| Financial Services (FS) is a complex area of VAT and the legislation and case law add to that complexity. For ease, I have made a flowchart which I hope may help. The supply of FS intermediary services may be exempt from VAT, but other types of supplies relating to FS are standard rated (advice, marketing, providing information etc). With new technology advancing all the time, this adds more difficulties in establishing the correct VAT treatment. |
HMRC has published updated guidance on childcare following the decision in the RSR Sports Limited (RSR) case. The issue being what supplies fell within the definition of “services… closely linked to the protection of children and young persons” and supplies of “welfare services” – VAT Act 1994, Schedule 9, Group 7, item 9.
The guidance in VATWELF3032 states that RSR could be distinguished from Sports Academies (Decision No TC05171), a case where the tribunal had held that the activities element predominated.
The important key features were:
Other providers supplying services can similarly exempt their supplies where the facts demonstrate that they qualify and exhibit the key features set out by the FTT in RSR.
HMRC no longer interprets activity-based clubs to include those clubs exhibiting these key features. Such clubs can therefore, qualify for the welfare exemption if they otherwise meet the conditions.
Normally, the supplier is the person who must account to the tax authorities for any VAT due on the supply. However, in certain situations, the position is reversed, and it is the customer who must account for any VAT due. Don’t get caught out!
Purchasing services from abroad
These will be obtained free of VAT from an overseas supplier. What is known as the ‘reverse charge’ (RC) procedure must be applied. Where the RC applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must account for output tax, calculated on the full value of the supply received, and (subject to partial exemption and non-business rules) include the VAT charged as input tax.
The effect of these provisions is that the reverse charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus, creating a level playing field between purchasing from the UK and overseas.
Accounting for VAT and recovery of input tax.
Where the RC procedure applies, the recipient of the services must act as both the supplier and the recipient of the services. On the same VAT return, the recipient must
Value of supply
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration. The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
More on consideration here.
Time of supply
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
Registration
If a business is not UK VAT registered, it must recognise the value of RCs in determining its turnover. That is; if its turnover is below the registration limit (currently £85,000 pa) but the value of its RCs supplies exceed this limit, it must register.
Other RCs
The RC or similar procedures can also apply in the following situations:
Import of goods (postponed accounting)
Mobile telephones
Motor cars
Land and buildings
Food that is too hot to eat can be classed as cold food for VAT purposes.
HMRC has published a new Factsheet CC/FS69 which sets out compliance checks to be made to avoid penalties for Making Tax Digital (MTD).
Under MTD, VAT-registered businesses must keep certain records digitally and file their VAT returns using compatible software.
The Factsheet covers:
Penalties
HMRC levy penalties for MTD for the following actions:
These penalties apply in addition to existing penalties and interest charged for a range of misdemeanours from late returns to deliberate underdeclarations.
HMRC has issued new guidance: Revenue and Customs Brief 10(2022) on how to determine if an entity carries out business or non-business (NB) activities. This goes to the core of the tax and establishes whether a person:
It mainly affects charities, NFP, an organisation which receives grants or subsidies and entities which are carrying out NB activities.
Previous tests
Since 1981 previous cases (mainly Lord Fisher and Morrison’s Academy) have set out the following business tests:
Changes
The guidance states that the ‘predominant concern’ is now irrelevant. The focus is on whether there is a direct link between the services the recipient receives, and the payment made rather than on the wider context of the organisation’s charitable objectives or motive. This is as a result of the Longbridge case.
I often think it helps if a person bears in mind here the comment in the EC case of Tolsma translated as: “…the question is whether services carried on by [a person] were carried on for the payment or simply with the payment”.
There is now a two-part test derived from the Wakefield College Court of Appeal case.
Test One:
The activity results in a supply of goods or services for consideration. This requires a legal relationship between the supplier and the recipient. The initial question is whether the supply is made for a consideration. An activity that does not involve the making of supplies for consideration is not a business activity.
Test Two:
The supply is made for the purpose of obtaining income therefrom (remuneration)
More on the definition of taxable supply here.
Where there is a direct or sufficient nexus between the supplies provided and the payments made, the activity is regarded as business (a taxable supply). The Wakefield case made a distinction between consideration and remuneration. Simply because a payment is received for a service provided does not itself mean that the activity is business. For an activity to be regarded as economic it must be carried out for the purpose of obtaining income (remuneration) even if the charge is below cost.
HMRC states that although it will no longer apply the above Lord Fisher tests, it accepts that they “can be used as a set of tools designed to help identify those factors which should be considered.” So Lord Fisher lives on in some form.
Further information
More detail is provided by HMRC in the updated Internal Guidance VBNB10000
Further reading
The following articles consider case law and other relevant business/NB issues:
Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft
HMRC has updated VAT Notice 700/63 – Electronic Invoicing in respect of “information required on a tax invoice” (para 3.2).
The Notice sets out what a business needs to do if it is sending, receiving and storing VAT invoices in an electronic format.
Electronic invoicing offers many advantages over traditional paper invoices. The rapid electronic transmission of documents in a secure environment may provide for:
A business does not need to inform, nor seek permission from, HMRC to use electronic invoicing.
We advise that any business periodically reviews its use of any invoicing system to ensure that:
If a business cannot meet HMRC’s conditions for transmission and storage of electronic invoicing, it must issue paper invoices.
There are penalties for incorrect invoices or systems.
Latest from the courts
In the Staysure.Co.UK Limited First Tier Tribunal (FTT) case the issue was whether services of service of generating insurance leads for the appellant fell within the insurance exemption or whether the reverse charge (please see guide below) should be applied.
Background
Staysure is an FCA regulated insurance broker based in the UK which provided travel insurance for people aged 50 or over, home insurance, cover for holiday homes and motor vehicles. It received services from an associated company belonging in Gibraltar.
The services amounted to:
If the services were not covered by the relevant exemption, they would be subject to a reverse charge via The Value Added Taxes Act 1994 section 8 by Staysure. As the recipient was not fully taxable, this would create an actual cost when the charge was applied. HMRC considered the service taxable and:
The assessment was circa £8 million, penalties of over £1 million plus interest. This was on the basis that HMRC concluded that the supply was taxable marketing rather than exempt intermediary services.
Decision
The court decided that the marketing and technology was used to find clients and introduce them to the insurer. The supplier was not supplying advertising, but qualified leads produced by that advertising. The quote engine was not merely technical assistance, but a sophisticated technology which assessed the conditions on which customers might be offered insurance. Consequently, these services were exempt as the supplies of an insurance intermediary (The VAT Act 1994, Schedule 9, Group 2, item 4) and Staysure was not required to account for UK VAT under the reverse charge.
The appeal was allowed. The services were within the insurance exemption, essentially because they were linked to essential aspects of the work carried out by Staysure, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts.
Technical
This is another case on the application of the reverse charge. I looked at a previous case here
However, the judge helpfully summarised the following principles on insurance intermediation after considering previous case law.
Commentary
Care should always be taken when outsourcing/offshoring services or in fact, when any business restructuring takes place. The VAT impact of doing so could provide costly. In this case, the distinction between intermediary and marketing services was considered. It went in the taxpayer’s favour, but slightly different arrangements could have created a large VAT hit.
Guide
Latest from the courts
In the First Tier Tribunal (FTT) case of Haymarket Media Group Limited (Haymarket) the issue was whether the sale of Teddington TV Studios qualified as a VAT free Transfer of a Going Concern (TOGC).
Background
The site in question was subjected to an Option To Tax (OTT) by the supplier. The sale of the property was with the benefit of planning consent for the development of flats and houses on the site after demolition of the TV studios.
Subject of the appeal
The transferor/vendor had previously let a small building on the site to the purchaser’s advisers and, on this basis, the sale was structured to be a TOGC as a property rental business. HMRC raised an assessment as it considered that neither a property rental business, nor a property development business had been transferred.
Decision
The appeal was dismissed. The FTT found that, despite the short lived and minor letting, this did not constitute a business. Further, that even if this had been a business, the contract required vacant possession so a business could not have been continued.
The contention that a property development business was being carried on was also rejected. Despite significant costs being incurred by Haymarket in obtaining the planning permission, the intention* was always to sell the site to a developer, rather than the appellant carrying out the development itself (there was no meaningful work being carried out on the site). The fact that planning permission was obtained did not mean that there was an ongoing property development business which could be transferred.
* The importance of “intention” in VAT is considered here and here.
Technical
In order for a transaction to qualify for a VAT free TOGC, ALL of the following conditions must be met:
In this case, the first, second and third tests was failed leaving the supply to be VAT-able as a result of the OTT.
More on the complex subject of TOGCs including case law here, here, here, and here.
Commentary
TOGCs are often a minefield for taxpayers and their advisers, especially if property is involved. Not only is land law and the relevant VAT legislation complex, but property transactions are usually high value, with a lot of VAT at stake (the VAT in this case was £17 million). Additionally, they are often “one-offs” and frequently outside the usual commercial expertise of people running the business. We strongly advise that comprehensive technical advice is always obtained when TOGC is mooted by one side or the other, particularly when the relevant asset is involved in property letting or development.