Category Archives: Tribunal

VAT – Latest from the courts – Holding companies management charges. Norseman Gold plc

By   15 February 2016
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The Norseman Gold plc case considered whether a holding company could recover input tax incurred on certain costs.  This is turn depended on whether the holding company was making taxable supplies. Specifically; management charges to non VAT-grouped subsidiary companies.

The Upper Tribunal has recently released its decision. It upheld the First-tier Tribunal’s decision which confirmed that, although the management services in this case could have been considered as economic activities for VAT purposes, there was insufficient evidence to demonstrate that Norseman was making, or intended to make, taxable supplies when the input tax was reclaimed. The UT found that “…vague and general intention that payment would be made …” for management services was insufficient to show a connection between the VAT incurred and taxable supplies.  Consequently, HMRC’s assessments to recover the relevant input tax were upheld.

Importance

This case emphasises the importance of holding companies having appropriate processes and ensuring that proper documentation is in place to evidence, not only the intention to make taxable supplies of management charges, but that those charges were actually made to subsidiaries.  It is also important to ensure that actual management of the subsidiaries take place, and a record of this management is retained.  Simply making a charge to subsidiaries is insufficient if no services are actually supplied as this will not constitute an economic activity.

Often significant costs can be incurred by a holding company in cases such as acquisitions and restructuring.  It is important that these costs are incurred by, and invoiced to the appropriate entity in order for the VAT on them to be recovered.  Consideration must be given to how the input tax is recovered before it is incurred and the appropriate structure put in place.

Please contact me should you require further information on this point or would like to discuss the matter further.

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

By   9 February 2016
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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.

Monthly VAT Round-Up

By   29 January 2016
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We produce a free monthly email update on all VAT things great and small. It covers events for the last month and flags up significant changes as a result of changes to legislation, HMRC announcements and case law. It also looks at specific VAT issues that may affect a business.

Please contact us you would like to subscribe.

marcus.ward@consultant.com

07748 117935

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Linked In Group – Marcus Ward Consultancy VAT

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

By   25 January 2016
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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 legislation – relationship between EU and UK law. A guide

By   22 January 2016
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As most people will know, UK domestic VAT law is derived from EU legislation, but what is the actual relationship?

It is important to understand how both elements of legislation work in cases of dispute with HMRC as it often provides additional ammunition.

History

Most Member States already had a system of VAT before joining the EU but for some countries VAT had to be introduced together with membership of the EU. When the UK joined the EU in 1972 it replaced two taxes; purchase tax and selective employment tax with VAT.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its Member States by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967.

Council Directive 2006/112/EC (the VAT Directive) sets out the infrastructure for a common VAT system which each Member State is required to implement by means of its own domestic legislation. This important Directive codifies into one piece of legislation all the amendments to the original Sixth Directive, thus clarifying EU VAT legislation currently in force.

Intention

The aim of the VAT Directive is to harmonise the indirect tax within the EU, and it specifies that VAT rates must be within a certain range. The basic aims are:

  • Harmonisation of VAT law
  • Harmonisation of content and layout of the VAT declaration
  • Regulation of; accounting, providing a common legal accounting framework
  • Common framework for detailed description of invoices and receipts
  • Regulation of accounts payable
  • Regulation of accounts receivable
  • Standard definition of national accountancy and administrative terms

EU Statements

There are four types of EU statements:

  • Regulations – Are binding in their entirety and have general effect to all EU Member States. They are directly applicable in the UK legal system.
  • Directives – Are binding as to result and their general effect is specific to named EU countries. The form and methods of compliance are left to the addressees.
  • Decisions – Are binding in their entirety and are specific to an EU country, commercial enterprise or private individual.
  • Recommendations and Opinions – Are not binding and are directed to specific subjects on which the Council’s or Commission’s advice has been sought.

EU Legislation as part of UK Legislation

EU law is made effective for UK legislation via European Communities Act 1972 section 2. The effects of EU law as regards UK VAT legislation is summarised as follows.

Direct effect

The Court of Justice has held “wherever the provisions of a directive appear … to be unconditional and sufficiently precise, those provisions may … be relied upon as against any national provision which is incompatible with the directive insofar as the provisions define rights which individuals are able to assert against the state” (Case: Becker).  Also in UFD Ltd it was stated that “in all appeals involving issues of liability, the Tribunal should consider the relevant provisions of the Council directives to ensure that the provisions of the UK legislation are consistent therewith”.

Primacy of EU Directives over UK legislation

A UK court which is to apply provisions of EU law is under a duty to give full effect to those provisions, if necessary refusing of its own motion to apply any conflicting provision of national legislation.

Interpretation of UK law

If UK VAT legislation is unclear or ambiguous, Tribunals are “entitled to have regard to the provisions of the relevant EU Directive in order to assist in resolving any ambiguity in the construction of the provisions under consideration’ (Case: English-Speaking Union of the Commonwealth).

Legal principles

In implementing the common VAT structure, domestic legislation is required to recognise certain legal principles.

Examples of some of these are the principle of:

  • Equality of citizens
  • Subsidiarity and proportionality
  • Non-discrimination on grounds of nationality
  • Fiscal neutrality
  • Legal certainty and the protection of legitimate expectations.

Practical application for most taxpayers

Practically, a result of the above is that taxpayers are regularly able to recover VAT (plus interest) paid to HMRC in error in cases where the UK domestic legislation has not implemented EU law correctly.  However, HMRC has no right to recovery where VAT has been under-collected as a result of inappropriate implementation of the EU legislation.

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

By   14 January 2016
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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   24 November 2015
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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 – Latest from the courts on multiple or composite supplies

By   14 October 2015
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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 sales promotion vouchers – Latest

By   5 October 2015
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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   22 June 2015
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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.