The Tribunal considered that the construction work had been carried out in order to expand worship space for the Church and therefore, that the hall was a supplementary structure and an annexe to an already existing building.

The FTT also considered that the annexe could operate separately from the main Church with its own doors, toilet facilities, kitchen and radiators. It is held that the costs incurred were correctly treated as zero-rated by the Diocese.

Constable Comment: This case will be of interest to anyone carrying out construction works. It is prudent to seek professional advice before works begin as if the incorrect rate of VAT is applied throughout a lengthy and expensive project, it is possible that HMRC will seek to recover any input VAT incorrectly claimed or issue VAT penalty assessments if a certificate is issued to a contractor claiming zero-rating in error.

3. DIY Housebuilder’s Scheme

This appeal is against a decision by HMRC to refuse a refund of VAT incurred on the construction of a building as a DIY Housebuilder.

The Appellant received planning permission in 2011 for a proposed building to be used for tourism purposes only. This was an explicit term in the permission and it was specifically stated that the property “…shall not be occupied on a permanent basis.” Following completion of the construction, the DIY VAT refund claim was submitted to HMRC seeking to recover the VAT incurred on the costs of the build.

The VAT repayment was denied on the grounds that the property was only for business purposes; one of the covenants attached to the planning permission being that the property be used for tourism purposes only. HMRC contended that this meant that the property had been constructed in the course of business and so the DIY housebuilders scheme was inapplicable.

Giving a reasonable amount of time to the Appellant’s submissions, the Tribunal found in favour of HMRC and upheld its refusal to repay VAT incurred on the grounds that the intention and planning permission for the development was specifically for business purposes and prohibited domestic use.

Constable Comment: The DIY Housebuilder’s scheme enables people wishing to build their own homes to put themselves on a level playing field with property developers who can recover their input tax provided that they intend to make taxable supplies. It can be a complex process and standards of proof can be very high. If you are considering submitting a DIY Housebuilder’s claim or beginning a project then please do not hesitate to contact Constable VAT. In this case the appellant could have VAT registered voluntarily, supplies of holiday accommodation being standard rated, and reclaimed VAT incurred. VAT would have to have been accounted for on supplies of holiday accommodation moving forward.

4. Personal Export Scheme

This is an appeal against a decision by HMRC to refuse to allow the personal export scheme to apply to the Appellant’s export of a vehicle.

Hofmanns Henley Limited (HHL) is a car dealership which agreed the sale of a car to a customer resident in Jersey. It was intended that the Personal Export Scheme be applied to export the car at the zero-rate of VAT. Having agreed the sale and sent the appropriate paperwork to HMRC, the car was supplied to the customer.

HMRC refused the application to use the scheme claiming that HHL did not have the necessary pre-approval to zero-rate the car’s export; whilst the forms had been sent off, they had not been approved prior to the car’s removal from the UK.

HHL conceded that it had made a mistake but asserted that it was, at least in part, the fault of HMRC’s misdirection given over the telephone. HMRC also concede that the incorrect information was given to the Appellant over the ‘phone but state that the complaints in relation to this had been handled separately through the formal grievance procedure.

The Tribunal held in favour of HMRC as the criteria for the application of the Personal Export Scheme had not been met.

Constable Comment: Whilst this case revealed mistakes by both sides it serves to prove an important point. HMRC telephone conversations and Public Notices are not to be relied on as the law. For any high value purchase or acquisition with a potentially complex cross-border transaction and application of a special scheme it is vital to seek professional advice to ensure the highest degree of compliance. In circumstances such as these, HMRC often state “the law is the law” even in cases of official error. Where doubt or ambiguity exists, submitting a non-statutory clearance application to HMRC is the safest approach because HMRC will be bound by this, provided full facts have been presented.

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.