Category Archives: Disputes

VAT – The Partial Exemption Annual Adjustment

By Marcus Ward 8 May 2018

What is the annual adjustment? Why is it required?

An annual adjustment is a method used by a business to determine how much input tax it may reclaim.

Even though a partly exempt business must undertake a partial exemption calculation each quarter or month, once a year it will have to make an annual adjustment as well.

An annual adjustment is needed because each tax period can be affected by factors such as seasonal variations either in the value supplies made or in the amount of input tax incurred.

The adjustment has two purposes:

to reconsider the use of goods and services over the longer period; and
to re-evaluate exempt input tax under the de minimis rules.

A MWCL explanation of the Value Added Tax Partial Exemption rules is available here

Throughout the year

When a business makes exempt supplies it will be carrying out a partial exemption calculation at the end of each VAT period. Some periods it may be within the de minimis limits and, therefore, able to claim back all of its VAT and in others there may be some restriction in the amount of VAT that can be reclaimed. Once a year the business will also have to recalculate the figures to see if it has claimed back too much or too little VAT overall. This is known as the partial exemption annual adjustment. Legally, the quarterly/monthly partial exemption calculations are only provisional, and do not crystallise the final VAT liability. That is done via the annual adjustment.

The first stage in the process of recovering input tax is to directly attribute the costs associated with making taxable and exempt supplies as far as possible. The VAT associated with making taxable supplies can be recovered in the normal way while there is no automatic right of deduction for any VAT attributable to making exempt supplies.

The balance of the input tax cannot normally be directly attributed, and so will be the subject of the partial exemption calculation. This will include general overheads such as heating, lighting and telephone and also items such as building maintenance and refurbishments.

The calculation

Using the partial exemption standard method the calculation is based on the formula:

Total taxable supplies (excluding VAT) / Total taxable (excluding VAT) and exempt supplies x 100 = %

This gives the percentage of non-attributable input VAT that can be recovered. The figure calculated is always rounded up to the nearest whole percentage, so, for example, 49.1 becomes 50%. This percentage is then applied to the non-attributable input VAT to give the actual amount that can be recovered.

Once a year

Depending on a businesses’ VAT return quarters, its partial exemption year ends in either March, April, or May. The business has to recalculate the figures during the VAT period following the end of its partial exemption year and any adjustment goes on the return for that period. So, the adjustment will appear on the returns ending in either June, July, or August. If a business is newly registered for VAT its partial exemption “year” runs from when it is first registered to either March, April or May depending on its quarter ends.

Special methods

The majority of businesses use what is known as “the standard method”. However, use of the standard method is not mandatory and a business can use a “special method” that suits a business’ activities better. Any special method has to be “fair and reasonable” and it has to be agreed with HMRC in advance. When using a special method no rounding of the percentage is permitted and it has to be applied to two decimal places.

Commonly used special methods include those based on staff numbers, floor space, purchases or transaction counts, or a combination of these or other methods.

However, even if a business uses a special method it will still have to undertake an annual adjustment calculation once a year using its agreed special method.

De minimis limits

If a business incurs exempt input tax within certain limits it can be treated as fully taxable and all of its VAT can be recovered. If it exceeds these limits none of its exempt input tax can be recovered. The limits are:

£625 per month on average (£1,875 per quarter or £7,500 per annum) and;
50% of the total input VAT (the VAT on purchases relating to taxable supplies should always be greater than the VAT on exempt supplies to pass this test)

The partial exemption annual adjustments are not errors and so do not have to be disclosed under the voluntary disclosure procedure. They are just another entry for the VAT return to be made in the appropriate VAT period.

Conclusion

If a business fails to carry out its partial exemption annual adjustment it may be losing out on some input VAT that it could have claimed. Conversely, it may also show that it has over-claimed input tax. When an HMRC inspector comes to visit he will check that a business has completed the annual adjustment. If it hasn’t, and this has resulted in an over-claim of input VAT, (s)he will assess for the error, charge interest, and if appropriate, raise a penalty. It is fair to say that partly exempt businesses tend to receive more inspections than fully taxable businesses.

VAT: Latest from the courts – Are loan administration services exempt?

By Marcus Ward 1 May 2018

In the First Tier Tribunal (FTT) case of Target Group Limited (Target) the appeal was against a decision by HMRC that loan administration services supplied by Target to a UK bank, Shawbrook Bank Limited (Shawbrook) were standard rated.

Background

Target contracted with Shawbrook to provide services related to loans provided by Shawbrook to its customers in the course of its lending business. Target’s description of its services was “loan account administration services” which amounted to Shawbrook outsourcing the management of the loans to Target. The services that Target provided covered the entire lifecycle of the loans, apart from the making of the initial loan. Target established loan accounts using its own systems, communicates with borrowers as an undisclosed agent of Shawbrook, and dealt with payments by borrowers and all administrative issues that arose. Target had limited discretion. The terms of the loans, including interest rates, were set by Shawbrook. Although Target is involved in dealing with arrears, any enforcement action would be a decision for Shawbrook. Specifically, the contract described Target as being “a provider of loan origination and account operation services” which “performs activities including the functions of: payment processing and servicing and portfolio management services”

Issue

It was accepted that Shawbrook made the loans (not Target) and that the services provided by Target were to Shawbrook and comprised a single (composite) supply for VAT purposes, rather than multiple supplies. Details of the definition between the two types of supply have been hot news in the VAT world for some time. My commentary on relevant recent case law here here here here here and here

The issue was the precise nature of the supplies and whether they qualified for exemption. The areas of dispute included whether Target’s supplies were excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.

Target’s case was that the principal supply it made to Shawbrook related to payments and transfers in the same way as in the Electronic Data Services Ltd (EDS) case, which related to similar customer-facing loan administration services. (EDS provided loan arrangement and execution services to banks in relation to the granting of personal loans. The services included the provision of a staffed call centre, the printing and despatch of loan agreement documentation, the transfer of funds via the BACS system on the release of loans and the administrative work related to handling loan accounts and repayments). In the alternative, the principal or core supply relates to the operation of accounts (specifically, current accounts), or amounts to transactions concerning debts.

Technical

Article 135(1)(d) of the Council Directive 2006/112/EC (the Principal VAT Directive, or “PVD”) requires Member States to exempt the following transactions: “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;”

This is transposed into UK legislation via VAT Act 1994, Schedule 9, Group 5, items 1 and 8:

“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. …

Item 8. The operation of any current, deposit, or savings account.”

Decision

It was decided that Target’s supplies did not qualify for exemption and they therefore fell to be standard rated. What was fatal to the appellant’s case was the fact that there was an absence of any involvement in the initial loan. Consequently, although it was possible to view the services as “transactions concerning payments” they fell within the debt collection definition and accordingly were not exempt. The judge also ruled that the supplies may be loan accounts, these did not qualify as an exempt operation of a current account.

Commentary

Of course, this decision was important for the recipient of the supply (Shawbrook) as well as Target. Because its supplies were exempt, the VAT on the outsourcing expenditure would be irrecoverable thus creating an extra 20% cost.

This case once again demonstrates that even the smallest variation of facts can produce an unexpected VAT outcome. Care must be taken to analyse precisely what is being provided. Financial Services is a minefield for VAT and it is certainly one area that assumptions of the VAT treatment should be avoided and timely advice sought.

Picture: A loan arranger (apologies)

Tax Tribunal backlog continues to increase

By Marcus Ward 26 April 2018

Both the First Tier Tribunal (FTT) and the Upper Tribunal (UT) which both hear VAT cases, report an increase in the number of cases waiting to be heard. In the case of the FTT the increase is 507 last year which means 28,521 cases are outstanding. The increase of UT cases outstanding is around 40%.

These are not all VAT cases and it is likely that the backlog is predominantly caused by

HMRC’s increased willingness to attack what they see as tax avoidance and evasion (see here)
More businesses being prepared to go to court
HMRC’s determination to “win on every point” rather than, perhaps, seeking a negotiated settlement, and
The increasing complexity of cases heard.

This backlog works in HMRCs favour as in the majority of cases the disputed tax must be paid before a hearing can take place. Delays may also cause anxiety and the burden of devoting resources to appeals which may cause the applicant to withdraw. It is not usually an inexpensive process to go to court and some cases can take a number of years to resolve.

In the current climate, it is more important than ever to challenge HMRC’s decisions. We have found that in the majority of cases we have been able to reduce HMRC assessments, in many cases, to zero. We always work on the basis that it is very important to try to resolve matters with HMRC before going to Tribunal. This is an increasingly difficult task given the political pressure on HMRC to reduce the tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected) and the seemingly common tactic of HMRC becoming “entrenched” and being unprepared to shift their position.

Please contact us if you have a dispute with HMRC or are being challenged on any technical points. It is better to deal with these as soon as possible to avoid going to court.

VAT: Longer prison sentences for tax fraud

By Marcus Ward 16 April 2018

The latest figures from the Ministry of Justice show that for fraud offences including; VAT, Excise Duty, and Custom Duty the average length of custodial sentences has increased by around 25%. The average sentence is now four years one month, up from three years three months as the government clamps down on tax evasion.

Why longer in jail?

It is thought that the reasons for this are that:

HMRC is demanding longer sentences
HMRC is pursuing an increasing number of suspected fraudsters
HMRC is devoting more resources to carrying out investigations
CPS has been pushing for tax frauds to be considered as a more serious offence (which, obviously, carry longer sentences).

Criminal prosecution has also increased enormously as a result of the Revenue and Customs Prosecutions Office being incorporated with the CPS. HMRC is no longer just interested in getting the VAT, it wants prosecutions, the convictions….and the tax. A person criminally prosecuted for evasion does not escape paying the tax and they will be chased for it. A fraudster may be prosecuted under the Proceeds of Crime Act 2002 and the Money Laundering Act 2007.

More resources

The news comes as companies including Amazon and eBay have agreed to give their data to HMRC in an effort to crack down on VAT evasion by overseas retailers. The deal will mean the companies will provide merchant’s data to tax officials so that fraudulent trends can be spotted.

HMRC have also been using increasingly technical procedures on data which was previously unavailable to them – details here

Naming and shaming

In addition, HMRC also publish details of people who deliberately “get their tax affairs wrong”. The current list is here

What is evasion, and what is the difference between that and avoidance?

I am often asked about the distinction between avoidance and evasion. Broadly, the difference between avoidance and evasion is legality. Tax avoidance is legally exploiting the tax system to reduce current or future tax liabilities by means not intended by Parliament. It often involves artificial transactions that are contrived to produce a tax advantage. Tax avoidance is not the same as tax planning or mitigation.

Tax evasion is to escape paying taxes illegally. This is usually when a person misrepresents or conceals the true state of their affairs to tax authorities, for example dishonest tax reporting.

Technical

The relevant legislation covering the offences of fraudulent evasion of VAT is under section 72(1) of the Value Added Tax Act 1994, furnishing false information under section 72(3) and committing evasion over a period under section 72(8). Section 72(8)(b) sets out that the offence is subject to”…imprisonment for a term not exceeding seven years…”.

Summary

The message is clear; after being criticised by the Public Accounts Committee for not have a clear strategy for dealing with tax fraud and not pursuing criminal prosecution in enough cases HMRC has demonstrated that it is prepared to go after more businesses and individuals and put more resources into detecting and prosecuting fraudulent activities.

Sleep tight

We always recommend full disclosure to HMRC, it is preferable to sleep at night (rather than trying to sleep in a prison cell). Of course, the very best course of action is not to commit tax fraud…

VAT – What is Reasonable Care?

By Marcus Ward 12 April 2018

What is reasonable care and why is it so important for VAT?

HMRC state that “Everyone has a responsibility to take reasonable care over their tax affairs. This means doing everything you can to make sure the tax returns and other documents you send to HMRC are accurate.”

If a taxpayer does not take reasonable care HMRC will charge penalties for inaccuracies.

Penalties for inaccuracies

HMRC will charge a penalty if a business submits a return or other document with an inaccuracy that was either as a result of not taking reasonable care, or deliberate, and it results in one of the following:

an understatement of a person’s liability to VAT
a false or inflated claim to repayment of VAT

The penalty amount will depend on the reasons for the inaccuracy and the amount of tax due (or repayable) as a result of correcting the inaccuracy.

How HMRC determine what reasonable care is

HMRC will take a taxpayer’s individual circumstances into account when considering whether they have taken reasonable care. Therefore, there is a difference between what is expected from a small sole trader and a multi-national company with an in-house tax team.

The law defines ‘careless’ as a failure to take reasonable care. The Courts are agreed that reasonable care can best be defined as the behaviour which is that of a prudent and reasonable person in the position of the person in question.

There is no issue of whether or not a business knew about the inaccuracy when the return was submitted. If it did, that would be deliberate and a different penalty regime would apply, see here It is a question of HMRC examining what the business did, or failed to do, and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.

Repeated inaccuracies

HMRC consider that repeated inaccuracies may form part of a pattern of behaviour which suggests a lack of care by a business in developing adequate systems for the recording of transactions or preparing VAT returns.

How to make sure you take reasonable care

HMRC expects a business to keep VAT records that allow you to submit accurate VAT returns and other documents to them. Details of record keeping here

They also expect a business to ask HMRC or a tax adviser if it isn’t sure about anything. If a business took reasonable care to get things right but its return was still inaccurate, HMRC should not charge you a penalty. However, If a business did take reasonable care, it will need to demonstrate to HMRC how it did this when they talk to you about penalties.

Reasonable care if you use tax avoidance arrangements*

If a business has used tax avoidance arrangements that HMRC later defeat, they will presume that the business has not taken reasonable care for any inaccuracy in its VAT return or other documents that relate to the use of those arrangements. If the business used a tax adviser with the appropriate expertise, HMRC would normally consider this as having taken reasonable care (unless it’s classed as disqualified advice)

Where a return is sent to HMRC containing an inaccuracy arising from the use of avoidance arrangements the behaviour will always be presumed to be careless unless:

The inaccuracy was deliberate on the person’s part, or
The person satisfies HMRC or a Tribunal that they took reasonable care to avoid the inaccuracy

* Meaning of avoidance arrangements

Arrangements include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable). So, whilst an arrangement could contain any combination of these things, a single agreement could also amount to an arrangement. Arrangements are `avoidance arrangements’ if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes of the arrangements.

NB: We at Marcus Ward Consultancy do not promote or advise on tax avoidance arrangements and we will not work with any business which seeks such advice.

Using a tax adviser

If a business uses a tax adviser, it remains that business’ responsibility to make sure it gives the adviser accurate and complete information. If it does not, and it sends HMRC a return that is inaccurate, it could be charged penalties and interest.

None of us are perfect

Finally, it is worth repeating a comment found in HMRC’s internal guidance “People do make mistakes. We do not expect perfection. We are simply seeking to establish whether the person has taken the care and attention that could be expected from a reasonable person taking reasonable care in similar circumstances…”

VAT: Latest from the courts – option to tax, TOGC and deposits

By Marcus Ward 26 March 2018

Timing is everything

The First Tier Tribunal (FTT) case of Clark Hill Ltd (CHL) illustrates the detailed VAT considerations required when selling property. Not only are certain actions important, but so is timing. If a business is one day late taking certain actions, a VAT free sale may turn into one that costs 20% more than anticipated. That is a large amount to fund and will obviously negatively affect cashflow and increase SDLT for the buyer, and may result in penalties for the seller.

The case considered three notoriously difficult areas of VAT, namely: the option to tax, transfers of going concerns and deposits.

Background

CHL owned four commercial properties which had opted to tax. CHL sold the freehold of these properties with the benefit of the existing leases. As a starting point VAT would be due on the sale because of the option. However, the point at issue here was whether the conditions in Article 5 of the Value Added Tax (Special Provisions) Order 1995 were met so that the sale could be treated as a transfer of a business as a going concern (TOGC) and could therefore be treated as neither a supply of goods nor a supply of services for VAT purposes, ie; VAT free. The point applied to two of the four sales. The vendor initially charged VAT, but the purchasers considered that the TOGC provisions applied. CHL must have agreed and consequently did not charge VAT. HMRC disagreed with this approach and raised an assessment for output tax on the value of the sale.

TOGC

In order that a sale may qualify as a TOGC one of the conditions is that; the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part. It is accepted that in a property business transfer, if the vendor has opted to tax, the purchaser must also have opted by the “relevant date”. If there is no option in place at that time HMRC do not regard it as “the same kind of business” and TOGC treatment does not apply.

Relevant date

If the purchaser opts to tax, but, say, one day after the relevant date, there can be no TOGC. The relevant date in these circumstances is the tax point. Details of tax points here

Basically put, a deposit can, in some circumstances, create a tax point. In this case, the purchaser had paid a deposit and, at some point before completion of the transfer of the property, the deposit had been received by the seller or the seller’s agent. The seller notified HMRC of the option to tax after a deposit had been received (in two of the relevant sales). The issue here then was whether a deposit created a tax point, or “relevant date” for the purposes of establishing whether the purchaser’s option to tax was in place by that date.

Decision

The judge decided that in respect of the two properties where the option to tax was not notified until after a deposit had been paid there could not be a TOGC (for completeness, for various other reasons, the other two sales could be treated as TOGCs) and VAT was due on the sale values. It was decided that the receipt of deposits in these cases created a relevant date.

Commentary

There is a distinction between opting to tax and notifying that option to HMRC which does not appear to have been argued here (there may be reasons for that). However, this case is a timely reminder that VAT must be considered on property transactions AND at the appropriate time. TOGC is an unique situation whereby the seller is reliant on the purchaser’s actions in order to apply the correct VAT treatment. This must be covered off in contracts, but even if it is, it could create significant complications and difficulties in obtaining the extra payment. It is also a reminder that VAT issues can arise when deposits are paid (in general) and/or in advance of an invoice being issued.

We recommend that VAT advice is always taken on property transactions ad at an early stage. Not only can situations similar to those in this case arise, but late consideration of VAT can often delay sales and can even cause such transactions to be aborted.

VAT: Are digital newspapers newspapers?

By Marcus Ward 14 March 2018

Are digital newspapers zero rated?

Background

A long running argument has reached the First Tier Tribunal (FTT) in the case of The News Corp case. The issue was whether digital versions of newspapers should share similar VAT treatment to traditional paper newspapers (in this case; The Times, The Sunday Times, The Sun and The Sun On Sunday) and therefore be zero rated.

Arguments

The contention by the appellant was that the digital editions of the titles are “newspapers” on the basis that they are the digital equivalent of the daily editions produced on ordinary newspaper printing paper (“newsprint”). In respect of the process of news-gathering and journalism, there is no distinction between the newsprint and digital editions. Content is produced by a single newsroom under a single editor. The website and tablet editors sit within the newsroom team and are part of the journalistic process. Thus, the manner in which the newsprint and digital editions are compiled is identical until the point at which the content is laid out for transposition onto the physical or digital medium. There was, therefore, essentially no difference in the journalistic content or news teams for the newsprint and digital editions. It was also submitted that Item 2 Group 3 of Schedule 8 of VATA 1994 (below) should be interpreted purposively. The purpose of the provision was to promote literacy, the dissemination of information and democratic accountability. There was, however, a further principle of statutory interpretation which formed an important part of the appellant’s case. This principle was that legislation once enacted had to be kept up-to-date with, technological advances so that a statutory provision is “always speaking”. This was important in the present case because digital editions of newspapers did not exist in 1973 when VAT was introduced.

HMRC argued simply, that they do not fall within the definition of “newspapers” which is confined to newsprint newspapers.

Decision

Unsurprisingly, the appeal was dismissed on the grounds that digital newspapers are not covered by the zero rating provision at VAT Act 1994, Schedule 8, Group 3, which zero rates, inter alia, “newspapers” (Item 2). Group 3 provides as follows:

“Group 3—Books, etc
Item No
1 Books, booklets, brochures, pamphlets and leaflets.
2 Newspapers, journals and periodicals.
3 Children’s picture books and painting books.
4 Music (printed, duplicated or manuscript).
5 Maps, charts and topographical plans.
6 Covers, cases and other articles supplied with items 1 to 5 and not
separately accounted for…”

This relief clearly relates to physical goods. Consequently, it was necessary to determine whether digital newspapers are goods or services (which would not be covered by Group 3). It was decided that the supply in question was of “electronically supplied services” and this fact was fatal to the appellant’s case. Therefore the standard rate applied if the place of supply of the services was in the UK.

The judge further noted (on the “always speaking” point) that EC legislation contains a “standstill” date of 1 January 1991 with regard to zero rating by EU Member States. Thus, the CJEU held that the scope of zero rating provisions cannot be extended beyond their 1991 limits and that they must be interpreted strictly. In the judge’s view, to extend Item 2 Group 3 beyond the supply of goods (newsprint newspapers) to cover the supply of services (digital newspapers) would be an impermissible expansion of the zero rating provisions.

So the answer is; digital newspapers are not newspapers.

VAT – Latest on the Nesquik case

By Marcus Ward 23 February 2018

Latest from the courts

I covered the Nesquik first Tier Tribunal (FTT) case here Well, legal matters have since moved on and the case reached the Upper Tribunal (UT) recently. Nestlé UK Limited the manufacturer of Nesquik appealed against the FTT’s decision that its fruit flavoured products are subject to 20% VAT despite the chocolate flavour being zero rated.

Unfortunately for Nestlé , the UT decision went against it and banana and strawberry Nesquik remains standard rated. Similar contentions (to those in the FTT case) were advanced by the taxpayer, however the UT dismissed Nestlé’s appeal.

The Tribunal recognised that there is not currently a logical and consistent regime which applies to VAT on food (there is a long list of examples which include gingerbread men, smoothies, various types of crisps, not to mention Jaffa cakes….). I think most advisers could not agree more with the judge and I echo the comments I made after the FTT case: the entire legislation relating to food needs a complete overhaul.

Full details of the case here

VAT: Latest from the courts – Hastings Insurance Place Of Supply

By Marcus Ward 22 February 2018

In the First Tier Tribunal (FTT) case of Hastings Insurance the issue was where was the place of supply (POS) of services?

The POS rules determine under which VAT regime the supply is treated, whether the associated input tax may be recovered and how the services are reported. Consequently, determining the POS for any supply is vitally important because getting it wrong may not only mean that tax is overpaid in one country, but it is not declared in the appropriate country so that penalties and interest are levied. Getting it wrong also means that the input tax position is likely to be incorrect; meaning that VAT can be over or underclaimed. The rules for the POS of services are notoriously complicated and even subtle differences in a business’ situation can produce a different VAT outcome.

Background

Hastings is an insurance services company operating in the UK. The appeal relates to whether the appellant was able to recover input tax it incurred in the UK which was attributable to supplies of; broking, underwriting support and claims handling services made to a Gibraltar based insurance underwriter (Advantage) which supplied motor insurance to UK customers through Hastings. In order to obtain credit for the relevant input tax, the supply to Advantage must have a POS outside the EU, eg: the recipient had a place of belonging in Gibraltar and not the UK. HMRC argued that Advantage belonged in the UK so that the input tax could not have been properly recoverable. Consequently, the issue was where Advantage “belonged” for VAT purposes.

The POS rules set out where a person “belongs”.

A taxable person belongs:

where it has a business establishment, or;
if different, where it has a fixed establishment, or;
if it has both a business establishment and a fixed establishment (or several such establishments), where the establishment is located which is most directly concerned with the supply

Further details on this point are explained here

Contentions

It was not disputed that Advantage had a business establishment in Gibraltar. The question was whether it also had a fixed establishment in the UK and, if so, whether the supplies of services were made to that fixed establishment rather than to its business establishment in Gibraltar. HMRC contended that Advantage had a fixed establishment in the UK which was “more directly concerned with the supply of insurance” such that the POS was the UK. This was on the basis that Advantage had human and technical resources in the UK which were actually used to provide its services to UK customers. Hastings obviously argued to the contrary; that Advantage had no UK fixed establishment and that services were supplied to, and by, Advantage in Gibraltar.

Technical

It may be helpful to look briefly at CJEU case law which considered what an establishment other than a business establishment is. It is: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”.

Decision

The FTT concluded that the input tax in dispute is recoverable because it was attributable to supplies made to Advantage on the basis that it belonged outside the EU (as interpreted in accordance with the relevant EU rules and case law). After a long and exhaustive analysis of the facts the summary was;

The appellant’s human and technical resources, through which it provided the services to Advantage, did not comprise a fixed establishment of Advantage in the UK, whether for the purposes of determining where Advantage made supplies of insurance or where the appellant made the supplies of its services.
Even if, contrary to the FTT’s view, those resources comprised a fixed establishment in the UK, there is no reason to depart from the location of Advantage’s business establishment in Gibraltar as the place of belonging/supply in the circumstances of this case.

Summary

If this case affects you or your clients it will be rewarding to consider the details of the arrangements which are helpfully set out fully in the decision. This was, in my opinion, a borderline case which could have been decided differently quiet easily. A significant amount of the evidence produced was deemed inadmissible; which is an interesting adjunct to the main issue in itself. Whether HMRC take this matter further remains to be seen. It is always worthwhile reviewing a business’ POS in depth and we are able to assist with this.

VAT: Timeshare is exempt

By Marcus Ward 19 February 2018

Latest from the courts

The Fortyseven Park Street Ltd (FPSL) Upper Tribunal case.

Brief technical overview

In general terms the provision of a “timeshare” in the UK is standard rated for VAT. This is because HMRC regard supplies of this type to be similar to hotels, inns, boarding houses and are treated as “serviced flats” (other than those for permanent residential use). The appellant sought to argue that what it provided was not “similar” to a hotel or boarding house.

Background

The issue in the FPSL case was whether “Fractional Interests” (akin to timeshares) in a property amount to an exempt supply of that property. The Fractional Interests entitled FPSL’s clients up to 21 days a year in block of apartments in Mayfair.

The First Tier Tribunal (FTT) determined that here were three main issues:

The FTT decided that the supplies of the Fractional Interests fell within the exemption from VAT provided for the leasing or letting of immovable property.
However, the FTT further found that the land exemption was excluded because the grant of the Fractional Interests was the provision of accommodation in a similar establishment to an hotel.
The therefore FTT dismissed FPSL’s argument that under the principle of fiscal neutrality the supplies of the Fractional Interests should be treated in the same way (exempt) as more traditional timeshare interests.

Decision

The UT decided that the relevant interests provided amounted to an exempt supply of the property. This was on the basis that the judges concluded 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, and was thus within the concept of the “letting of immovable property”. It was also found that the supply was a passive activity and not outside the land exemption by reason of FPSL having added significant value to the service despite providing; certain additional facilities, services (eg; concierge) and benefits to clients – this was not, it was decided, a situation where the appellant had actively exploited the asset to add value to the supply (which may have made it taxable). The UT also ruled that as the concierge was provided by a third party, it could not be combined to form a single supply made by FPSL thus emphasising the fact that this was a more passive activity.

It was noted that there was a distinction in this case from supplies of boutique hotels (which are standard rated hotel accommodation) because residents were contracting for the supply of a long-term right to occupy an apartment and not a series of short-term stays and that the high amount paid for the Fractional Interest brought with it certain financial obligations which are not found in the hotel industry.

Commentary

This is an interesting case and the decision somewhat surprising. There is a subtle distinction between what was provided here and serviced flats or hotel accommodation, but the UT found it sufficient to apply exempt treatment. If you, or your clients may be affected by this decision, please contact us.