Monthly Archives: July 2017

VAT – Latest from the courts: Fleming claims

By   26 July 2017
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In the First Tier Tribunal (FTT) case of NHS Lothian Health Board “the Board” the judge was asked to consider whether the Board had a valid Fleming claim* in respect of certain laboratory services performed from 1974 to 1997. The relevant services were, inter alia; Nequas work, food-testing, water-testing, non-medical testing of samples, especially for public health, and research and development.

Decision

The appeal was rejected. Although the Tribunal accepted the considerable evidence and testimony from members of staff working for the Board during the relevant years, and had decided that the relevant supplies were subject to VAT (they were not exempt of non-business) unfortunately, there was insufficient documentary evidence to actually quantify the amount of input tax claimed.  Of course, in order to recover input tax, it had to relate to taxable (business) supplies made by the appellant. The Tribunal was required to consider whether the business income of the laboratories could be calculated. The FTT considered that whilst the evidence was helpful in determining that taxable supplies were made, that evidence fell short of facilitating its quantification. While the business income was almost certainly significant, the Tribunal did not consider that it has been quantified satisfactorily for the whole period.

The appellant contended that a set percentage representing business income could be projected backwards to earlier VAT periods. The Tribunal did not consider such an approach “reasonable or acceptable” and that the timescale involved also undermined the likely accuracy of the process of extrapolation. (The Tribunal suggested that there is a need to have a verifiable percentage, calculated by reference to prime records at regular intervals. For example, it might well be acceptable in a 25 year period to have verifiable figures every five years, and if there is not significant variation, to use extrapolated figures for the intervening years).  There was also uncertainty about the Board’s partial exemption position and how, historically, apportionment was carried out.

Commentary

This case demonstrates the difficulty of making retrospective claims that go back to the early 1970s, that’s over 40 years ago! It is to be expected that certain records may be absent and HMRC has previously agreed that the required information may be established by other methods, however, a claim has to be made on the basis of “something more concrete” than a backwards projection of a percentage figure calculated from more contemporary records. The judge gave an example of evidence that may be acceptable in these circumstances.

The outcome does seem somewhat unfair given the fact that all parties agree that VAT was overpaid due to an error made by HMRC, but the level of evidence required to support a Fleming claim has to be of a certain standard to be accepted.

As always in VAT – record keeping is of the utmost importance.

* Background to Fleming claims
Fleming claims’ are claims for underdeclared or overpaid VAT, potentially going back as far as the inception of VAT in 1973. They followed the House of Lords judgements in January 2008 in the cases of Fleming and Conde Nast (Fleming) which concerned the way that the three year time limit on making claims had been introduced. In Revenue and Customs Brief 07/08, published on 20 February 2008, claims were invited in respect of overpaid output tax for accounting periods ending before 1 May 1997. Subsequent legislation in the 2008 Finance Act limited the scope for making claims for these accounting periods by introducing a new transitional period ending 1 April 2009, before which any such claims had to be made.

VAT treatment of vouchers, gifts and discounts – How business promotions work

By   17 July 2017
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Business promotions are an area of VAT which continues to prove complex.  This is further exacerbated by changes to the legislation at EC and domestic level and ongoing case law.

The VAT position is summarised here. Part of this commentary has been taken directly from HMRC guidance on the subject and is the most up to date authority on the matter.  I thought it may be useful if the VAT treatment of various business promotion schemes is summarised in one place.

…I recall a statement from an old mentor of mine; “if you have a marketing department you have a VAT problem!”

 Summary

Offer How to charge VAT
Discounts Charged on the discounted price (not the full price)
Gifts Charged on the gift’s full value – there are some exceptions listed below
Multi-buys Charged on the combined price if all the items have the same VAT rate. If not, VAT is ‘apportioned’ as mixed-rate goods
Money-off coupons, vouchers etc No VAT due if given away free at time of a purchase. If not, VAT due on the price charged
Face value vouchers that can be used for more than one type of good or service (multi-purpose) No VAT due, if sold at or below their monetary value
Face value vouchers that can only be used for one type of good or service (single-purpose) VAT due on the value of the voucher when issued
Redeemed face value vouchers Charged on the full value of the transaction at the appropriate rate of the goods provided in return for the voucher

 Exceptions for gifts

There’s no VAT due on gifts given to the same person if their total value in a 12 month period is less than £50.

Free goods and services

You don’t have to pay VAT on things like free samples if they meet certain conditions.

Supplies Condition to meet so no VAT due
Free samples Used for marketing purposes and provided in a quantity that lets potential customers test the product
Free loans of business assets The cost of hiring the asset is included in something else you sell to the customer
Free gifts The total cost of all gifts to the same person is less than £50 in a 12 month period
Free services You don’t get any payment or goods or services in return

Face value vouchers

Recent changes, radically alter the UK rules for face value vouchers. Face value vouchers are vouchers, tokens, stamps (physical or electronic) which entitle the holder to certain goods or services up to the value on the face of the vouchers from the supplier of those goods or services.

Examples of face value vouchers would include vouchers sold by popular group discount websites, vouchers sold by high street retailers, book tokens, stamps and various high street vouchers.

Single or multi-purpose

The most important distinction for face value vouchers is whether a voucher is a single purpose voucher or multi-purpose voucher. If it is a multi-purpose voucher then little has changed. If it is a single purpose voucher, however, HMRC will now charge VAT when it is issued.

Single purpose vouchers are vouchers which carry the right to receive only one type of goods or services which are all subject to a single rate of VAT. Multi-purpose vouchers are anything else. The differences can be quite subtle.

For example:

  • a voucher which entitles you to download an e-book from one seller will be a single purpose voucher. A voucher which entitles you to either books (zero rated) or an e-book download (standard rated) from the same seller will be multi-purpose
  • a voucher which entitles you to £10 of food at a restaurant which does not sell takeaways is probably single purpose, whereas if the restaurant has a cold salad bar and you can buy a take away with the voucher (or hot food) then it would be multi-purpose. 

The above means that for single purpose vouchers VAT is due whether the voucher is actually redeemed or not; which seems an unfair result. There is no way to reduce output tax previously accounted for if the voucher is not used.

The situations set out above are often further complicated when three or more parties are involved, but that’s a detailed article for another day….

Is the Upper Tribunal bound by High Court decisions?

By   11 July 2017
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Upper Tribunal versus High Court

In the case of Meena Seddon Settlement which actually involved Inheritance Tax, the First Tier Tribunal (FTT) was required to decide whether the Upper Tribunal is bound by decisions made in the High Court. The FTT decision will doubtless affect VAT cases in the future.

It decided to follow a precedent set by the Upper Tribunal over an earlier decision by the High Court.

The taxpayer contended that the matter should be decided on the basis of a previous High Court decision. HMRC argued on the basis of a later Upper Tribunal decision. In normal circumstances, a later decision should take precedence over the earlier if both decisions have the same authority and have fully considered the previous judgments. However, if the taxpayer was correct to say that the Upper Tribunal was bound by precedents set by the High Court, the later decision could be disregarded as being wrong in law.

The FTT decided that it was the intention of Parliament that the Upper Tribunal was not bound to follow High Court precedents. This was notwithstanding the fact that a High Court could have a supervisory role over the Upper Tribunal in cases of judicial review. Therefore, it determined the case on the authority of the later Upper Tribunal decision in favour of HMRC.

VAT: Latest from the courts – extent of exemption for financial services

By   5 July 2017
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Coinstar Limited

In the Upper Tribunal (UT) case of Coinstar Limited the issue was whether the services Coinstar provided were exempt supply of financial services via Value Added Tax Act 1994, Schedule 9, Group 5, item 1 – “The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.”

Background

I’ve no doubt that you’ve seen those kiosks with machines in supermarkets into you which you tip your bag full of loose change in return for a voucher.  The voucher can then be redeemed at the checkout against the supermarket bill. Coinstar provides this service and charges 9.9% of the value of the coins inserted into the machine.  HMRC considered this to be a table service of “coin counting”, while Coinstar claimed that it was an exempt supply under the above legislation.

Decision

The UT affirmed the decision of the First Tier Tribunal and dismissed HMRC’s appeal, ruling that Coinstar was providing an exempt financial service. The Transaction was not a coin counting service, but a service of exchanging a less convenient means of exchange into a more convenient one which was provided in return for the 9.9% fee.  This involved a change in the legal and financial status of the parties such that the exemption applied.

Commentary

Another case which demonstrates the fine line between exemption and taxable treatment of “financial” services.  HMRC’s argument here was that this was a single supply of coin counting (which is outside the exemption) but clearly, a person emptying their big pots of change into the machine did not want it to be simply counted, the aim was to obtain a voucher in return for the shrapnel (or, if feeling philanthropic, there is an option to donate the coins to charity – for which Coinstar made no charge). It is fair to observe that just because a supply may be “financial” in nature it is not automatically exempt.  It pays to check the liability of such services because, as may be seen, HMRC often attack exempt treatment.  I have recently had to untangle a position where there was doubt about whether an online service amounted to exempt intermediary service. HMRC ultimately agreed that exemption applied in this case, but that was not their starting point.

VAT: More on agent/principal – Latest from the courts

By   3 July 2017
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Lowcost Holidays Ltd

There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions.

It appears to me that this uncertainty has increased as a result of the growing amount of on-line sales and different parties being involved in a single sale.

By way of background, I looked at this issue at the end of last year here

The case

On a similar theme, the First Tier Tribunal (FTT) case of Lowcost Holidays Ltd the issue was whether the Tour Operators’ Margin Scheme (TOMS) applied to Lowcost’s activities.

Background

Lowcost was a travel agent offering holiday accommodation in ten other EU Member States, and other countries outside the EU, for the most part to customers based in the UK. The issue between the parties is whether Lowcost provided holiday accommodation to customers as a principal, dealing in its own name, under article 306 of Directive 2006/112, the Principal VAT Directive and therefore came within TOMS or whether it acted solely as an intermediary or agent (in which case TOMS would not apply and the general Place Of Supply rules apply).

Decision

The FTT found in favour of the appellant. HMRC had argued that Lowcost was buying and selling travel and accommodation as principal, however, the FTT decided that the contracts which Lowcost entered into with; hotels, transport providers and holidaymakers were clear that the arrangement was for the appellant acting as agent. The helpful Supreme Court case of SecretHotels2 (which I commented on here) was applied in this case. The main point being that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’ and great weight was given to the terms of Lowcost’s contracts rather than what HMRC often call the “economic reality”.  Specifically highlighted to the court was the fact that Lowcost set the prices for the holidays, which HMRC pointed out would be inconsistent with an agency arrangement. The FTT decided that this was outweighed by the actual terms of the contracts.

Consequently, as Lowcost acted as agent (for the providers of the services not the holidaymaker) the Place Of Supply was determined by reference to where the supply was received under the general rule.  In this case, this is VAT free when the services were received by principals located outside the UK.

As with all TOMS and agent/principal matters it really does pay to obtain professional advice.