Tag Archives: VAT updates

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 12 April 2018

12th April 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 review these annual adjustments for clients if required.

HMRC NEWS

VAT: road fuel scale charge tables

VAT Updated Valuation Table: Road Fuel Scale Charges effective from 1 May 2018 added to the page.

VAT Notice 700/11: cancelling your registration

This notice tells you when and how to cancel your VAT registration.

VAT Notice 700/1: should I be registered for VAT?

This notice cancels and replaces Notice 700/1 September 2016.

Apply for the Fulfilment House Due Diligence Scheme (Notice FH1)

Page updated with link to new application service and further information what information needed to apply to register.

 CVC BLOG

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

 

Where certain conditions are satisfied, the sale of donated goods by a charity is zero-rated for VAT purposes. This can be beneficial because no output VAT is due on the income generated by these sales but a right to input VAT recovery on associated costs arises.

CASE REVIEW

First Tier Tribunal

 

1. Reasonable Excuses?

 

In this instance the Tribunal heard an appeal from an individual, Mr. Phillip Ashley Legg against HMRC’s decision to impose various surcharges ranging from VAT accounting periods 12/05 to 12/14.
During this period, Mr Legg only made two payments from 14 September 2006 and 29 June 2012. Mr Legg sought to contend that he had a reasonable excuse for his behaviour in that he had contacted HMRC to establish a payment plan for the surcharges and by 2014 he had cleared all actual VAT arrears. Mr Legg relied heavily on the fact that his profits took a large drop in the period in question, owing to a rapid decline in his area of business.
Whilst the Tribunal accepted a sharp decline in the business had taken place, it still held that this was not a reasonable excuse as the down-turn took place over a number of years and Mr. Legg should have, as a prudent businessman, made adaptations to evolve and fortify himself against changing market conditions. The Tribunal were more sympathetic towards Mr Legg’s catastrophic hard drive errors which led to a severe loss of data. They also took into account that during the period in question, Mr Legg’s father was ill and Mr Legg played a large role in his care.
The important test in relation to a ‘reasonable excuse’ relates to whether or not the taxpayer has behaved reasonably in his or her circumstances. Whilst the Tribunal confirmed that a down-turn in business could not constitute a reasonable excuse, the death of a close relative and fatal computer crashes losing to loss of accounts can. For these reasons, the Tribunal allowed the appeal in half, cancelling a selection of those surcharges not relating to the decline in business activity.

2. Supply or unsolicited delivery

 

This appeal related to whether the applicant, Quality Engines Direct Ltd (QEDL), supplied silver ingots to Microring, a potential purchaser of the company. Whilst in the process of dealing with a transfer of his business, the proprietor (Mr. Rafiq) engaged with a purchaser (Mr. Healey) who immediately began treating the business as his own; making deposits and withdrawals and using the business address. HMRC questioned two invoices relating to the sale of silver from Mr. Rafiq to Mr. Healey which took place before the transfer of QEDL. The veracity of these invoices was denied by Mr. Rafiq, who denied any supply of silver was made to Microring or to Mr. Healey, or that QEDL makes supplies of silver at all, and that he owes no VAT on this alleged supply. He contended that the invoices raised by Microring are not genuine and there had been no silver trade activity with Microring at all.

Mr. Rafiq claimed that delivery of the silver to his business address was not sanctioned, the packages remained unopened as they were unsolicited and he informed Mr. Healey to remove the packages, which he did.

The Tribunal agreed on appeal with Mr. Rafiq that the delivery of silver was unsolicited, the invoices had been recreated by Mr. Healey on behalf of Microring. The Tribunal found that as the packages of silver were unsolicited, unopened and removed as a matter of urgency, that QEDL had not made a supply to Microring and Mr. Healey had in fact made the order.

3. Omitted sales and disallowed input tax

 

In this case, Mr. Paul Shore, trading as “DP Contractors”  disputed a decision by HMRC in relation to his 04/11 VAT return. Mr Shore submitted that in this period of trading he was owed a £3,025.60 VAT repayment. HMRC submitted that due to under-declared output VAT of £16,599.40 and over-declared input VAT, Mr. Shore in fact owed £14,605.52 to HMRC.

Mr. Shore traded as DP Contractors which he claimed HMRC had confused with D&P Contractors, a separate firm to which he was a partner alongside Mr. David MacMillan. D&P Contractors had tendered for a contract with Southern Electrical Contracting Limited (SEC) using Mr Macmillan’s VAT registration number as Mr. Shore was not, himself, registered for VAT. Whilst Mr Macmillan was taken ill, Mr. Shore continued to trade using the VAT number of D&P Contractors whilst establishing himself as a sole proprietor “DP Contractors”.

Mr MacMillan played no role in the business being done for SEC by Mr. Shore and ceased to trade with D&P Contractors owing to injury and received no payment from Mr. Shore for on-going work. D&P Contractors issued over 190 invoices to SEC without declaring these on VAT returns and could offer no reasonable explanation for this. Mr. Shore attempted to highlight some discrepancy between the names of the firms but, as the Tribunal found, the same VAT registration number and bank account were used in continuing the trade by Mr. Shore and that the suppressed sales were correctly assessed on Mr. Shore, despite his pleas that Mr. Macmillan was jointly responsible.

Irrecoverable input tax which had also been deducted by Mr. Shore for items such as power showers were also disallowed and a forgery was uncovered for the purchase of a lorry. The Tribunal dismissed all appeals by Mr. Shore and upholds the assessments in full in relation to the suppressed sales.

 


 

 

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

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.

 

2018 Spring Statement and VAT

15th March 2018

In the Spring Statement, the Chancellor announced details of two consultations with implications for the future operation of VAT.

VAT threshold

One of the conclusions of a recent Office of Tax Simplification (OTS) report regarding UK VAT was that the relatively high VAT registration threshold has a distortionary impact on business growth. The OTS recommended that the ‘government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism’. As a result the government has now published a call for evidence.

This call for evidence is split into three chapters.

  • the first explores in more detail how the threshold might currently affect business growth
  • the second looks in more detail at the burdens created by the VAT regime at the point of registration, and why businesses might manage their turnover to avoid registering
  • the third considers possible policy solutions, based on international and domestic examples

Responses to the questions raised by the consultation should be submitted by 11:59pm on 5 June 2018

Split Payment Method of VAT collection

HMRC is also consulting on an alternative method of VAT collection to help combat VAT losses arising as a result of the expansion of e-commerce. A split payment method would see VAT separated and paid at the time of the transaction, rather than on a periodic basis via the VAT return process. Through this consultation, HMRC are asking for views on potential options for a split payment mechanism, whilst also further assessing the overall viability of split payment by seeking the views of a wider range of stakeholders.

Responses to the questions raised by the consultation should be submitted by 11:45pm on 29 June 2018

CVC VAT Focus 08 March 2018

8th March 2018

PARTIAL EXEMPTION

It is around this time of year that those businesses that are partially exempt are required to calculate their annual adjustment.  This adjustment must be made in the VAT return period ending June/July or August but can be made in the prior period (March/April/May) if a business wishes.  CVC is able to calculate or check these annual adjustments for businesses if required.

 

HMRC NEWS

 

VAT Notice 706/2: Capital Goods Scheme

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

 

VAT: Fulfilment Business Approval Regulations

HMRC has issued this Tax Information and Impact Note is about fulfilment and storage businesses that handle imported goods on behalf of third parties located outside the EU.

 

Genuine HMRC contact and recognising phishing emails and texts

HMRC has updated its guidance on how to recognise when a contact from HMRC is genuine, and how to recognise phishing or bogus emails and text messages.

 

CVC BLOG

 

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

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

 

CASE REVIEW

 

Court of Justice of European Union (CJEU)

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

 

A recent Hungarian case (Nagyszénás Településszolgáltatási Nonprofit Kft., C-182/17) before the CJEU concerned supplies between a local government (municipality) and its wholly owned non-profit making organisation (NFP). The NFP, under contract with the municipality, undertook to carry out certain public tasks such as management of housing and other property, management of local public roads etc. The NFP did not issue invoices to the municipality for the services nor did it charge VAT. The NFP argued that the contract did not constitute a contract for the provision of services; furthermore, the NFP argued it was a “body governed by public law” and as such if it is supplying services those services are VAT exempt.

 

The CJEU found that where a company performs public tasks under a contract with a municipality this constitutes a taxable supply of services subject to VAT. In addition, the NFP did not meet the conditions to be classified as a “body governed by public law”, it has none of the rights and powers of local authority and therefore the services provided do not fall within the VAT exemption for bodies governed by public law.

 

CVC comment: many local authorities sub-contract various responsibilities to charities and not-for profit organisations. Increasingly, charities enter into service agreements as oppose to receiving grant funding. It is important to consider the VAT implications of such contracts and agreements.

 

Upper Tribunal

 

2. VAT liability of timeshare

 

Fortyseven Park Street Limited (FPS) acquired a property, formerly a hotel, and refurbished it in 2002. The property now contains 49 self-contained apartments. FPS sold fractional interests in the property. The agreement under which fractional interests are sold is the Membership Agreement. Members are granted certain occupancy rights and access to exchange programmes. There are three types of occupancy rights: primary use time (up to 21 days in a calendar year) for no rental fee, extended occupancy time (once primary use time has been used, the member can occupy a residence for up to 14 days for a fee), and space available programme.

 

FPS argued that it supplied VAT exempt licences to occupy land. HMRC argued that members did not acquire the right to occupy property as owner, therefore VAT exemption did not apply. If HMRC failed on its first argument, it contended that the services provided went beyond a licence to occupy land and were therefore standard rated for VAT purposes.

 

The UT found that the grant of the fractional interest was the grant of a right to occupy a residence and to exclude others from enjoying such a right with no significant added value; therefore, the grant was VAT exempt. The UT also considered whether the licences to occupy were akin to hotel accommodation and standard rated. The UT set aside the FTT’s decision, finding that FPS did not supply accommodation similar to a hotel. FPS’ appeal was allowed.

 

CVC comment: the UT found that the FTT had erred in law. The FTT focused on the length of the stays, concluding that FPS’ supply was similar to a hotel, rather than on the nature of the right acquired by the members.

 

 

First Tier Tribunal

 

3. Permission to appeal out of time

 

Newcastle Under Lyme College (NULC) applied to the Tribunal for permission to bring a late appeal against a decision of HMRC to deny that construction supplies received during 2009 and 2010 should be treated as zero-rated.

 

NULC seeks to appeal HMRC’s decision dated 23 September 2014. NULC’s notice of appeal was filed on 6 February 2017, over two years out of time. NULC contends that a portion of the construction services supplied and received should be zero-rated on the basis that a portion of the building was intended for use solely for a relevant charitable purpose (RCP), namely, use by a charity otherwise than in the course or furtherance of business. This is on the basis that income received from ‘part-funded’ students is a non-business activity. There is litigation pending in this area in a number of cases, including Wakefield College which is the subject of an appeal to the Court of Appeal. Both NULC and HMRC agree that the case will be unarguable if the Court of Appeal upholds the Upper Tribunal’s decision in Wakefield College.

 

The Tribunal took into account the amount of VAT at stake in this appeal, why the delay in appealing occurred, as well as the fact that NULC has not presented a consistent case. The Tribunal made the point that permission to appeal out of time should only be granted exceptionally and it should not be granted routinely. Nevertheless, the Tribunal granted permission to NULC to bring a late appeal. The Tribunal considered this appropriate in order to deal justly with this case.

 

CVC comment: as the Tribunal has granted permission to bring a late appeal, NULC’s appeal will be stood behind the Court of Appeal’s judgment in Wakefield College. We will keep subscribers updated on the progress of this case.

 

 

4. Whether partial exemption special method fair and reasonable

 

Dynamic People Limited (DPL) provides domiciliary care to patients in their own home (VAT exempt welfare service) and training (subject to VAT at the standard rate). In 2011 DPL incurred costs associated with the purchase and refurbishment of two properties (Unit 1 and Unit 3). In 2012 DPL applied to HMRC for a Partial Exemption Special Method (PESM). The proposed method was a sectorised method which provided that the VAT recovery of costs associated with Unit 1 and Unit 3 be determined by reference to floor area. The VAT recovery of general (residual) costs would be recoverable according to a turnover calculation akin to the standard partial exemption method. Following a visit to the properties HMRC approved this method as giving rise to a fair and reasonable input VAT recovery.

 

With effect from 1 April 2014 DPL formed a VAT group registration. The other companies in the VAT group being non-trading companies which did not use Units 1 and 3. DPL, as representative member of the VAT group, was required to submit a new PESM proposal. HMRC rejected the proposed method on the basis that the method must be auditable by HMRC. DPL must be able to evidence the use of the various areas of the property.

 

The Tribunal found that VAT grouping with non-trading businesses did not result in the method not being fair and reasonable in this case. In addition, the Tribunal considered the proposed PESM to provide a fairer outcome than the standard partial exemption method (despite HMRC’s perceived difficulties in auditing the method).

 

CVC comment: the Tribunal accepted that the operation and audit of a PESM is relevant to the fairness and reasonableness of the method; however, the Tribunal commented that as the new method was identical to the method accepted by HMRC in 2012 to conclude that VAT grouping with non-trading entities that do not use the properties renders the method unfair and unreasonable is perverse.

 

 

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

 

Essex International College appeals an assessment for VAT in the sum of £275k. The College is a private limited company that provides tertiary level education courses accredited by Edexcel. The supplies made by the College to students included tuition and books. Students are charged a single fee. The College treated two-thirds of the fees charged to students as standard rated and one-third as attributed to the zero-rated supply of books. HMRC argued that the supplies made by the College constituted a single standard rated supply for VAT purposes.

 

The Tribunal felt there was insufficient evidence presented before it to reach a firm conclusion. However, based on the fact that students are charged a single fee and there is no opportunity for the student to receive one part of the supply and not the other, the Tribunal found in favour of HMRC that the College made a single taxable supply.

 

The College put forward additional grounds of appeal. First, that the College’s supplies are VAT exempt on the basis that the College is a university. Second, if the College’s supplies are not exempt under UK law they are exempt under EU law. Finally, the introduction of VAT in 1972 was a breach of the UK’s obligation to provide free education. The Tribunal dismissed all grounds of appeal.

 

CVC comment: the burden of proof was on the College to provide evidence that it made separate supplies of tuition and books. The College did not provide the Tribunal with evidence of the supplies it made or any marketing materials. The Tribunal was therefore unable to fully consider the issue of whether the College made single or separate supplies. Based on the agreed facts the FTT could only conclude that the College made a single supply.

 

 

  

We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email laura.beckett@ukvatadvice.com. If you wish to subscribe to the VAT & Charities newsletter please email sophie.cox@ukvatadvice.com.

CVC VAT Focus 22 February 2018

22nd February 2018

HMRC NEWS

‘Reasonable care’ guidance

HMRC has issued guidance on what it considers to be ‘reasonable care’. If a taxpayer fails to take reasonable care HMRC can and will issue penalties.

CVC BLOG

CVC client wins case before Tribunal – construction of clubhouse for community use is zero-rated

In CVC’s latest blog Stewart Henry is pleased to report that CVC’s client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT).

CASE REVIEW

First Tier Tribunal

1. Construction of clubhouse is zero-rated

In 2010 Greenisland Football Club (GFC) commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community. In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test.

The First Tier Tribunal allowed GFC’s appeal. The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate.

Stewart Henry considers this decision in detail in his blog.

CVC comment: for a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

If you are involved with a charitable or not-for-profit sports club or association (or any other charity) and are in dispute with HMRC over a technical VAT matter or interpretation of VAT law please do not hesitate to contact CVC. We would be pleased to help.

 

Upper Tribunal

2. Banana and strawberry flavoured Nesquik held to be standard rated (HMRC accept that chocolate Nesquik is zero-rated)

Nestle UK Limited appealed the FTT’s decision that its banana and strawberry flavoured Nesquik is standard rated for VAT purposes. HMRC accept that chocolate Nesquik should be zero-rated (as a preparation of cocoa).

Beverages and products for the preparation of beverages are specifically excluded from the zero-rate for food (subject to certain exceptions including milk). Nestlé presented two arguments before the UT. First, Nestlé argued that the legislation should be read purposively so that the meaning of the legislation was to remove milk and preparations thereof from the concept of beverage. Milk is zero-rated for a defined social reason. The supply of a ready-mixed milk drink flavoured with Nesquik would be zero-rated. Nestlé contended that Parliament could not sensibly have intended that an ingredient to be added to a zero-rated drink to create a drink that if sold in its pre-prepared form would be zero-rated, should be subject to VAT at the standard rate. The UT could see no indication of any wider purpose or intent to zero-rate the separate supply of powders that are added to milk.

Nestlé’s second argument was that unless the powder created a new or different beverage, the powder could not be for the “preparation of beverages” and therefore did not fall within exceptions to the zero-rate. The UT also dismissed this argument. The only use to which Nesquik is intended to be put is in the preparation of flavoured milk drinks.

CVC comment: this case serves as a reminder as to the difficulty of interpreting the VAT legislation regarding the application of the zero-rate to food.

3. Supercar driving experience – VAT liability of collision damage waiver payments

The Tribunal considered the VAT treatment of collision damage waivers offered by Supercar Drive Days Limited (SDDL) in connection with its main business of providing supercar driving experiences. The issue before the Tribunal was whether the waivers qualified for VAT exemption as supplies of insurance. HMRC ruled that the waivers were taxable at the standard rate.

SDDL’s customers are liable to pay for any damage to a vehicle up to a value of £2,500. If the customer chooses to pay a fee for a collision damage waiver the £2,500 liability would not arise. SDDL argued that the waivers are supplies of insurance. SDDL does not hold the relevant authorisation to permit it to underwrite insurance.

The Tribunal found that the waivers were not insurance. The waiver simply varies the potential liability of the customer under the contract.

CVC comment: suppliers that offer waivers for additional payment may need to consider the VAT treatment of such payments in light of this case.

4. Branches found to be independent for VAT purposes

The National Federation of Occupational Pensioners (NFOP) challenges a decision by HMRC that branch rebates collected by NFOP form part of the taxable consideration received by NFOP for VAT purposes. There were two issues before the Tribunal: (1) whether NFOP’s branches are separate taxable persons for VAT purposes, and (2) whether the branch rebate should be included in the membership subscriptions paid to NFOP for VAT purposes, or should be treated as an amount collected on behalf of branches and belonging to them.

The Tribunal found that the branches are separate entities from NFOP for VAT purposes. NFOP’s role is more support, guidance and coordination, rather than direction or control. The existing branches were all established before NFOP was incorporated. There are significant variations between the individual branches which supports the finding that the branches are independent. In reality a branch decides how it conducts its activities and spends its money.

However, despite succeeding on the first issue, NFOP was unable to demonstrate that the branch rebates are collected on behalf of branches. Therefore, branch rebates received form part of NFOP’s taxable income for VAT purposes.

CVC comment: the Tribunal’s decision regarding branches may have wider implications. It is possible this case will be heard before the Tribunals again as there appear to remain unresolved issues.

5. Whether HMRC assessment made to best judgment

HMRC raised an assessment in the sum of £29,539 following a visit to Southgates UK’s premises. HMRC took the view that Southgate UK’s losses were unsustainable. It was not conceivable that someone would be able to continue to trade in such circumstances. HMRC found it impossible to reconcile VAT returns submitted with the business’ underlying records and invoices. HMRC’s assessment was based on “capital introduced” or “deficits” in SAGE accounts. HMRC assumed that these figures were under-declared sales.

Southgates UK’s accountant explained that there had been problems with the business. Due to a decline in business, the appellant’s son had left in 2010. The appellant struggled to maintain records while running the business and dealing with ill-health. There was also an ongoing problem with a spare parts supplier which resulted in court action.

The accountant could not explain why his analysis of the records of the business produced a lower sales figure than those in the submitted VAT returns. The accountant did explain that the “capital introduced” transactions in SAGE were to ‘true up’ the accounts and zero out losses.

The Tribunal found the appellant to be a credible witness. HMRC’s assessment was based on one set of figures. The Tribunal therefore found that the VAT assessment was not made to best judgment. HMRC did not use other information in its possession to confirm whether or not it was reasonable to base the assessment on a single accounts entry. The Tribunal directed that the VAT assessments should be reviewed by HMRC.

CVC comment: taxpayers should always ensure any VAT assessments HMRC issue are made to best judgment. This is particularly important where the matter is ambiguous and not straightforward. 

6. Supply of lift passes for main ski slope – whether reduced rated transport

Snow Factor Limited (SFL) operates an indoor snow sport resort. The appeal before the Tribunal relates to the VAT liability of lift passes for the main ski slope. SFL argues that the lift passes are subject to VAT at the reduced rate (5%) as a cable suspended passenger transport system. HMRC disagreed and raised two VAT assessments in the sum of £156,160 plus interest and £138,555 plus interest.

The Tribunal found that SFL’s supplies are excluded from the reduced rate because the legislation provides that the reduced rate does not apply to the transport of passengers within a place of entertainment, recreation or amusement by the person who supplied a right of admission to, or a right to use the facilities at, such a place.

CVC comment: This case demonstrates the importance of determining the correct VAT liability of supplies made. SFL has received VAT assessments totalling £294,000 (including interest) in the three years to 29 February 2016. An HMRC enquiry arose in this case because SFL submitted an Error Correction Notice to HMRC to recover output VAT it believed it believed incorrectly declared in the VAT accounting period ending 31 May 2013. 

 

 

We also issue specialist Land & Property and VAT & Charities newsletters. If you wish to subscribe to the Land & Property newsletter please email laura.beckett@ukvatadvice.com. If you wish to subscribe to the VAT & Charities newsletter please email sophie.cox@ukvatadvice.com.

 

 

 

 

 

 

 

 

CVC client wins case before Tribunal – construction of clubhouse is zero-rated

13th February 2018

Constable VAT Consultancy LLP (CVC) is pleased to report that our client, the registered charity Greenisland Football Club (GFC), has successfully won its appeal against the issue of a VAT penalty assessment by HMRC in the First Tier Tax Tribunal (FTtT). GFC and CVC would like to thank Tim Brown of Temple Tax Chambers who represented the charity at the hearing in Belfast.

1. Background

In 2010 GFC commenced an ambitious project to construct a clubhouse which it intended would be a multi-purpose facility for use by the local community.

In 2011 the charity issued a zero-rating certificate to the appointed contractor. The certificate was issued on the basis that the building would be used for a relevant charitable purpose (RCP) as a village hall or similarly in providing social or recreational facilities for a local community. GFC is not VAT registered. VAT incurred on construction works would have been an absolute cost to the charity.

GFC fulfilled its original intention. Since its construction the building has been enjoyed by various community groups and local people.
HMRC carried out a targeted and proactive campaign in 2014 when it wrote to numerous charitable sports clubs. HMRC sent a standard seven question letter to a range of sporting clubs in the UK. HMRC clearly feels that many sports organisations have benefitted from zero-rating when they should not have done. Some clubs are not registered with the Charity Commission which may be problematic for such organisations when seeking zero-rating.

In 2014 HMRC issued a penalty assessment on GFC in the sum £53,101 on the basis the building did not satisfy the RCP test. The decision to raise the penalty assessment was upheld on review by HMRC in 2015 and the charity appealed HMRC’s decision.

The case was originally listed to be heard on 8 January 2016. A few weeks before the hearing HMRC applied for the case to be stood over pending the decision in Caithness Rugby Football Club (Caithness) which was under appeal to the Upper Tribunal (UT). HMRC subsequently lost Caithness but then applied for GFC’s case to be stood over behind HMRC’s preferred new lead case. Due to the amount of time GFC’s appeal had been taken to be heard, and the uncertainty impacting adversely on GFC’s charitable activities, GFC opposed HMRC’s request. The Tribunal refused HMRC’s application. This allowed GFC to proceed to Tribunal last month.

2. GFC’s position

The charity’s position is as follows:

  • GFC is a registered charity recorded on the charity register.
  • The building it constructed is not a village hall but it is similar to a village hall and used as such.
  • The charity’s intention prior to construction was that the building would be a facility which would be used by the wider community and not just GFC.
  • The charity’s original intention has been demonstrably fulfilled. The facility has been used by a range of community groups giving the local population access to a wide range of activities they would not previously have had an opportunity to partake in.
  • The building is available for use on a ‘first come first served’ basis.

3. HMRC’s position

  • Sports clubhouses are ‘dual purpose buildings’ and are not used ‘similarly’ to a village hall because such facilities are used by a) the club and b) the local community.
  • Only use by the community qualifies for RCP use and this does not include use by a local sports club, even though a local sports club is inevitably part of that local community.
  • If a decision on hire and bookings is at the club’s discretion the facility cannot be said to be ‘similar’ to a village hall (i.e. ‘first come first served’) because use is not at the direction of the local community but GFC.
  • The term ‘similarly’ means similar to the way a village hall operates i.e. the trustees or committee of a village hall would be made up of individuals from various local groups and clubs.
  • The renting out of a facility to a variety of local groups or members of the community by a charity, or the provision of social and recreational facilities by a charity, does not necessarily mean that zero-rating applies to the construction of a new facility.
  • HMRC also suggested GFC was using the clubhouse for business purposes because it charges adult members a subscription and the parents of junior members pay fees to cover costs such as purchasing equipment.

4. Decision

The Tribunal found that GFC was correct to issue a zero-rating certificate to the contractor. The Tribunal also found that, had it reached a different conclusion on this entitlement, the charity had a reasonable excuse for issuing the certificate. The appeal lodged covered both issues. This, the reasonable excuse point, is something which we would recommend any club involved in a dispute with HMRC considers. GFC had read HMRC’s VAT public notices and discussed the matter with professional advisors.

5. Overview

For a number of years now it has been difficult to be certain when HMRC will accept sports pavilions/clubhouses are intended to be used ‘similarly’ to village halls. The UT in Caithness Rugby Football Club (Caithness) and New Deer Community Association (and now the FTT in this case) do not accept the majority of HMRC’s interpretations set out in either VAT Notice 708 (buildings and construction) or HMRC internal guidance manuals.

HMRC appears to have a two pronged strategy in attacking zero-rating in GFC and similar cases.
Firstly, the management of the building should be vested in a committee that represents a number of community groups. This approach has not been supported by the UT.

Secondly, HMRC believes there is a difference between a charitable sports club’s use of a facility and the community’s use of that same building. This ‘dual purpose’ argument means a distinction should be drawn because the two uses are different and are not both RCP. The use by the club, according to HMRC, is not RCP. This seems an unreasonable argument when considering that members of local sports clubs are very likely to come from their local community. It is difficult to view amateur sport as anything other than a recreational activity, as contemplated by the zero-rate provisions.

Viewing the Hansard entries dated 12 July 1989 (Value Added Tax: Buildings and Land Volume 156 1036-63) Peter Lilley, the then economic advisor to the treasury, is recorded as saying in Parliament when referring to this matter “the amendment therefore seeks to reinstate for the construction of charitable community buildings the zero-rate which was abolished on 1 April as a consequence of last year’s court judgment”.

Mr Lilley went on to say “the amendment is confined to buildings run by charities. It covers church halls, village halls and other community buildings providing similar social and recreational facilities for a local area. It also extends to buildings such as cricket pavilions and changing rooms, constructed for charitable playing fields and recreation ground associations”.

When Mr Lilley was questioned on the application of the zero-rate he responded as follows: “The Honourable Member for Wrexham (Dr Marek) asked me to clarify the definition further and asked in particular whether it would include sports halls. For those sports halls that are both charities and run for the benefit of the local community, the answer is yes, they will be included, as they come under the general heading of providing recreational facilities”.

It is disappointing that HMRC is actively pursuing voluntary organisations whose members and supporters devote so much free time and effort to help their local communities. This not only seems at odds with VAT law but also what Parliament intended that law to include. The majority of people volunteering do their very best to satisfy all of the many regulatory requirements necessary when operating a not-for-profit sports club, including VAT. Such organisations are usually very small with a low turnover in terms of income generated. The activities of these clubs may mean that committee members or Trustees take personal financial risks in return for their endeavours. HMRC seems to consider that it is justified in investing large sums of taxpayer’s money trying to prevent such organisations benefitting from a relief that is quite clearly intended to apply.

If you are involved with a charitable or not-for-profit sports club or association (or any other charity) and are in dispute with HMRC over a technical VAT matter or interpretation of VAT law please do not hesitate to contact CVC. We would be pleased to help.

CVC VAT Newsletter for Charities – February 2018

9th February 2018

money-gold-coins-finance

 

 This VAT & Charities newsletter comments on the following:

  1. Local Healthwatch organisations campaign by HMRC
  2. VAT & crowdfunding
  3. VAT exemption for welfare services
  4. Whether the construction of a cricket pavilion was zero-rated?
  5. Whether free admission to events run by a charity are non-business activities and the VAT recovery implications
  6. Supplies of membership services – single or multiple supply

 

  1. Local Healthwatch Organisations campaign by HMRC

 Readers may recall the recent First Tier Tribunal (FTT) case concerning Healthwatch Hampshire C.I.C where it was concluded that its supplies to Hampshire County Council are taxable for VAT purposes.  It appears HMRC have been reviewing turnover generated by similar organisations from such services using the Charity Commission’s website. Local Healthwatch Organisations were approached by HMRC questioning the VAT liability of their supplies. HMRC has now confirmed that it does not agree with the FTT decision; however, it has not appealed this decision to the Upper Tribunal (UT).

CVC comment: It is interesting to note that HMRC has dramatically decreased the number of Briefs issued in recent years. Revenue & Customs Briefs are used by the Commissioners to communicate any changes in policy and to comment on decisions of the Tribunals and Courts. HMRC has not formally commented on the Tribunal’s decision in Healthwatch Hampshire. In that case HMRC argued that supplies to the Council were outside the scope of VAT and current guidance reflects this. Why HMRC did not issue a Brief on this occasion is not clear. This would have been a more efficient approach for all parties rather than put Local Healwatch Organisations to the expense of dealing with written enquiries.

 

 2. Are funds raised via Kickstarter payment for services in advance?

Lunar Missions Ltd raised funds through crowdfunding platform, Kickstarter, which amounted to £672,447 and were paid on 6 January 2015. Lunar Missions’ plan was to send an unmanned robotic landing module to the moon. A £60 pledge will reserve backers a digital memory box that will be buried on the moon during the mission.

The issues in this case were whether the sums received were prepayments of consideration or consideration for supplies of face-value vouchers. If they are prepayments then the tax point is the date of receipt. If they are face-value vouchers, the tax point will depend on whether the vouchers are ‘single purpose vouchers’ (SPV). Whilst the default position for vouchers is that the tax point is the date of redemption, for SPVs, the tax point is the date consideration is received on issue of the vouchers.

The Tribunal considered the terms and conditions on Kickstarter’s website and the benefits associated with pledges. The Tribunal held that backers are supplied with face-value vouchers which are redeemable for one type of service, namely space in a time capsule. As such, the vouchers supplied were SPVs and taxable at the time of issue. The Tribunal upheld HMRC’s decision to VAT register Lunar Missions with effect from 16 December 2014.

CVC comment: With crowdfunding sites proving increasingly popular for charities, this case highlights the need for charities to consider the VAT implications of the receipt of such funding.

 

 3.VAT exemption for welfare services

 HMRC appealed against the FTT’s 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 business 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 falls 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 identical supplies in Scotland and Northern Ireland making identical supplies are granted exemption.

  

 4.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 (it was not registered with the Charity Commission)therefore, the Club’s appeal failed.

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.

 

5.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 VAT incurred that directly related to these events. The charity appealed this decision.

HMRC’s usual 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 is not input tax and 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 event where 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.

 

6.Supplies of membership services – 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.

HMRC considered that VAT is chargeable on all membership subscriptions regardless of where the members belong. HDE’s approach was that 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 is particularly relevant to charities which make supplies to members or offer a range of benefits for which supporters pay a subscription.

 

 

Constable VAT Consultancy LLP (CVC) is a specialist independent VAT practice with offices in London and East Anglia. We work together with many charities and not-for-profit bodies ranging from national charities, those working overseas, and regionally based local organisations. CVC has a nationwide client base.

 

We understand that charities wish to achieve their objectives whilst satisfying the legal requirements placed upon them. Charities may be liable to account for VAT on supplies made and VAT will be payable on certain expenditure. As irrecoverable VAT represents an absolute cost to most charities, regardless of their VAT registration status, there is a need to review the position regularly and carefully. We offer advice with planning initiatives, technical compliance issues, complex transactions, help with innovative ideas on VAT saving opportunities, and liaising with HMRC.

 

If you would like to discuss how VAT impacts on your organisation please contact Stewart Henry,  Laura Beckett or Sophie Cox on 020 7830 9669, 01206 321029 or via email on stewart.henry@ukvatadvice.com, laura.beckett@ukvatadvice.com and  sophie.cox@ukvatadvice.com.  Alternatively, please visit our website at www.ukvatadvice.com where you can view some of the services we offer in more detail and subscribe to our free general and regular VAT alerts and updates. Visit our website for current news updates. You can also follow CVC on Twitter.

 

This newsletter is intended as a general guide to current VAT issues and is not intended to be a comprehensive statement of the law. No liability is accepted for the opinions it contains or for any errors or omissions. CVC cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this newsletter. Specialist VAT advice should always be sought in relation to your particular circumstance.

CVC VAT Focus on Land and Property – January 2018

31st January 2018

CVC VAT Focus on Land and Property

HMRC NEWS

Fraud in the provision of labour in the construction sector

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

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

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

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

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

CVC BLOG

HMRC clarifies policy on VAT zero-rating & new buildings
In CVC’s latest blog Helen Carey considers HMRC’s policy on VAT zero-rating and new buildings further to the recent Information Sheet 07/17 issued by HMRC

CASE UPDATE

Court of Justice of European Union (CJEU)

1. Sale of holiday homes

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

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

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

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

Upper Tribunal

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

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

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

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

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

First Tier Tribunal

3. Disapplication of the option to tax

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

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

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

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

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

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

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

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