Category Archives: Contract

VAT: What is open market value? The Jupiter case

By   11 May 2021


Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

  • the full cost of making the supplies;
  • the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
  • the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

VAT: Is a car wash a car park? The RK Fuels Ltd case

By   26 April 2021

Latest from the courts

More on car parking.

In the RK Fuels Ltd First Tier Tribunal (FTT) case, the issue was whether the lease of an area of the supplier’s petrol station to a business operating a car wash was an exempt right over land or whether it was excluded from the exemption because it was a car park (the ‘grant of facilities for parking a vehicle’ VAT Act Schedule 9, Grp. 1, Item [1] [h]) and was therefore standard rated.

Background

Although the tenant operated a car wash (and not a car park) and this was a permitted use under the commercial use agreement, the car wash was located on land used as a car park.

The appellant contended that the car park was rented to carry out the business of car washing, and this is clearly stated in the lease agreement. It is not rented as a car park to park cars. Furthermore, a VAT inspection was carried out by HMRC and the point about the rental income being exempt was raised and accepted by HMRC.

HMRC relied on, inter alia, the fact that the relevant part of the lease stated that “the landlord agrees to rent to the tenant the car park. The car park will be used for only the following permitted use (the Permitted use): as a car wash business. Neither the car park nor any part of the premises will be used at any time during the terms of this lease by the tenant for any purpose other than the permitted use.” And the fact that the appellant was permitted an alternative use of the car park to run a car wash does not cause the area to cease to be a car park, nor does it mean that it cannot be used as a car park. There is a need for cars to be parked on the land whilst waiting to be washed, dried, and cleaned. Without the ability to park a car on the land, the permitted use could not occur.

Decision

The appeal was dismissed. The judge found that a grant of facilities for parking vehicles was made, either expressly or by necessary implication and so was standard rated. Further, the occupation of the car park under the terms of the lease agreement is a means to enable the car wash facility to operate. The site for parking is any place where a motor vehicle may be parked. It was also found that the fact that a person may not leave a vehicle does not render a vehicle any less parked.

The fact that the land was referred to as a “car park” consistently throughout the lease agreement was always going to be a problem for the appellant.

The court went on to consider whether a licence over land had been granted. It is a long-standing principle that a central characteristic of a licence over land is the right to exclude others. As the tenant had no right to exclude others from the relevant land (because, as an example given; customers of the petrol station could park there to visit the shop) there was no exempt supply of the right over land.

Commentary

There were other subsidiary issues, namely on whether an option to tax had been made but this was redundant considering the court’s decision on the substantive point. The decision was unsurprising even considering the guidance set out in VAT Notice 742 para 4.3:

 “When a supply is of land rather than parking facilities 

If you grant an interest in, or right over or licence to occupy land in the following circumstances, your supply will be exempted, unless you have opted to tax… 

·         letting of land or buildings where any reference to parking a vehicle is incidental to the main use..”

Even if the argument could be made that the parking was incidental, as the decision was that there was not an interest in, or right over or licence to occupy land the ancillary use point fell away.

Another nail in the coffin of the appeal was that the court found that the decision in the Fareham Borough Council [2014] TC04129 (which found that the right to operate was not an exempt right over land) applied in this case.

Care should be taken when analysing the VAT treatment of a lease. It is tempting to consider that if there is a lease, and it is of land, it is sufficient to merit exemption, but this case demonstrates that further consideration must always be given.

VAT – Top 10 Tax Point Planning Tips

By   25 March 2021

VAT Tax Point Planning

If a business cannot avoid paying VAT to the HMRC, the next best thing is to defer payment as long as legitimately possible. There are a number of ways this may be done, dependent upon a business’ circumstances, but the following general points are worth considering for any VAT registered entity.

A tax point (time of supply) is the time a supply is “crystallised” and the VAT becomes due to HMRC and dictates the VAT return period in which VAT must be accounted for.  Very broadly, this is the earliest of; invoice date, receipt of payment, goods transferred or services completed (although there are quite a few fiddly bits to these basic rules as set out in the link above).

 The aims of tax point planning

1.            Deferring a supplier’s tax point where possible.  It is sometimes possible to avoid one of these events or defer a tax point by the careful timing of the issue of a tax invoice.

2.            Timing of a tax point to benefit both parties to a transaction wherever possible. Because businesses have different VAT “staggers” (their VAT quarter dates may not be the co-terminus) judicious timing may mean that the recipient business is able to recover input tax before the supplier needs to account for output tax.  This is often important in large or one-off transactions, eg; a property sale.

3.            Applying the cash accounting scheme. Output tax is usually due on invoice date, but under the cash accounting scheme VAT is only due when a payment is received.  Not only does this mean that a cash accounting business may delay paying over VAT, but there is also built in VAT bad debt relief.  A business may use cash accounting if its estimated VAT taxable turnover during the next tax year is not more than £1.35 million.

4.            Using specific documentation to avoid creating tax points for certain supplies. If a business supplies ongoing services (called continuous services – where there is no identifiable completion of those services) if the issue of a tax invoice is avoided, VAT will only be due when payment is received (or the service finally ends). More details here.

5.            Correctly identifying the nature of a supply to benefit from certain tax point rules. There are special tax point rules for specific types of supplies of goods and services.  Correctly recognising these rules may benefit a business, or present an opportunity for VAT planning.

6.            Generate output tax as early as possible in a VAT period, and incur input tax as late as possible. This will give a business use of VAT money for up to four months before it needs to be paid over, and of course, the earlier a claim for repayment of input tax can be made – the better for cashflow.

7.            Planning for VAT rate changes. Rate changes are usually announced in advance of the change taking place.  There are specific rules concerning what cannot be done, but there are options to consider when VAT rates go up or down.

8.            Ensure that a business does not incur penalties for errors by applying the tax point rules correctly. Right tax, right time; the best VAT motto!  Avoiding penalties for declaring VAT late is obviously a saving.

9.            Certain deposits create tax points, while other types of deposit do not.  It is important to recognise the different types of deposits and whether a tax point has been triggered by receipt of one. Also VAT planning may be available to avoid a tax point being created, or deferring one.

10.         And finally, use duty deferment for imports. As the name suggests, this defers duty and VAT to avoid it having to be paid up front at the time of import.

Always consider discussing VAT timing planning for your specific circumstances with your adviser. It should always be remembered that it is usually not possible to apply retrospective VAT planning as VAT is time sensitive, and never more so than tax point planning.

I have advised a lot of clients on how to structure their systems to create the best VAT tax point position.  Any business may benefit, but  I’ve found that those with the most to gain are; professional firms, building contractors, tour operators, hotels, hirers of goods and IT/internet businesses.

A CASC is not a charity for VAT – The Eynsham Cricket Club case

By   2 March 2021

Latest from the courts

In the Court of Appeal (CoA) case of Eynsham Cricket Club (ECC) the issue is whether a Community Amateur Sport Club (CASC) is able to take advantage of VAT reliefs in the same way as a charity.

Background

The question was whether supplies of construction services of building a new cricket pavilion for a CASC qualify for zero-rating via The VAT Act 1994, Schedule 8. Group 5, item 2 (a) “The supply in the course of the construction of a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose…”Emphasis added.

The outcome depended on whether ECC was a charity. That in turn depends on whether:

  • ECC was “established for charitable purposes only” pursuant to Schedule 6 to the Finance Act 2010
  • Section 6 of the Charities Act 2011 applied and had the effect of preventing ECC from being treated as “established for charitable purposes”
  • ECC satisfied the other conditions, and in particular, the “registration condition”

Decision

It was determined that CASCs cannot be treated as charities for VAT purposes as the above criteria were not met. Therefore, the construction of ECC’s new pavilion did not qualify for zero-rating and was standard rated. It was noted that becoming a CASC meant that certain charitable benefits were forgone in return for relief for certain administrative and management chores.

Commentary

It appears that ECC had the opportunity to register as a charity, but apparently, unlike a near neighbour cricket club, decided not to.

“Charity” is not defined in VAT legislation, so this case is a reminder that it should not be assumed that every entity which may have charitable objectives, or generally exist in order to benefit a section of the community qualifies as a charity for the tax.

VAT: Uber Supreme Court case

By   23 February 2021

Latest from the courts

As many would have heard, the Supreme Court has ruled that individuals driving taxis are “workers” rather than third party contractors. Although not a VAT case, it has This decision has highlighted a number of VAT issues.

Agent versus principal

The main matter in VAT terms is; which party is making the supply? This is often a point of dispute with HMRC, especially with taxi businesses, driving schools, the operation of online platforms, travel and accommodation, and many other types of businesses. It is one of the most common areas of disagreement as many cases have demonstrated, eg; here, here, here, and here.

The difference

VAT legislation does not define agency for the purposes of the tax.

As is often the case in these types of arrangements, there are some matters that point towards a business acting as agent, and others indicating that the proper VAT treatment is that of principal. The important difference, of course, being whether output tax is due on the “commission” received by an agent (20% in Uber’s case), or on the full payment made to it by the end user.

Uber contended that the drivers were independent contractors who work under contracts made directly with the customers and are not employees. Thus, they (Uber) acted as agent. One main argument advanced by them was that the drivers were free to work for other businesses (although in reality this was very unlikely due to the market share held by Uber).

Contract

It also demonstrates both the importance of a contract (or lack of one in Uber’s case), and how all parties act in relation to it. There have been many VAT cases on how much weight should be given to a written agreement versus what the relevant parties actually agree, how they act, how the services are performed and what the customer thinks is the position (who [s]he thinks is providing the service).

Decision

Finding that the drivers work for, and under contracts with, Uber, the following aspects supported its decision – Uber sets the fare, the terms are set by Uber and drivers have no input, Uber restricts communications between driver and passenger, and Uber exercises significant control over the way in which the services are delivered.

Update

A similar decision has been made in the Dutch courts in the Deliveroo case.

Next steps

Commentary

We wait to hear how HMRC will proceed as a result of this case. There is a chance that it may attack taxi firms which they have previously accepted as agent on the grounds that they are principals – providing the service via their ‘employees/workers” and so assessing output tax on the full value of the fare paid.

VAT: Domestic Reverse Charge for construction services from 1 March 2021

By   17 February 2021

A reminder

The twice delayed introduction of the Domestic Reverse Charge (DRC) for the construction industry will be introduced from the first of next month and affected businesses need to have the necessary procedures in place – as it won’t be deferred again.!

Details of the scheme here and here.

Please contact us if you have any queries.

VAT: Fiscal representation in the UK

By   12 January 2021

As Brexit is all completely finished * * hollow laugh * * I look at what overseas businesses operating in the UK need to know in respect of compliance.

What is fiscal representation?

It is a safeguard for the authorities responsible for VAT in the EU (and UK). If it is not possible to collect tax from the taxable person, they can go to the representative who is usually jointly and severally responsible for the debt.

Each EU Member State has its own rules on representatives, but here I look at what overseas businesses need to do in the UK, and what the responsibilities are for a business acting in such a role. A representative must meet a set of tests to ensure that it is fit and proper in order for it to be allowed to act in a representative capacity.

In most cases, overseas businesses with no place of belonging in the UK register as a Non-Established Taxable Person (NETP).

Choices

If a business is a NETP, it will have a choice in how it registers and accounts for VAT in the UK (although in certain circumstances, HMRC have the power to direct a business appoint a tax representative).

Deal with UK VAT itself

In most cases an overseas business can deal with VAT without third party assistance. However, it must be able to:

  • register for VAT at the correct time
  • keep a record of everything it buys and sells in the UK
  • keep all the records needed to complete its VAT Return
  • produce records and accounts to HMRC for inspection
  • keep a note of all VAT paid and charged for each period covered by the return
  • pay the right amount of tax on time

Tax representative

A NETP may appoint a tax representative who:

  • must keep its principal’s VAT records and accounts and account for UK VAT on its behalf
  • is jointly and severally liable for any VAT debts the NETP incurs

A NETP is obliged to provide all of the information required to fulfil its obligations.

Tax Agent

A NETP may appoint a tax agent to act on its behalf. Such an arrangement will be subject to whatever contractual agreement the NETP and the agent decide. The significant difference to a tax representative is that HMRC cannot hold the agent responsible for any of the NETP’s VAT debts. This is clearly a better position for a UK business acting on behalf of a NETP. HMRC can decide not to deal with any particular agent appointed. Also, in some circumstances, if HMRC think it is necessary, it may still insist that a tax representative is appointed – this is usually in cases where there is a risk to the revenue. Additionally, HMRC can ask for a financial security.

As with the appointment of tax representatives a NETP:

  • may only appoint one person at a time to act as its agent (although an agent may act for more than one principal)
  • must still complete the appropriate form to apply for registration
  • HMRC require a NETP’s authority before it can deal with an agent
  • Needs to give the agent enough information to allow them to keep the VAT account, make returns and pay VAT

It is possible to appoint an employee to act as a VAT agent.

Penalties

As is to be expected, get any of the above wrong and there are penalties!

VAT: Is the supply of football pitches an exempt right over land? The Netbusters case.

By   11 November 2020

Latest from the courts.

In the First-tier Tribunal (FTT) case of Netbusters (UK) Limited the issue was whether the supply was the standard rated provision of sporting facilities, or an exempt right over land.

Background

Netbusters organised football and netball leagues and provided the playing facilities (artificial pitches for football and courts for netball). The hire of the facilities was for a defined period of time and no other party had the right to access the pitches during those times. The hire could be a block, or one-off booking. The appellant contended that the supplies were exempt via VAT Act 1994, Sch 9, Group 1 – “The grant of any interest in or right over land or of any licence to occupy land…”  However, item 1 Note (para m) excludes the “the grant of facilities for playing any sport or participating in any physical recreation” in which case they become standard rated. To add complexity, Note 16 overrides the exception for sporting facilities (so they are exempt) if the grant of the facilities is for:

“(a) a continuous period of use exceeding 24 hours; or

(b) a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—

(i) each period is in respect of the same activity carried on at the same place;

(ii) the interval between each period is not less than one day and not more than 14 days;

(iii) consideration is payable by reference to the whole series and is evidenced by written agreement;

(iv) the grantee has exclusive use of the facilities; and

(v) the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.”

I have a simplified flowchart which may assist if you, or your clients, need to look at these types of supplies further.

Another issue was whether Netbusters’ league/tournament management services which were, in principle, available independently of pitch hire, but in practice rarely were provided in that way, were separate supplies or composite. There was a single price payable for both pitch hire and league management services.

The appellant contended that its supplies were exempt via VAT Act 1994, Sch 9, Group 1 or that Revenue and Customs Brief 8 (2014): sports leagues, is applicable which states “HMRC accepts that the decision of the FTT is applicable to all traders who operate in circumstances akin to Goals Soccer Centres plc. This includes traders who hire the pitches from third parties such as local authorities, schools and clubs…

HMRC argued that there was no intention to create a tenancy and the agreements between the parties did not provide for exclusive use of the premises, so the supplies fell to be standard rated.

Decision

The appeal was allowed; the supply was a singe exempt supply because the objective character of the supplies were properly categorised as the granting of interests in, rights over or licenses to occupy land. It was found to be significant Netbusters (or its customers) had the ability to exclude others from the pitches during the period of the matches.

It was therefore unnecessary to consider whether Netbusters’ supplies grants of facilities satisfy all the conditions set out in Note 16 (although the FTT were disinclined to do this anyway as a consequence of the way respondent prepared its case).

Commentary

The issue of the nature sporting rights has a long and acrimonious history both in the UK and EU courts. Any business providing similar services are advised to review the VAT treatment applied.

VAT: Transfers of going concerns (TOGCs): additional condition

By   21 September 2020

Reallocation of VAT registration number (VAT 68 action) conditions of reallocation

When a business is transferred as a going concern it is possible for the transferee to take the VAT registration number of the transferor. We do no generally advise such an action as the transferee inherits any VAT “issues” of the transferor, but there may be occasions where it is desirable.

Details of TOGCs including the conditions here.

The additional new condition for the reallocation of the VAT number in a TOGC is that the transferor may not have a VAT debt.

Details of VAT 68

  • the transferee must complete the form if it wants to keep the registration number of the previous owner. The transferee must also complete a form VAT 1. The previous owner must not complete a form VAT 7 to deregister
  • once the transfer of the registration number has been allowed, it cannot be revoked
  • the conditions that the new and previous owners must agree to are set out on the application form and are legally binding. This means that the transferee will be liable for any outstanding VAT from the previous owner’s registration. The transferor will no longer be entitled to any repayments of VAT or unclaimed input tax, even if these amounts refer to periods before or after the transfer
  • the previous owner must cancel any Direct Debit that they have set up to pay their VAT

Full conditions

The following conditions should be met as both a matter of law before reallocation can be allowed.

  • a TOGC must have taken place
  • a VAT 68 must have been completed correctly by all parties
  • the transferor must not have already deregistered
  • the transferee must not already be registered
  • where the transferor is a corporate body, it must not have been dissolved before the VAT 68 was signed
  • a group registration must not be involved
  • the transferor must be neither liable nor eligible to remain VAT-registered following the transfer
  • the transferor must not be the subject of a Notice of Direction in respect of disaggregation.
  • the transferor must have no VAT debt. This includes amounts declared (both due or not yet due), penalties and other applied charges – the new condition
  • any assessment notified to the transferor covering periods before the date of transfer must be paid
  • any assessment raised, or due to be assessed, against the transferor, or any voluntary disclosure made by the transferor, must be paid with no indication of an appeal
  • any penalty incurred by the transferor for periods prior to the date of transfer must have been paid, with no indication of an appeal
  • any interest incurred by the transferor for periods prior to the date of transfer must have been paid with no indication of an appeal
  • no civil penalty has been or is intended to be imposed on the transferor

HMRC internal guidance on this matter VATREG30100 here

VAT: Changes to early termination fees and compensation payments

By   10 September 2020

HMRC has announced changes to the treatment of “compensation” and similar payments in its Revenue and Customs Brief 12 (2020).

This is as a result of recent judgments of the Court of Justice of the European Union (CJEU), specifically Meo (C-295/17) and Vodafone Portugal (C-43/19).

Background

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT; being compensatory in nature.

New treatment

Now, as a result of the CJEU cases, it is apparent that such charges are considered as being payment for the supply of goods or services for which the customer originally contracted. Consequently, most early termination and cancellation fees are standard rated. HMRC comment that this is the case even if they are described as compensation or damages (which, if an accurate description, remain VAT free). An example of this is given as; charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset.

Action

Any businesses which have not accounted for output tax on receipt of these payments are required to amend past declarations.

Commentary

The retrospective nature of this announcement seems unfair and is likely to cause administrative problems for a lot of businesses. The other issue is that HMRC have not said how far back such adjustments apply, is it: The usual four-year cap? The earlier of the two EJEU cases mentioned (2018)? The June 2020 Vodafone case? Some other date?

It does not appear that the relevant date will be the date of issue of the changes – 2 September 2020 as HMRC say that this date will only apply to certain businesses (those that have received a specific written ruling) so where does that leave the majority of other taxpayers? HMRC remain silent on this and it does not help those affected at all. It is possible that retrospection may be challengeable via judicial review.

While the application of the new rules seems logical and consistent with case law, the implementation and lack of detail is really, to be polite, unhelpful.