Category Archives: Planning

VAT Splitting a business to avoid registration: Disaggregation

By Marcus Ward 8 December 2016

I have a cunning plan to avoid registering for VAT…….

….I’ll simply split my business into separate parts which are all under the VAT registration turnover limit – ha!

I’ve heard this said many a time in “bloke in the pub” situations. But is it possible?

You will not be surprised to learn that HMRC don’t like such schemes and there is legislation and case law for them to use to attack such planning known as “disaggregation”. This simply means artificially splitting a business.

What HMRC will consider to be artificial separation:

HMRC will be concerned with separations which are a contrived device set up to circumvent the normal VAT registration rules. Whether any particular separation will be considered artificial will, in most cases, depend upon the specific circumstances. Accordingly it is not possible to provide an exhaustive list of all the types of separations that HMRC will view as artificial. However, the following are examples of when HMRC would at least make further enquiries:

Separate entities supply registered and unregistered customers

In this type of separation, the registered entity supplies any registered customers and the unregistered part supplies unregistered customers.

Same equipment/premises used by different entities on a regular basis

In this type of situation, a series of entities operates the same equipment and/or premises for a set period in any one-week or month. Generally the premises and/or equipment is owned by one of the parties who charges rent to the others. This situation may occur in launderettes and take-aways such as fish and chip shops or mobile catering equipment.

Splitting up of what is usually a single supply

This type of separation is common in the bed and breakfast trade where one entity supplies the bed and another the breakfast. Another is in the livery trade where one entity supplies the stabling and another, the hay to feed the animals. There are more complex examples, but the similar tests are applied to them too.

Artificially separated businesses which maintain the appearance of a single business

A simple example of this type of separation includes; pubs in which the bar and catering may be artificially separated. In most cases the customer will consider the food and the drinks as bought from the pub and not from two independent businesses. The relationship between the parties in such circumstances will be important here as truly franchised “shop within a shop” arrangements will not normally be considered artificial.

One person has a controlling influence in a number of entities which all make the same type of supply in diverse locations

In this type of separation a number of outlets which make the same type of supplies are run by separate companies which are under the control of the same person. Although this is not as frequently encountered as some of the other situations, the resulting tax loss may be significant.

The meaning of financial, economic and organisational links

Again each case will depend on its specific circumstances. The following examples illustrate the types of factors indicative of the necessary links, although there will be many others:

Financial links

financial support given by one part to another part
one part would not be financially viable without support from another part
common financial interest in the proceeds of the business

Economic links

seeking to realise the same economic objective
the activities of one part benefit the other part
supplying the same circle of customers

Organisational links

common management
common employees
common premises
common equipment

HMRC often attack structures which were not designed simply to avoid VAT registration, so care should be taken when any entity VAT registers, or a conscious decision is made not to VAT register. Registration is a good time to have a business’ activities and structure reviewed by an adviser.

As with most aspects of VAT, there are significant and draconian penalties for getting registration wrong, especially if HMRC consider that it has been done deliberately to avoid paying VAT.

VAT – EC proposal for new rules for e-commerce and online businesses

By Marcus Ward 1 December 2016

The EC has announced measures to simplify VAT for e-commerce businesses in the EU. The proposals will purportedly allow consumers and businesses to buy and sell goods and services more easily online.

New VAT rules for sales and goods and services online

Currently, online traders have to register for VAT in all the Member States to which they sell goods. Often cited as one of the biggest barriers to cross-border e-commerce, these VAT obligations cost businesses around €8,000 for every EU country into which they sell. We are now proposing that businesses make one simple quarterly return for the VAT due across the whole of the EU, using the online VAT One Stop Shop. This system already exists for sales of e‑services such as mobile phone apps, and has been proven successful with more than €3 billion in VAT being collected through the system in 2015. Administrative burdens for companies will be reduced by a staggering 95%, giving an overall saving to EU business of €2.3 billion and increasing VAT revenues for Member States by €7 billion.

Simplifying VAT rules for micro-businesses and start-ups

A new annual threshold of €10,000 in online sales will be introduced under which businesses selling cross-border can continue to apply the VAT rules they are used to in their home country. This will make complying with VAT rules easier for 430,000 companies across the EU, representing 97% of all micro-business trading cross‑border. A second new yearly threshold of €100,000 will make life easier for SMEs when it comes to VAT, with simplified rules for identifying where their customers are based. The thresholds could be applied as early as 2018 on e‑services, and by 2021 for online goods. Other simplifications would allow the smallest businesses to benefit from the same familiar VAT rules of their home country, such as invoicing requirements and record keeping. The first point of contact will always be with the tax administration where the business is located and businesses will no longer be audited by each Member State where they have sales.

VAT fraud from outside the EU – Removal of Low Value Consignment (LVC) relief

Small consignments imported into the EU that are worth less than €22 are currently exempt from VAT. With around 150 million parcels imported free of VAT into the EU each year, the EC says that this system is open to massive fraud and abuse, creating major distortions against EU business. Firstly, EU businesses are put at a clear disadvantage since unlike their non-EU competitors, they are liable to apply VAT from the first eurocent sold. Secondly, imported high-value goods such as smartphones and tablets are consistently undervalued or wrongly described in the importation paperwork in order to benefit from this VAT exemption. The Commission has therefore decided to remove LVC relief

Equal rules for taxing e-books, e-newspapers and their printed equivalents

Current rules allow Member States to tax printed publications such as books and newspapers at reduced rates or, in some cases, super-reduced or zero rates. The same rules exclude e-publications, meaning that these products must be taxed at the standard rate. Once agreed by all Member States, the new set-up will allow (but not oblige) Member States to align the rates on e-publications to those on printed publications.

Action

Please contact us if any of the above affects your business or your client’s businesses.

VAT – Input tax on buy out costs and VAT grouping

By Marcus Ward 23 November 2016

Latest from the courts

May input tax incurred by a VAT group be attributed to the activities of a single member of that group?

In the First Tier Tribunal (FTT) case of Heating and Plumbing Supplies Ltd, the issue was whether input tax incurred on professional costs of a management buyout were recoverable.

Background

A company was formed with the intention of buying the shares of a trading company. The purchasing company and the trading company were then VAT grouped and the professional costs were invoiced to, and paid for, by the VAT group (the tax point being created after the date that the VAT group was formed). HMRC disallowed the claim for the relevant input tax on the grounds that the purchasing company itself did not make any taxable supplies (it did not engage in an economic activity). While this may have been correct, the appellant contended that in these circumstances, the VAT group must be considered as a single taxable person and that the activities of the group as a whole that should be considered. The input tax was an overhead of the group, and because the group itself only made taxable supplies (via the representative member) the input tax was recoverable in full by the representative member

Decision

Following recent case law in Skandia America at the Court of Justice, the judge here decided in favour of the appellant. It was ruled that HMRC may not look at the purchasing company in isolation but rather, the group must be considered as a whole. The FTT stated that “when a VAT group is formed the identities of the individual members of the group disappear…” meaning that a VAT group is a single taxable entity, the VAT status of the individual members being irrelevant in this situation. This confirms our long held view on the status of VAT groups and provides welcome clarification on the matter.

Relevance

This case highlights that HMRC’s policy of looking at the activities of a group member individually is inappropriate. This is so even if the grouping structure provides input tax recovery which would not have been available had the companies been VAT registered independently.

Typically in these circumstances, HMRC will either challenge the decision, or amend its guidance to reflect this ruling. We await news on how HMRC will react.

Action

If a business has either been denied input tax on buy out or similar acquisition costs, or made a decision not to recover this VAT, it would be prudent to lodge a claim with HMRC (plus interest).

We are able to assist with such a claim.

www.marcusward.co

VAT Snippet – Australia GST

By Marcus Ward 21 November 2016

Changes to sales to Australia

If your business, or clients’ business, sell goods to customers in Australia, new rules will be introduced that will affect the tax on these supplies.

Draft legislation

From 1 July 2017 GST (Goods and Services Tax – the equivalent of VAT in Australia) will be applied to low value goods imported by Australian consumers. These sales have, hitherto, been tax free. There is a relief however, for sales below the GST turnover of $75,000 which will not attract GST. The reason for the introduction is to ensure that imports are not treated more favourably than domestic sales.

Changes for the EU too?

Interestingly, the EC is actively considering the introduction of similar rules for VAT on low value consignments and this may impact UK consumers and/or businesses (assuming, of course that the UK remains in the EU at that time…).

Assistance

We are able to advise on any cross-border transactions, both within and outside the EU. With our network of professional contacts and strategic partners here we provide a comprehensive tax service from one-off ad-hoc queries to day to day compliance issues around the world.

VAT Latest from the courts – Application of Capital Goods Scheme

By Marcus Ward 10 November 2016

Should the costs of a phased development be aggregated, and if so, do the anti-avoidance provisions apply?

In the case of Water Property Limited (WPL) the First Tier Tribunal was asked to consider the application of; the Capital Goods Scheme (CGS) and the anti-avoidance provisions set out in the VAT Act 1994, Schedule 10, para 12.

A helpful guide to the CGS is here

Background

WPL purchased land and buildings formerly used as a public house, subject to planning permission to convert the ground floor into a children’s day care nursery and the upper floor into residential flats. The planning permission was subsequently granted. WPL paid £210,000 plus £37,500 VAT on the acquisition of the ex-pub in March 2013. The children’s nursery business was kept separate from the property development business to enable the children’s nursery business to be sold at a date in the future and for the leasehold reversion to be retained as an investment by WPL. The value of the building contract for the nursery was £209,812.34 including VAT. The value of the contract for the residential flats was £161,546.42 including VAT. The consideration for the acquisition and each phase of development was below £250,000 (the threshold at which land and buildings become CGS items) but combined, they exceeded the £250,000 limit. WPL exercised an option to tax on the property and entered into a lease with Smile Childcare Limited (SCL). SCL was established to carry on a business of the provision of nursery care for infant children. It was jointly owned by Mr and Mrs Waters. Mrs Waters as the operator of the children’s nursery.

WPL recovered input tax on costs incurred in respect of the nursery, but not the flats. It was accepted by the appellant that SCL and WPL were “connected” within the meaning of VAT Act 1994, Schedule 10, para 13 and that the activity of carrying on the business of a nursery was an exempt activity.

Issue

HMRC formed the view that the option to tax should be disapplied by virtue of the anti-avoidance legislation meaning that no input tax was recoverable. This is because the property was, or was intended to become, a CGS item and the ‘exempt land test’ is met. This test is met if, at the time the grant is made, the grantor, or a person connected with the grantor expects the land to be used for an exempt purpose.

So the issue was whether the land constituted a CGS item. That is, whether the value of the two elements forming the phased development should be aggregated.

Decision

The FTT allowed the taxpayer’s appeal against HMRC’s decision. It was decided that the acquisition and development costs were financed through different means; there were separate contracts for each phase; there was no overlap in the works* and HMRC had not identified any evasion, avoidance or abuse and considered that the costs did not need to be aggregated. In addition, it was concluded that WPL had relied on HMRC guidance in determining that there was no requirement to aggregate the cost of the phased development provided that there was no overlap in time.

As a consequence, as each part of the development fell below the £250,000 limit, there were no CGS items. Therefore the fact that the parties were connected was irrelevant and the anti-avoidance provisions did not apply such that the option to tax could not be disapplied meaning that the recovery of the input tax was appropriate. The Chairman also commented that the appellant had a legitimate expectation to rely on the guidance provided by HMRC (in this case the provision of a copy of Public Notice 706/2).

Commentary

There is often uncertainty on the VAT position of land and property developments of this kind, and the interaction with the CGS is rarely straightforward. This is not helped by HMRC’s interpretation of the rules.

Action

If any business or advisers with clients which have been;

forced to use the CGS as a result of aggregation
subject to the application of the anti-avoidance provisions
assessed despite relying on HMRC’s published guidance

they should seek advice and review their position. We can advise in such circumstances.

* As per PN 706/2 Para 4.12 as follows

“What if the refurbishment is in phases?

If you do this you will need to decide whether the work should be treated as a whole for CGS [capital goods scheme] purposes or whether there is more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes. Normally there is more than one refurbishment when:

· There are separate contracts for each phase of work, or;

· A contract where each phase is a separate option which can be selected, and;

· Each phase of work is completed before work on the next phase starts…”

VAT Latest from the courts – exemption for sporting facilities by an eligible body

By Marcus Ward 8 November 2016

St Andrew’s College, Bradfield

This Upper Tribunal case demonstrates the importance of getting the structure right. Full case here

Overview

Exemption exists for an eligible body making certain supplies of sporting services.

Background

St Andrew’s College is a boarding school and a registered charity. It is the representative member of a VAT group which also included two subsidiary companies. The companies provided facilities for playing sport and the group intended to treat these as exempt supplies. HMRC challenged the intended treatment on the basis that the subsidiaries did not qualify as eligible bodies via VAT Act 1994, Schedule 9, Group 10 (exemption related to sport, sports competitions and physical education). It was agreed that all of the other criteria were met, so the case turned on the definition of an eligible body. It was common ground that the College, as an educational charity, was itself an eligible body. Even though, as the representative member of the VAT group, the College was treated as making all supplies actually made by the subsidiaries, that did not mean that the supplies were exempt.

Decision

In order to be regarded as an eligible body the subsidiaries were required to be a non-profit making body. What was relevant here was whether the subsidiaries (themselves) had specific restrictions on their ability to distribute any profit that they made. The UT formed the view that there was no specific restriction and that although profits were only covenanted up to the College this was insufficient to meet the test in Group 10 Note (2A). It was also found that the deeds of covenant did not, of themselves, establish that the subsidiaries could make distributions only to non-profit making bodies.

Consequently, the subsidiaries failed to qualify for exemption and that the First Tier Tribunal correctly found that output tax was due on the income from provision of sporting facilities.

Commentary

This case highlights the importance of putting in place a correct structure and to ensure that it reflects the intention of the supplier. One may see that in this scenario it would have been relatively simple to arrange matters to accurately reflect the aims of the group. Care would have been required in drafting documentation etc as matters stood, or rearranging the supply chain.

It should also be noted that there are specific anti-avoidance provisions in place for certain suppliers of sporting services (although not in issue here). Advice should be taken at an early stage in planning to ensure that if exemption is desired, that it is achieved if possible.

Professional Conduct in relation to Tax

By Marcus Ward 4 November 2016

A note on “aggressive” tax planning

Such tax planning is often viewed as tax avoidance by HMRC. We do not involve ourselves in such activities, and details of our attitude to aggressive planning are set out here and may be summarised as “Marcus Ward Consultancy Ltd does not market, advise on, or advocate aggressive schemes…“

However, it is worth highlighting a recent announcement made jointly by several professional bodies. The main bodies are; Chartered Institute of Taxation, Association of Taxation Technicians, Association of Chartered Certified Accountants, and Institute of Chartered Accountants in England and Wales. They have issued a revised version of Professional and Ethical standards for tax advisers. The salient new standard is that Members

i) must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation, and/or

ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.

Breaching this new requirement may result in disciplinary action. The new guidance has been endorsed by HMRC here and full details from our Institute here

You may rest assured that we already refuse to advocate these schemes and are pleased to see the introduction of these new standards.

Please contact us if you have any questions on this matter.

VAT – Latest from the courts: Craft fair pitches standard rated

By Marcus Ward 17 October 2016

The Upper Tribunal (UT) case of Zombory-Moldovan (trading as Craft Carnival)

Background

In the past, the rent of stall at craft fairs have generally been treated as an exempt right over land. In fact, in this instant case, the First Tier Tribunal agreed with the appellant that supplies made to stallholders to sell their goods were the equivalent to a right to occupy land and therefore exempt from VAT.

However, in this decision, the UT overturned this analysis and found that the supply was standard rated.

Decision

The reasons given were that what Craft Carnival supplied went beyond the mere use of a plot of land for a specific period and amounted to the use of a pitch at an event in order to “offer certain goods for sale”. The test in the previous “Temco” case on this point stated that an exempt supply amounts to a “relatively passive activity linked simply to the passage of time and not generating any significant added value”. Craft Carnivals had “very real and significant responsibilities beyond the bare provision of an appropriately-sized plot”. This, being a single supply (it was decided) meant that the entire charge was subject to VAT at the standard rate.

The appellant’s website stated that “In addition to the erection of marquees, which are hired for the duration of a fair, Mrs Zombory-Moldovan arranges for the provision 45 of other necessary temporary facilities including portable toilets, electrical generators and security fencing. She also employs between five and seven members of staff to act as ticket sellers and car park 3 marshals. Before the fair takes place Mrs Zombory-Moldovan would have issued a press release and advertised the event in local newspapers and on Craft Carnival’s website and booked a children’s entertainer, such as a magician, to encourage families to attend.”

Impact

Any business or charity which provides similar supplies must review their VAT responsibilities in light of this decision immediately. This case is likely have far-reaching implications for both organisers and those businesses which sell goods in fairs and similar events. This may encompass; trade fairs, exhibitions and even, possibly, high end car-boot sales type events. We await HMRC’s response to their victory in this case and how wide-ranging they consider the decision to be.

Please contact us if this decision affects your or your client’s businesses.

Latest from the courts: missing goods subject to VAT

By Marcus Ward 13 October 2016

In the CJEU case of Maya Marinova the issue was whether goods which could not be located in the Bulgarian appellant’s warehouse were subject to VAT on the grounds they had been disposed of.

Background

The appellant purchased certain goods, and subsequently, at an inspection, was unable to either;

produce the goods , or;
demonstrate how they were disposed of.

The Bulgarian authorities had confirmed that the goods had been purchased from a supplier, but the purchases did not appear in the business’ purchase records. They assessed for VAT on the missing goods assuming that they had been purchased and sold off record and the output tax had not been accounted for. They employed a mark-up exercise based on similar goods sold in the appellant’s shop.

The case proceeded directly to the court without an AG’s opinion. The matter was; whether the decision to assess offended the principle of fiscal neutrality if it were supported by national legislation (which it was here). It was decided that in these circumstances, such action was not precluded and the assessment was basically sound. It was stated that “… tax authorities may presume that the taxable person subsequently sold those goods to third parties and determine the taxable amount of the sale of those goods according to the factual information at hand …”. As usual, the case was passed back to the referring court to consider whether the Bulgarian domestic legislation goes further than is necessary to ensure the correct collection of tax and to prevent evasion.

Commentary

Although the issues in this case arose from specific facts, this is not an uncommon scenario for a business. It was hardly a surprising outcome. In a similar position in the UK, HMRC is also very likely to form the view that if the goods are no longer on hand, then they must have been disposed of, unless evidence to the contrary is provided by a taxpayer.

Of course, there may be a genuine reason why the goods are no longer in stock, but no output tax has been declared on them. These reasons are considered in guidance published by HMRC here and the rules mainly consider goods which have been lost, stolen, damaged or destroyed.

There are specific ways of dealing with VAT in these situations, and in fact, whether output tax is due at all. Failure to comply with this guidance may result in an assessment being issued. The general point is VAT is only due after a tax point has been created. A crude example is that if goods are shoplifted from a store, there is no output tax due. However, if the goods were sold and recorded via a till, and the money which went into the till was stolen, output tax is still due on the supply of those goods (as found in the case of G Benton [1975] VATTR 138).

As always with VAT, it is crucial to keep accurate and up to date records to evidence supplies (as well as recording the movement of stock and any discrepancies in these circumstances). Although an inspector will need to demonstrate “best judgement” in issuing an assessment in respect of missing goods, it is obviously prudent to be able to demonstrate why the anticipated output tax has not been declared and therefore be prepared for such enquiries.

In this instant case, it was not discovered why the goods were not located in the warehouse. It could be that there was a miscommunication between parts of the business, a simple underdeclaration of sales, staff theft, or any other hazards of business. Even for non-tax reasons it is vital that a business’ systems are sufficiently robust to identify such occurrences and procedures are put into place to deal with them.

If you or your clients have received an assessment of this sort, it is usually worthwhile obtaining a review of the position.

VAT – Intended penalty for participating in fraud

By Marcus Ward 3 October 2016

Consultation

A consultation was proposed in the 2016 Budget on the introduction of a new penalty for businesses that participate in VAT fraud. Now HMRC has announced that views are sought on; whether there is a case for a new penalty, its structure and to whom it should apply. The intended changes will require amendment to Schedule 24 of the Finance Act 2007. The main target of these proposed new measures is MTIC (Missing Trader Intra-Community) fraud.

Full details of the consultation paper here

Penalty principles

It may be worth reviewing HMRC’s view on the principles of applying a penalty, which they state are;

The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.

Penalties should be proportionate to the offence and may take into account past behaviour.

Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.

Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.

Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Consultation Process

It may be an appropriate time to look at what the consultation process is and how it works. This may helpfully be summarised (by HMRC) as:

There are 5 stages to tax policy development:

Stage 1 Setting out objectives and identifying options.

Stage 2 Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3 Drafting legislation to effect the proposed change.

Stage 4 Implementing and monitoring the change.

Stage 5 Reviewing and evaluating the change.

The closing date for comments on this consultation is 11 November 2016.

Comment

Putting to one side the minor irritation of taxpayers being called customers (a bête noire of mine I’m afraid) it is difficult to argue with the above principles and any attempt to prevent or deter VAT fraud is to be welcomed, as long as it does not impact on innocent parties and HMRC apply any such penalty in an even-handed manner. As a taxpayer in a personal and business capacity, I welcome any measures that may result in my tax bill being increased to cover revenue lost to fraud!

Action

Of course, please respond to HMRC should you feel that you should make your views known. The consultation is open to businesses, individuals, legal firms, accountants, and other interested parties.

We occasionally come across situations where innocent parties have been inadvertently been caught up in fraudulent supply chains. Please contact us for advice on planning that may be put in place to avoid this position and how we can assist if HMRC are making enquiries. As always in VAT, it always pays to be proactive to ensure that processes and structures in place are robust and are demonstrably so.