Category Archives: Latest from the Courts

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

By   26 March 2018
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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   14 March 2018
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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   23 February 2018
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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   22 February 2018
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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   19 February 2018
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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.

VAT – There is no such thing as a free lunch

By   3 January 2018
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Latest from the courts

In the Court of Appeal case of ING Intermediate Holdings Ltd the issue was whether the provision of “free” banking actually constituted a supply for VAT purposes.

Background

The appeal concerned the recoverability of input tax. ING wished to recover (via deduction against the outputs of a separate investment business) a proportion of VAT expenses incurred in connection with a “deposit-taking” business. ING contended that this activity did not involve any VATable supply. HMRC contended, and did so successfully before both prior tribunals, that it is more than a deposit-taking business and involved the provision of banking services.

The issue

The relevant services were supplied to the public, and the user of the services were not charged a fee. Consequently, the essential issue was; whether the “free” banking services were provided for consideration and, if so, how that consideration ought to be quantified for VAT purposes. If there was a consideration, there was a supply, and that supply would be exempt; thus not providing a right to recovery of input tax for the appellant.

Technical

There is no definition of consideration in either the EC Principal VAT Directive or the VAT Act 1994. In the UK, the meaning was originally taken from contract law, but the European Court of Justice (ECJ) has confirmed that the term is to be given the Community meaning and is not to be variously interpreted by Member States. The Community definition used in ECJ cases is taken from the EC 2nd VAT Directive Annex A13 as follows even though this Directive is no longer in force:

“…the expression “consideration” means everything received in return for the supply of goods or the provision of services, including incidental expenses (packing, transport, insurance etc), that is to say not only the cash amounts charged but also, for example, the value of the goods received in exchange or, in the case of goods or services supplied by order of a public authority, the amount of the compensation received.”

NB: In order for there to be consideration, it must be able to be quantifiable and able to be expressed in monetary terms.

Decision

The CA decided that although there was no distinct charge to the users of the service, there was a supply of services for a consideration. That consideration was the difference between what the customer obtained from the relevant account, and what he could have obtained from an account which was not free, but provided better returns (the interest rate offered must have contained some deduction for the services provided). This was capable of being expressed in monetary terms (although it is interesting to note that the CA stated that it would be undesirable to say which method should be applied, although the court was “entirely satisfied” that it could be done).

Consequently there was a supply for VAT purposes and ING’s appeal was therefore dismissed.

Commentary

HMRC quite often argue that there is a supply when in fact, there is no supply. However, they did have a decent argument in this case and I understand that they are likely to apply this to a number of other long running disputes.  Please contact us if you consider that this case could affect your business or your client’s business.

Ding Dong – Avon calling (for VAT)

By   21 December 2017
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Latest from the courts

The CJEU case of Avon Cosmetics Limited considered the validity and completeness of a specific UK derogation called a “Retail Sale Direction”.

Background

Avon Cosmetics Limited (‘Avon’) sells its beauty products in the UK to representatives, known colloquially as ‘Avon Ladies’, who in turn make retail sales to their customers (‘direct selling model’). Many of the Avon Ladies are not registered for VAT. As a result, their profit margins would not normally be subject to VAT. As an example; an Avon Lady may buy goods from Avon at £50 and sell them at £70. In HMRC’s eyes, the £20 difference is not taxed.

“Lost VAT” Derogation

That problem of ‘lost VAT’ at the last stage of the supply chain is typical of direct selling models. In order to deal with the problem, the UK sought and obtained a derogation from the standard rule that VAT is charged on the actual sales price. In Avon’s case that derogation  allowed HMRC to charge Avon VAT, not on the wholesale price paid by the unregistered Avon Ladies, but instead on the retail price at which the Avon Ladies would go on to sell the products to the final consumer. However, the way the derogation is applied does not take into account the costs incurred by the unregistered representatives in their retail selling activities, and the input tax that they would normally have been able to deduct had they been VAT registered (‘notional input tax’). In particular, where Avon Ladies buy products for demonstration purposes (not to resell but to use as a selling aid) they cannot deduct VAT on those purchases as input tax.  The result is that the disregarded notional input tax in relation to such costs ‘sticks’ in the supply chain and increases the overall VAT charged on the direct selling model over that charged on sales through ordinary retail outlets.

Challenge

The appeal by Avon concerns the interpretation and validity of the Derogation.

In particular

  • whether there is an obligation to take into account the notional input tax of direct resellers such as the Avon Ladies
  • whether there was an obligation for the UK to bring the issue of notional input tax to the EC’s attention when it requested the Derogation, and
  • what would be/what are the consequences of failing to comply with either of those obligations?

Result

The CJEU found that neither the derogation authorised by Council Decision 89/534/EEC of 24 May 1989 authorising the UK to apply, in respect of certain supplies to unregistered resellers nor, national measures implementing that decision infringe the principles of proportionality and fiscal neutrality. Therefore, output tax remains due on the ultimate retail sale value, but there is no credit for any VAT incurred by the Avon Ladies.

VAT: Time limit for claiming input tax

By   4 December 2017
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Latest from the courts.

In the helpful CJEU case of Biosafe (this link is in French, so with thanks to Mr Lees – for my schoolboy French and more helpfully; a translation website) the issue was the date at which input tax can be reclaimed in cases where VAT was charged at an incorrect rate (lower than should have been applied) and this is subsequently corrected by the issue of an additional VAT only invoice.

Background

The two parties to a transaction believed that a reduced rate of VAT applied to the supply of certain goods. The Portuguese tax authorities subsequently determined the correct VAT rate applicable was higher. The recipient refused to pay the additional tax on the grounds that the recovery of the input tax may be time barred.

Decision

Broadly, the CJEU held that VAT may be recovered on the date when a “correcting” (VAT only) invoice is issued, rather than when the initial tax point was created. So the capping provisions applicable in this case where not an issue.

Commentary

This is often an issue, and I come across it usually in the construction industry (where various VAT rates may be applicable). It is an important issue as in the UK we have a four year capping provision. If the initial supply was over four years ago, any claim for input tax will be time barred if this was deemed to be the only tax point.

In my experience, this issue does create some “confusion” in HMRC and is a helpful point of reference if there are any future disagreements on this matter.  It must be correct that the right to recover input tax only arises when there is a document (invoice) issued to support such a claim as it would not be possible to make a claim without evidence to support it. If the original tax point is used as a one-off date which cannot be subsequently moved, it means that the claim for the difference in the two rates of tax (the original incorrect rate and the later, higher rate) could not be made after the capping period; which seems, at the very least, unfair. The later correcting invoice therefore creates a new tax point.

Please contact us if you have any similar input tax claims disallowed as being time barred, or you are currently in a dispute with HMRC on this matter.

VAT – Littlewoods compound interest Supreme Court judgement

By   6 November 2017
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Latest from the courts

The Littlewoods Limited case

This is a long running case on whether HMRC is required to pay compound interest (in addition to simple statutory interest) in cases of official error (Please see below for details of how the overpayment initially arose). Such errors are usually in situations where UK law is incompatible with EC legislation.  Previous articles have covered the progress of the case: here and here

Background

Littlewoods was seeking commercial restitution for overpayments of VAT previously made. It’s view was that an appropriate recompense was the payment of compound interest. It was accepted by all parties that statutory interest amounted to only 24% of Littlewoods’ actual time value loss from the relevant overpayments. There are many cases stood behind this case, so it was important for both taxpayers and HMRC.

Decision

The Supreme Court rejected Littlewoods’ claim for compound interest of circa £1.25 billion on VAT repayments of £205 million for the years 1973 to 2004. The court held that the correct reading of the VAT Act is that it excludes common law claims and although references are made to interest otherwise available these are clearly references to interest under other statutory provisions and not the common law. To decide otherwise would render the limitations in the VAT Act otherwise meaningless. Further, it held that the lower courts were wrong to construe the Court of Justice of the European Union’s (CJEU) requirement of an “adequate indemnity” as meaning “complete reimbursement”. The Supreme Court construed the term as “reasonable redress”.

The above reasoning was based on the following reasons:

  • They read the CJEU’s judgment as indicating that the simple interest already received by Littlewoods was adequate even though it was acknowledged to be only about 24% of its actual loss
  • It is the common practice among Member States to award simple interest with the repayment of tax. If the CJEU intended to outlaw that practice they would have said so
  • The reading “reasonable redress” is consistent with the CJEU’s prior and subsequent case law.

Implications

The Supreme Court ruling means that claims for compound interest in cases of official error cannot be pursued through a High Court claim. It would appear that, unless other appeals which are currently listed to be heard are successful, (extremely unlikely given the comments of the Supreme Court) this is the end of the road for compound interest claims.

History of the overpayment
During the period with which this case is concerned, the claimants Littlewoods carried on catalogue sales businesses. It distributed catalogues to customers and sold them goods shown in the catalogues. In order to carry on its businesses, it employed agents, who received a commission in return for their services. They could elect to be paid the commission either in cash or in kind. Commission was paid in cash at the rate of 10% of the sales achieved by the agent. Commission paid in kind took the form of goods supplied by Littlewoods, equal in price to 12.5% of the sales achieved by the agent.
As suppliers of goods, Littlewoods were obliged to account to HMRC for the VAT due in respect of their chargeable supplies. Between 1973 and 2004, they accounted for VAT on the supplies which it made to its agents, as commission paid in kind, on the basis that the taxable amount of those supplies was reduced by the enhancement in the commission, that is to say by 2.5%. On a correct understanding of VAT law, the taxable amount of the supplies was actually reduced by the entire 12.5% which constituted the agents’ commission. Consequently, Littlewoods accounted for and paid more VAT to HMRC than was due.

VAT: The ECJ decides that bridge is NOT a sport

By   27 October 2017
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Latest from the courts

The English Bridge Union Limited (EBU) case

Further to my article on contract (or duplicate) bridge here which covered the Advocate General’s opinion that it could be considered a sport, the Court of Justice of the EU has ruled that it does not qualify as a sport and therefore certain supplies by The EBU are subject to UK VAT.

The court decided that “…the fact that an activity promotes physical and mental health is not, of itself, a sufficient element for it to be concluded that that activity is covered by the concept of ‘sport’ within the meaning of that same provision….

The fact that an activity promoting physical and mental well-being is practised competitively does not lead to a different conclusion. In fact, the Court has ruled that Article 132(1)(m) of Directive 2006/112 does not require, for it to be applicable, that the sporting activity be practised at a particular level, for example, at a professional level, or that the sporting activity at issue be practised in a particular way, namely in a regular or organised manner or in order to participate in sports competitions…

In that respect, it must also be noted that the competitive nature of an activity cannot, per se, be sufficient to establish its classification as a ‘sport’, failing any not negligible physical element.”

As my aged father has always said; it can only be sport if the players wear shorts and sweat…

He may not have been far off you know. I still have difficulty considering pub games as sport, but I am sure there will be many who think that darts and pool are indeed sport.  It is also interesting that, inter alia, HMRC consider; baton twirling, hovering (not “hoovering as I first read it) octopush, dragon boat racing and sombo as sport.