You pay VAT on the first 28 days of a stay at a hotel, but from the 29th the accommodation is VAT free.
Category Archives: Land & Property
VAT: The importance of Transfer of a Going Concern rules. The Haymarket case
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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:
- the assets must be sold as a business, or part of a business, as a going concern
- 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 (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
- there must be no break in trading
- where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
- where only part of a business is sold it must be capable of separate operation
- there must not be a series of immediately consecutive transfers
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.
VAT: Are preparatory ground works for burial chambers exempt? The Hodge case
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In the First-Tier tribunal (FTT) case of Hodge and Deery Limited the issue was whether ground works preparatory to installing flexi vault burial chambers exempt via The VAT Act 1994, Schedule 9, group 8, item 2 – “The making of arrangements for or in connection with the disposal of the remains of the dead.”
Background
The vaulting system was installed in graveyards with unstable soil structures which can result in issues with toxins and in subsidence of an existing grave when another grave is dug in the adjacent plot. The burial plots are ready for use and the element above the plots is landscaped (which was undertaken by a third-party).
The appellant’s case
The appellant considered that the installation of the flexible burial vaults should be treated as the advance digging of multiple graves. It should not be regarded differently from the preparation of “normal” graves. The sole purpose of the preparation of a grave is to dispose of the remains of the dead and it should not matter that the undertaker does not prepare the grave himself.
HMRC’s case
HMRC considered that the installation of flexible burial vaults do not fall within the exemption because:
- item 2 must be construed to confine the exemption to those supplies directly involved with the disposal of the remains of a particular dead person
- item 2 is confined to supplies directly made by the funeral director with care and custody of the deceased. It does not extend to sub-contractors of the funeral director
- the appellant had no responsibility for the deceased
- although the availability of zero rating in connection with the provision of new housing can be available to sub-contractors involved in the supply of new housing, this exemption cannot extend to sub-contractors in the same way, as the sub-contractors cannot be concerned with the body of the deceased
Decision
The judge considered that the services resulted in the provision of many graves for the disposal of the remains of the dead and that the result of the services satisfied the object of the exemption. The digging of graves is central to the disposal of the remains of the dead, the services are made in connection with the disposal of the remains of the dead and within Item 2.
Commentary
In this case, it did not matter that the services are provided in advance, and nor did it matter that the services are not provided in connection with a specific funeral. It also confirms that the funeral director or undertaker need not provide all the services themselves. It seems obvious that the digging of graves is pivotal to the disposal of the remains of the dead and once it was established that a third party could dig the grave, the appeal was bound to be successful.
VAT: Place of belonging. The Berlin Chemie A Menarini case
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The place of belonging of a business or other person is an important tenet of the tax. I have considered this issue at length here and recent case law here.
A recent CJEU case involved a situation where a business had a registered office in one country and, potentially (hence the appeal) a fixed establishment in another.
Background
“Berlin” used a “third party” to receive certain services. Does this entry represent a fixed establishment for Berlin if it has a sufficient degree of permanence and a suitable structure in terms of technical and human resources? If yes, is it is necessary for those human and technical resources to belong to the company receiving the services or whether it is sufficient for that company to have immediate and permanent access to such resources through a related company, of which it is major shareholder?
Technical
The wording of Article 44 of the VAT Directive and Article 11(1) of Implementing Regulation No 282/2011 do not provide any details as to whether human and technical resources must belong to the company that receives the services.
Decision
The CEUJ ruled that, simple control or ownership, of another entity is insufficient to create a fixed establishment for VAT purposes. Consequently, a third party location does not inevitably represent a fixed establishment by dint of control/ownership.
Having made that comment, the court impressed that the decision should be made “in the context of the economic and commercial reality”.
The analysis of the place of belonging should recognise that it is not necessary for the fixed establishment to own the resources, but there should be control over these resources in the same way as an “owner”. A fixed establishment is characterised by a suitable structure which enables a business to receive and use services supplied to them for their own needs and not by the decision power of a certain structure that businesses have put in place.
Commentary
Although an EU case, it could impact UK businesses who make supplies to EU recipients and particularly, if there is a “network” of offices or business locations in various EU Member States. Overseas suppliers to (potentially) UK business with various business premises and structures will need to recognise this ruling in order to establish the place of supply (and hence what country’s VAT and at what rate to apply).
This decision provides some helpful clarity, which may be summarised as: In principle, a subsidiary does not always create a fixed establishment.
VAT – Overseas holiday lets: A warning
Do you, or your clients, own property overseas which you let to third parties when you are not using it yourself?
It is important to understand the VAT consequences of owning property overseas.
The position of UK Holiday Lets
It may not be commonly known that the UK has the highest VAT threshold in the EC. This means that for many ‘sideline’ businesses such as; the rental of second or holiday properties in the UK, the owners, whether they are; individuals, businesses, or pension schemes, only have to consider VAT if income in relation to the property exceeds £85,000 pa, and this is only likely if a number of properties are owned.
It should be noted that, unlike other types of rental of homes, holiday lettings are always taxable for VAT purposes.
Overseas Holiday Lets
EU Member States have nil thresholds for foreign entrepreneurs. This means that if any rental income is received, VAT registration is likely to be compulsory. Consequently, a property owner that rents out a property abroad will probably have a liability to register for VAT in the country that the property is located. Failure to comply with the domestic legislation of the relevant Member State may mean; payment of back VAT and interest and fines being levied. VAT registration however, does mean that a property owner can recover input tax on expenditure in connection with the property, eg; agent’s fees, repair and maintenance and other professional costs. This may be restricted if the home is used for periodical own use.
Given that every country has differing rules and/or procedures to the UK, it is crucial to check all the consequences of letting property overseas. Additionally, if any other services are supplied, eg; transport, this gives rise to a whole new (and significantly more complex) set of VAT rules.
A final word of warning; I quite often hear the comment “I’m not going to bother – how will they ever find out?”
If an overseas property owner based in the UK is in competition with local letting businesses, those businesses generally do not have any compulsion in notifying the local authorities. In addition, I have heard of authorities carrying out very simple initiatives to see if owners are VAT registered. In many resorts, income from tourism is vital and this is a very important revenue stream for them so it is well policed.
Please contact us if you are affected by this matter; we have the resources to advise and act on a worldwide basis.
VAT: Car boot sale pitches are exempt – The Rufforth Park case
Latest from the courts
In the Rufforth Park Limited (RPL) First Tier Tribunal (FTT) case the issue was whether pitches for car boot and auto jumble sales were subject to VAT or were they a simple licence to occupy land and exempt?
Background
The appellant has been running car boot sales at Rufforth Park for the more than forty years. When RPL began the car boot sales, the VAT office was asked to confirm that it did not need to charge VAT on the fees for the pitches. It was told that it should charge VAT, and did so. After a number of years, RPL demonstrated to the VAT office that other businesses in a similar position were not charging VAT. HMRC then agreed and the VAT the company had paid was refunded with interest. The company has not charged VAT on the pitch fees since. After a routine inspection HMRC formed the view that there were a number of services that, together, formed a standard rated supply and assessed for VAT on that basis. RPL appealed against this decision.
Technical
HMRC concluded that the fees for the pitches should be standard rated because the supply of the pitches was provided with other goods and services which constituted a single overarching supply of a service, not merely the right to occupy land. The reasons were:
- Forty years of running car boot sales had built up a reputation which is a tangible benefit to stallholders. The reputation of regular events is part of the supply the stall holder receives.
- Advertising to bring buyers to the site for the benefit of stall holders is part of the supply.
- The amenities on site enable buyers better to enjoy their time at the car boot sale and are part of the supply.
- The sellers benefit from the amenities as well as the activities undertaken by RPL to attract buyers to the site to buy items from the sellers. Those activities include:
- advertising
- on site café
- toilets
- parking
- capital improvements to the site to make it more attractive to buyers
- provision of some pitches under cover
- cleaning the site after the events
- RPL had real and significant responsibilities to the sellers (although HMRC did not specify what they were)
This was said to show there was more to the supply than the exempt passive supply of land for a stall to sell items.
The appellant submitted that the supply in this case is a single supply of a pitch rental and one must look at all the circumstances in order to establish its nature. Regard must be had to the commercial and economic realities. The renting of a pitch in a car boot sale in the present case was a relatively passive activity linked to the passage of time and not generating any significant added value and so is VAT free.
Decision
The court found that that the nature of the supply provided in return for the pitch fees is a licence to occupy land within The VAT Act, Schedule 9, Group 1, Item 1 and accordingly the fees were exempt. The appeal was allowed.
Commentary
Yet another case demonstrating the uncertainty in this area. Superficially, there is little difference in the facts of this case to those in the Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival) which found that supplies of pitches at craft fairs were standard rated. However, the court found that this case could be distinguished on its facts. Which may be summarised as:
- there was no formal contract between RPL and its sellers
- it was not possible to book in advance
- there was no selection of sellers. Anyone who arrived and paid would get a space, allocated by RPL
- the advertising on the company’s website, local TV, and Facebook provided only basic information to both buyers and sellers about times and prices
- RPL had no obligation to put on the car boot sales or the auto jumbles. Sellers have no right to attend. If there was no sale, they would have no recompense.
- no tables, chairs or electricity were provided, even for an extra fee
- there was no provision of security
- the toilet and refreshment facilities were basic
- the Appellant had carried out such maintenance as is required but had not attempted to enhance the facilities
- whilst the car boot sales and auto jumbles might be efficiently run, they are simple events involving only the Appellant’s land and its employees and not requiring any particular organisational or management skills. Well run is not the same thing as “expertly organised and expertly run”.
It is important when considering these two decisions to establish precisely what is being supplied, as small differences in facts can affect the VAT treatment. The more “basic” the supply, the more likely that exemption will apply, but it is a question of small degrees of difference.
Is room hire subject to VAT? – The Errol Willy Salons case
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In the First Tier Tribunal (FTT) case of Errol Willy Salons Ltd (2022) TC 08370 the issue was whether the rent of two rooms were an exempt right over land, or the standard rated supply of facilities.
Background
Room hire is usually exempt from VAT unless it is subject to an option to tax. However, it can be subsumed into a different rated another supply if something more than a “bare” room is provided. In such cases, it would follow the VAT treatment of the composite supply.
The Issue
In the Errol Willy Salons case, HMRC formed the view that what was being supplied was facilities (the room occupation being a minor part of the supply) and therefore subject to VAT. In its opinion the economic and social reality was that the beauticians were provided with a licence to trade from the premises. The appellant occupied the ground floor – operating a hairdressing business. The rooms over the saloon were rented to third party beauticians. The occupants furnished the rooms themselves, provided their own equipment, set their own pricing and opening hours. They did have use of certain services and facilities; a receptionist and toilets, but it was understood that the services were rarely used. Unsurprisingly, the appellant disagreed and contended that the other services were incidental or subsidiary to the exempt supply of the room rental.
The decision
The Tribunal allowed the appeal against the assessment. It found that “non-rent” services provided to the beauticians were limited in nature and not essential to the beauticians’ businesses Consequently, the arrangements amounted to a supply of property (a licence to occupy the rooms) rather than a supply of taxable facilities and was therefore exempt.
Commentary
This is the latest in a long line of issues on composite/separate supplies and room hire/facilities disputes, especially in relation to weddings. It is important to establish precisely what is being provided to establish the correct VAT treatment and advice should be ought if there is any doubt about the VAT liability.
The CIOT has long advocated that it is not the case that every package of supplies involving room hire and other things must be a composite supply of something other than an exempt letting of land.
NB: This case is different to hairdresser chair rentals which remain standard rated.
VAT: Roof panels are not insulation. The Greenspace case
Latest from the courts
In the Upper Tribunal (UT) case of Greenspace Limited the issue was whether insulated roof panels were “energy-saving materials” per VAT Act 1994, sect 29A, Schedule 7A, group 2, items 1 and 2 and thus liable at the reduced rate of 5%. Or rather at the standard rate of 20% on the basis that they were a supply of a roof itself.
Background
The appellant supplied and installed roof panels for conservatories which comprised a layer of close-cell extruded polystyrene foam (Styrofoam) around 71mm thick. The Styrofoam was covered with a thin aluminium layer and a protective powder coating which are together around 2mm thick. The supplies were made to residential customers and the panels were fitted onto their pre-existing conservatory roofs. The Panels were slotted into place on the existing roof structure and Greenspace did not replace its customers’ existing roof framework when doing this; the struts and glazing bars that supported the previous glass or polycarbonate panels were left in place. Consequently, the Panels were not self-supporting and could only be used if the customer already had an existing conservatory roof structure.
The decision
The First-tier Tribunal (FTT) decided in 2020 that the panels were not “insulation for a roof” but were a new roof in their own right, and that the appellant’s supplies did not therefore qualify for the reduced rate of VAT (unlike insulation that could be separately attached to a roof, the panels actually formed the roof).
The UT dismissed the new appeal and found that the FTT had not been obliged to compare the roof after Greenspace had installed its panels to the original roof. The frame that was retained could not itself be described as a roof, and the provision of the Thermotec panels which made the conservatory weatherproof as well as insulating it could properly be categorised as the provision of a new roof.
One of Greenspace’s grounds of appeal was that the FTT decision was vitiated by the assumption that because the panels took the form of roof coverings, they were necessarily incapable of constituting “insulation for … roofs”. The appellant argued that as this was a flawed assumption (that Greenspace’s supplies “must” be treated as something more than insulation) the decision should be set aside. This contention was rejected by the UT judge.
Commentary
A fine distinction is often required to be made to establish the correct VAT treatment of a supply. In this case a degree of semantics was required to determine whether the panels were energy-saving materials (even when they certainly saved energy). On such small things turned the assessment of £2.6 million here. It always pays to double check VAT treatments rather than making assumptions.
VAT: Input tax recovery. The Mpala Mufwankolo case
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In the First Tier Tribunal (FTT) case of Mr Mufwankolo the dispute was whether the appellant was able to recover VAT charged by the landlord of the property from which he ran his business – a licenced retail outlet on Tottenham High Road.
Background
The landlord had opted to tax the commercial property and charged VAT on the rent. The appellant was a sole proprietor; however, the lease was in the name of Mr Mufwankolo’s wife, and the rent demands showed her name and not that of the sole proprietor. It was contended by the appellant, but not evidenced, that the lease had originally been in both his and his wife’s names, despite his wife being the sole signatory.
The issues
Could the appellant recover input tax?
- Did the business receive the supply?
- Was there appropriate evidence?
It was clear that the business operated from the relevant property and consequently, in normal circumstances, the rent would be a genuine cost component of the business.
The Decision
The FTT found that there was no entitlement to an input tax claim and the appeal was dismissed. The lease was solely in the wife’s name and the business was the applicant as a sole proprietor. (There was an obvious potential for a partnership and an argument that a partnership was originally intended was advanced. The status of registration was challenged in 2003, but, crucially, not pursued).
It was possible for the property to be sub-let by the wife to the husband, however, this did not affect the VAT treatment as matters stood. Additionally, there was no evidence that the appellant actually paid any of the rent, as this was done by the tenant. There were no VAT invoices addressed to the sole proprietor.
Given the facts, there was no supply to the appellant, so there was no input tax to claim, and the issue of acceptable evidence fell away.
It was a certainty that the appeal could not succeed.
Commentary
There were a number of ways that this VAT cost could have easily been avoided had a little thought been given to the VAT arrangements. An oversight that created an avoidable tax hit.
A helpful guide to input tax considerations here: Care with input tax claims.
Legislation
The VAT Act 1994 Section 3 – Taxable person
The VAT Act 1994 Section 4 – Taxable supply
The VAT Act 1994 Section 24 (1) – Input tax
The VAT Act 1994 Section 24 (6) – Input tax claim evidence
Oops! – Top Ten VAT howlers
I am often asked what the most frequent VAT errors made by a business are. I usually reply along the lines of “a general poor understanding of VAT, considering the tax too late or just plain missing a VAT issue”. While this is unquestionably true, a little further thought results in this top ten list of VAT horrors:
- Not considering that HMRC may be wrong. There is a general assumption that HMRC know what they are doing. While this is true in most cases, the complexity and fast moving nature of the tax can often catch an inspector out. Added to this is the fact that in most cases inspectors refer to HMRC guidance (which is HMRC’s interpretation of the law) rather to the legislation itself. Reference to the legislation isn’t always straightforward either, as often EC rather than UK domestic legislation is cited to support an analysis. The moral to the story is that tax is complicated for the regulator as well, and no business should feel fearful or reticent about challenging a HMRC decision.
- Missing a VAT issue altogether. A lot of errors are as a result of VAT not being considered at all. This is usually in relation to unusual or one-off transactions (particularly land and property or sales of businesses). Not recognising a VAT triggerpoint can result in an unexpected VAT bill, penalties and interest, plus a possible reduction of income of 20% or an added 20% in costs. Of course, one of the basic howlers is not registering at the correct time. Beware the late registration penalty, plus even more stringent penalties if HMRC consider that not registering has been done deliberately.
- Not considering alternative structures. If VAT is looked at early enough, there is very often ways to avoid VAT representing a cost. Even if this is not possible, there may be ways of mitigating a VAT hit.
- Assuming that all transactions with overseas customers are VAT free. There is no “one size fits all” treatment for cross border transactions. There are different rules for goods and services and a vast array of different rules for different services. The increase in trading via the internet has only added to the complexity in this area, and with new technology only likely to increase the rate of new types of supply it is crucial to consider the implications of tax; in the UK and elsewhere.
- Leaving VAT planning to the last minute. VAT is time sensitive and it is not usually possible to plan retrospectively. Once an event has occurred it is normally too late to amend any transactions or structures. VAT shouldn’t wag the commercial dog, but failure to deal with it at the right time may be either a deal-breaker or a costly mistake.
- Getting the option to tax wrong. Opting to tax is one area of VAT where a taxpayer has a choice. This affords the possibility of making the wrong choice, for whatever reasons. Not opting to tax when beneficial, or opting when it is detrimental can hugely impact on the profitability of a project. Not many businesses can carry the cost of, say, not being able to recover VAT on the purchase of a property, or not being able to recover input tax on a big refurbishment. Additionally, seeing expected income being reduced by 20% will usually wipe out any profit in a transaction.
- Not realising a business is partly exempt. For a business, exemption is a VAT cost, not a relief. Apart from the complexity of partial exemption, a partly exempt business will not be permitted to reclaim all of the input tax it incurs and this represents an actual cost. In fact, a business which only makes exempt supplies will not be able to VAT register, so all input tax will be lost. There is a lot of planning that may be employed for partly exempt businesses and not taking advantage of this often creates additional VAT costs.
- Relying on the partial exemption standard method to the business’ disadvantage. A partly exempt business has the opportunity to consider many methods to calculate irrecoverable input tax. The default method, the “standard method” often provides an unfair and costly result. I recommend that any partly exempt business obtains a review of its activities from a specialist. I have been able to save significant amounts for clients simply by agreeing an alternative partial exemption method with HMRC.
- Not taking advantage of the available reliefs. There are a range of reliefs available, if one knows where to look. From Bad Debt Relief, Zero Rating (VAT nirvana!) and certain de minimis limits to charity reliefs and the Flat Rate Scheme, there are a number of easements and simplifications which could save a business money and reduce administrative and time costs.
- Forgetting the impact of the Capital Goods Scheme (CGS). The range of costs covered by this scheme has been expanded recently. Broadly, VAT incurred on certain expenditure is required to be adjusted over a five or ten year period. Failure to recognise this could either result in assessments and penalties, or a position whereby input tax has been under-claimed. The CGS also “passes on” when a TOGC occurs, so extra caution is necessary in these cases.
So, you may ask: “How do I make sure that I avoid these VAT pitfalls?” – And you would be right to ask.
Of course, I would recommend that you engage a VAT specialist to help reduce the exposure to VAT costs!