Category Archives: Latest from the Courts

VAT Latest from the courts; can HMRC impose a higher value on a supply?

By Marcus Ward 9 February 2016

VAT Latest from the courts – Whether Open Market Value applies

HMRC has the power to direct that Open Market Value (OMV) is applied to the value of certain supplies between connected parties – VAT Act 1994 Schedule 6, paragraph 1. This power is used to avoid situations where one party is unable to recover all of the input tax incurred on purchases. Usually, the direction is used when one party purchase goods and services at OMV, recovers full input tax and then supplies these goods and services to a connected party at a lower price, thus reducing the amount of input tax lost by the recipient party.

HMRC deemed this to be the position in Temple Retail Limited and Temple Finance Limited (TC04840) where “TRL” purchased goods and services and resupplied them to “TFL”. TFL was a company that was unable to recover all of its input tax as a result of partial exemption (it made supplies of exempt credit as it sold goods to consumers via HP agreements). HMRC was concerned that TRL and TFL had an opportunity to improve their aggregate input tax recovery by charging fees for certain services below OMV and consequently issued an OMV direction.

HMRC later issued TRL with assessments for under-declared output tax for not complying with the direction and this, inter alia, was the subject of the appeal by the taxpayer.

The FT Tribunal was satisfied that the majority of TRL’s fees charged to TFL were charged at OMV. However, The Tribunal decided that advertising services were not calculated at OMV and held that these services should be recalculated by reference to a method which it specified.

The case is a useful reminder of HMRC’s powers to substitute a stated value of a supply with what it believes to be OMV between connected parties. Business which are connected and provide exempt services need to be aware of the position and ensure that relevant supplies do not fall foul of the OMV direction rules. Care should be taken to document the values used and the reasons why they reflect the economic reality of the position in order to avoid a challenge from HMRC. OMV is often an area that creates differences of opinion and therefore disputes. Any structures which set out to deliberately reduce the value of supplies are likely to result in more serious actions from HMRC.

A definition of what constitutes connected parties is found here

If the case sets off any warning bells, please contact us as soon as possible.

VAT – Zero rating of charitable building; latest from the courts

By Marcus Ward 25 January 2016

A recent case at the Upper Tribunal (UT): Wakefield College here considered whether certain use of the property disqualified it from zero rating.

Background

In order to qualify for zero rating a building it has to be used for “relevant charitable purpose”

This means that it is used otherwise than in the course or furtherance of a business. In broad terms, where a charity has a building constructed which it can show it will use for wholly non business purposes then the construction work will be zero rated by the contractor. This is the case even if there is a small amount of business activity in the building as long as these can be shown to be insignificant (which is taken to be less than 5% of the activities in the whole building) This so called de-minimis of 5% can be of use to a charity. In order for zero rating to apply the charity must issue a certificate to the builder stating the building will be used for non-business purposes.

Although the UT supported HMRC’s appeal against the F-tT decision there was an interesting comment made by the UT. The fact that students paid towards the cost of their courses (albeit subsidised) meant that business supplies were made, and the quantum of these fees exceeded the 5% de minimis meant that the construction works were standard rated. This decision was hardly surprising, however, a comment made by the Tribunal chairman The Honourable Mr Justice Barling Judge Colin Bishopp may provide hope for charities in a similar position to the appellant: he stated that it believed that the relevant legislation should be reconsidered, suggesting that;

“… it cannot be impossible to relieve charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse …”.

In my view, it is worth considering the summing up in its entirety as it helpfully summarises the current position and provides some much sought after common sense in this matter:

“We cannot leave this appeal without expressing some disquiet that it should have reached us at all. It is common ground that the College is a charity, and that the bulk of its income is derived from public funds. Because that public funding does not cover all of its costs it is compelled to seek income from other sources; but its doing so does not alter the fact that it remains a charity providing education for young people. If, by careful management or good fortune, it can earn its further income in one way rather than another, or can keep the extent of the income earned in particular ways below an arbitrary threshold, it can escape a tax burden on the construction of a building intended for its charitable purpose, but if it is unable to do so, even to a trivial extent, it is compelled to suffer not some but all of that tax burden. We think it unlikely that Parliament intended such a capricious system. We consider it unlikely, too, that Parliament would consider it a sensible use of public money for the parties to litigate this dispute twice before the FTT and now twice before this tribunal. We do not blame the parties; the College is obliged to maximise the resources available to it for the pursuit of its charitable activities, just as HMRC are obliged to collect tax which is due. Rather, we think the legislation should be reconsidered. It cannot be impossible to relieve 16 charities of an unintended tax burden while at the same time protecting commercial organisations from unfair competition and preventing abuse”.

Action

If any charities, or charity clients have been denied zero rating on a building project, it will be worthwhile monitoring this development. Please contact us if you require further information.

VAT Flat Rate Scheme (FRS)– New judgement on retrospective application

By Marcus Ward 14 January 2016

Latest from the courts

In the recent case of KDT Management Ltd an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose was considered.

HMRC issued an assessment to recover VAT which was alleged to have been omitted from the appellant’s returns because it did not apply certain increases of rate to its turnover under the FRS of accounting for VAT.

It was also an appeal against a decision by HMRC not to allow the appellant to retrospectively apply the percentage of turnover it says was appropriate to its business under the FRS instead of the one it says it mistakenly chose.

The decision was that the appeal against the assessments to VAT and interest were upheld. The appeal against the decision not to backdate was also upheld and the decision was cancelled.

Please contact us if you have been in dispute over the rate applicable on a FRS, or if you think you may be using an inappropriate percentage. This is likely to mainly affect small businesses.

Details of the FRS here

VAT Compound Interest – Latest

By Marcus Ward 24 November 2015

Proposed introduction of a new tax.

The Littlewoods case is slowly making its way through the court system with the CJEU ruling that there is a right to the taxpayer of adequate indemnity in respect of tax incorrectly collected via a mistake of law. There are myriad claims to which this will apply, especially “Fleming” claims where they covered a significant period of time a number of years ago.

HMRC has now applied to Supreme Court’s decision for permission to appeal the decision and we expect the Supreme Court’s verdict within the next month.

HMRC appear very concerned that it will ultimately be required to pay large amounts of interest to taxpayers who have suffered as a result of HMRC applying the relevant law incorrectly. Consequently, it has announced that the Summer Finance Bill 2015 will impose a 45% corporation tax charge on compound interest. There will be no right of set off or deduction for other losses. HMRC will withhold the corporation tax from any payment of interest made. This will take effect on 21 October 2015 (although the relevant legislation will not become law until 2016 indicating that HMRC is indeed running scared).

It is understood that there are a number of parties currently working on ways to challenge the legality of the proposed legislation.

Action

Claims already submitted

No immediate action is required, although it may be beneficial to review the basis of the claim, how it was made and what the status of it is currently.

New claims

For businesses which have received repayments due to HMRC error, it may be worthwhile reviewing the position to determine whether a claim for compound interest is appropriate and if so, to make a claim as soon as possible. We would, of course, be happy to advise on this and assist where necessary.

VAT – An important ECJ case which will affect charities – Sveda

By Marcus Ward 28 October 2015

A benefit to charities?

In the case of Sveda (C-126/14) which was recently heard by the European Court of Justice (ECJ) the issue was whether input tax was recoverable on the construction of a recreational woodland path which ended at a shop that Sveda owned and made taxable supplies from. Full case here

90% of the construction costs were met by Grant received from the Lithuanian Ministry of Agriculture on the condition that the path was made available free of charge to the public for a period of five years. There was no dispute that the grant was outside the scope income for Sveda.

The authorities disallowed the VAT claimed on 100% of the costs on the grounds there was no link to taxable supplies since free access is a non-economic activity because there was no consideration paid to use the path. Alternatively, there was a contention that only 10% of the VAT should be reclaimed, since the company only met 10% of the cost.

Sveda argued that, although the path could be used free of charge, the purpose was increase taxable sales from its shop (food, drink and souvenirs). This meant there was a link between the VAT incurred and its economic activity as a whole.

The ECJ rejected the view that the input tax should be blocked in its entirety or in part. Its view was that the expenditure was incurred with the intention of carrying out an economic taxable activity, even if there was no direct link to any one specific supply and use of the path was free. The VAT was overhead VAT. No exempt supplies (that would break the chain of deduction) took place.

So, although the path was used for a non-business activity (free access) the ECJ deemed that the input tax incurred on the costs of building the path was deductible. As there was a link to economic activities the VAT is treated as overhead and, in this case, fully recoverable.

Although Sveda is a commercial company and the decision will no doubt be of assistance to commercial entities, there may be a significant impact on charities and NFP organisations. This judgment highlights the basic right to deduct VAT where a link to taxable supplies made by a taxable person can be demonstrated. It does not matter whether the link is to one taxable supply or to all the taxable economic activities. The non-business use of the asset did not prevent recovery. The outcome would no doubt have been different if Sveda was only involved in building the path and just providing free access to it without also selling items form the shop.

On a personal note, this case has echoes of one I took to Tribunal for The Imperial War Museum – with a similar successful outcome. HMRC views here

Let’s hope it will be just as useful for the taxpayer as the landmark IWM decision.

If you think you, or a charity you are aware of, or a client of yours may be affected by this decision, please contact me. This may be the case if the charity undertakes both business and non-activities. I would always counsel that a charity should have its activities reviewed from a VAT perspective. There are usually savings that could be made.

VAT – Trading in Bitcoin ruled exempt by ECJ

By Marcus Ward 22 October 2015

VAT – Trading in Bitcoin ruled exempt by ECJ

Further to my article of 13 March 2014 here

The European Court of Justice (ECJ), the highest court of appeal for EC matters, has ruled that trading in digital, such as bitcoin, is exempt. this is on the basis that they are a method of payment with no intrinsic value, like goods or commodities. They are therefore covered by the exemption relating to “currency, bank notes and coins used as legal tender” – (Article 135 (1) of the VAT directive).

This confirms that the UK authority’s approach is correct and that the VAT treatment applied in Germany, Poland and Sweden where those authorities treated the relevant transactions as subject to VAT, is erroneous.

This is good news for the UK as it is a big (if not the biggest) player in the bitcoin sector.

VAT – Latest from the courts on multiple or composite supplies

By Marcus Ward 14 October 2015

In the seemingly endless and conflicting series of cases on whether certain supplies are multiple (at different VAT rates) or single, the latest decision from the First Tier Tribunal (FTT) this week doesn’t really clarify matters.

In Metropolitan International Schools

The Appellant provided distance learning courses. The courses in question included various trade courses, such as electrical and plumbing courses. One single price was charged for the courses. Customers were provided with manuals that described the particular subject matter on a step-by-step basis. The Appellant’s aim was that the manuals should be entirely comprehensive, and that the information contained in them would be all that was required to enable customers to master the particular subjects. There was no additional provision of classroom tuition. Tutor support was provided via phone calls or emails. No examinations were provided, nor any degrees, qualifications or diplomas. The courses were generally designed to prepare customers to take third party examinations.

Both the appellant and HMRC contended that the supply of distance learning courses was a single supply. Unsurprisingly, the appellant thought that the supply was of zero rated printed matter, and HMRC contended that it was a single supply of (non-exempt) education so all of the supply was standard rated.

Among others, the main point was whether the Appellant’s supplies of distance learning courses were single or multiple supplies and, assuming that the provision was of one single composite supply, whether that supply was a supply of zero-rated books coupled with ancillary services or standard-rated education (with the books being ancillary).

This meant that, if a single supply, it was necessary to consider which element was predominant.

The FTT held that the end result sought by customers from the supply made by the Appellant was to learn, and to accomplish that aim essentially by reading the vast amount of printed material. The Appellant’s essential supply was the sale of manuals and all of the other features of the supply were appropriately regarded as add-on ancillary functions. The Tribunal therefore held that there was only one single supply in the present case and that it took its nature from that of the principal supply, namely the zero-rated provision of books. Accordingly, the Tribunal held that there was one single supply of zero-rated books.

It should be noted that The Tribunal found it difficult to rationalise all of the relevant case law authorities and to arrive, with confidence, at the correct tests to apply in identifying the nature of the single supply. Indeed, the Tribunal observed that this decision may well lead to appeals to a higher court, and quite possibly a referral to the Court of Justice of the European Union for guidance.

So… are we any further on with this matter? Not really.

VAT and Insurance – The Riskstop case

By Marcus Ward 12 October 2015

Latest from the courts

Generally, supplies of insurance and insurance broking are exempt from VAT. However, it is important to look at exactly what is being provided as there is no “blanket” exemption.

The latest First Tier Tribunal case of Riskstop Consulting Limited illustrates the precise tests that must be applied and met in order for exemption to apply.

VAT and sales promotion vouchers – Latest

By Marcus Ward 5 October 2015

HMRC has appealed to the Upper Tribunal against the First-Tier Tribunal’s decision in the Associated Newspapers matter. The FTT decided that Associated Newspapers could recover input tax incurred on vouchers given away in its sales promotion schemes.

A previous decision by the FTT that no output tax is due on the vouchers when given away as part of a sales promotion is subject to an appeal and both cases will be heard together this week.

This is likely to have a significant impact on the VAT treatment of vouchers and sales promotion schemes and will be watched with interest by many businesses. The outcome may also affect staff incentive schemes where vouchers are provided.

The interaction between vouchers and VAT has had a turbulent past and the matter is complex. I hope that we obtain some clarity from the courts before too long.

VAT – Retrospective input tax claim opportunity for charities and not for profit bodies.

By Marcus Ward 22 June 2015

The Upper Tribunal has decided In the University Of Cambridge case that costs incurred on running its endowment fund relate to the university’s overall economic activity in general and consequently it is possible to recover an element of it. The full judgement here

This will impact on all charities and similar bodies which have non-business activities that support their business activities.

Please contact us if your charity is in a similar position because if past input tax claims have been restricted as a result of HMRC’s interpretation (which is highly likely) it is possible to make a claim which covers the last four years’ VAT costs.