Category Archives: VAT Financial Services

VAT: What is an exempt supply, and what does it mean?

By   17 June 2024
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VAT Basics

Exemption generally

Some services are exempt from VAT. If all the services a business provides are exempt, it will not be able to register for VAT, which means it cannot reclaim any input tax incurred on its purchases or expenses.

If a business is VAT registered it may make both taxable and exempt supplies (it will need to make at least some taxable supplies to be registered). Such a business is classed as partly exempt and it may be able to recover some input tax, but usually not all (Please see de minimis below).

Types of supply which may be exempt

Examples are:

The above list is not exhaustive.

* Most businesses which do not routinely make exempt supplies usually encounter exemption in the area of land and property and it is an easy trap to fall into not to consider VAT when involved in property transactions. This is one area where VAT planning may be of assistance as it is possible in most situations to deliberately choose to add VAT to an exempt supply to avoid a loss of input tax.  This is known as the option to tax, and it is considered in more detail here.

The legislation covering exemption is found at The VAT Act 1994, Schedule 9. 

What does exemption mean?

 An entity only making exempt supplies cannot register for VAT and consequently has no VAT responsibilities or obligations. While this may seem attractive, exemption is often a burden rather than a relief. This is because any VAT it incurs on any expenditure is irrecoverable and represents an additional cost.  This often affects charities, although there are some limited reliefs.

Exempt supplies are completely different to non-business activities, although the VAT outcome is often similar.

 Partial exemption de-minimis

A partly exempt business cannot usually recover all of the input tax it incurs. However, there is a relief called de minimis. Broadly, if VAT bearing expenditure is below certain limits in may be recovered in full. These are provisional calculations and are subject to a Partial Exemption Annual Adjustment.

Further information on terms used in partial exemption here.

Tax points and VAT groups – The Prudential Assurance Company Ltd CoA case

By   11 April 2024
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Latest from the courts

In the The Prudential Assurance Company Limited (Pru) Court of Appeal (CoA) case the issues were the “difficult” questions in respect of the relationship between the VAT grouping rules and the time of supply (tax point) legislation. Is VAT is applicable on a continuous supply of services where these services were supplied while the companies were VAT grouped, but invoices were issued after the supplier left the VAT group?

Background

Pru was at the relevant time carrying on with-profits life and insurance business. Silverfleet Capital Limited (Silverfleet) provided Pru with investment management services. Under an agreement dated 30 August 2002, the consideration which Silverfleet received for its services comprised a management fee calculated by reference to the amount of investments made during the period in which services were provided and performance fees, payable in the event that the performance of certain funds exceeded a set benchmark rate of return.

When Silverfleet was rendering its investment management services, Pru was the representative member of a VAT group of which Silverfleet was also a member. However, in 2007 a management buy-out was effected, as a result of which Silverfleet ceased to be a member of Pru’s VAT group. It also ceased to provide management services to Pru.

During 2014 and 2015, the hurdle rate set under the 2002 agreement was passed. Silverfleet accordingly invoiced Prudential at various dates between 2015 and 2016 for fees totalling £9,330,805.92 (“the Performance Fees”) plus VAT at 20%.

The Issues

The CoA considered whether the Performance Fees are subject to VAT.

The First-tier Tribunal (FTT) decided the point in favour of Pru. However, HMRC succeeded in an appeal to the Upper Tribunal (UT). In a decision that decision, the UT concluded that VAT was chargeable on the Performance Fees.

In its decision, the FTT queried whether regulation 90 of the VAT Regulations went so far as to direct that Silverfleet’s services had not been provided within a VAT group and had been “supplied in the course or furtherance of a business that in the VAT group world was not being carried on”. Further, the FTT was “unable to see what feature distinguishes [Prudential’s] case from that of the taxpayer in [B J Rice & Associates v Customs and Excise Commissioners]”.

In contrast, the UT considered that, pursuant to regulation 90 of the VAT Regulations, Silverfleet’s services were to be treated as having been supplied when invoiced and, hence, at a time when Silverfleet and Prudential were no longer members of the same VAT group. That being so, section 43 of VATA 1994 was not, in the UT’s view, in point. The UT also considered that the FTT had erred in regarding itself as bound by B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“B J Rice”) to allow the appeal. Unlike Mr Rice, the UT said in its decision, Silverfleet “was not entirely outside the scope of VAT when the Services were rendered, but rather it was subject to a specific set of assumptions and disregards”.

Pru contended that Silverfleet should not be considered to have made the supply in the course or furtherance of any business carried on by it. The business will instead be assumed to have been carried on by Pru. This was important because if VAT was applicable to the services Pru would not be in a position to recover it (in full at least) due to partial exemption which represented a large VAT cost.

Unsurprisingly, HMRC considered that output tax was due because at the tax point, Silverfleet as no longer part of the VAT group. 

Legislation

The VAT Act 1994, section 43 lays down the rules in respect of VAT groups, and The VAT Regulations 1995, regulation 90 makes provision with respect to the time at which continuous supplies of services are to be treated as supplied for VAT purposes.

Section 43 explains that any supply by one member of a VAT group to another is to be “disregarded” and that “any business carried on by a member of the group shall be treated as carried on by the representative member”. Does this mean that no VAT is chargeable on an intra-group supply regardless of whether the supplier has left the group by the time consideration for the supply is the subject of a VAT invoice and paid? Or is section 43 inapplicable in respect of continuous supplies insofar as the consideration is invoiced and received only after the supplier is no longer a member of the VAT group because regulation 90 provides for the services to be treated as supplied at the time of the invoice or payment?

Decision

The appeal was dismissed and HMTC’s assessment was upheld. It was not possible to disregard the supply as intra-group and the tax point rules for the continuous supply of services meant that it was a taxable supply. The decision was not unanimous, with the decision by the judges being a 2:1 majority.

Commentary

This was a close decision and highlights the necessity of considering the interaction between VAT groups and tax points and the implications of timings. The case makes interesting reading in full (well, for VAT people anyway!) for the technical discussions and the disagreement between the judges.

VAT registration HMRC update

By   20 February 2024
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HMRC has updated VAT Notice 700/1 – Who should register for VAT. The publication explains when a business must register for VAT, and how to do it.

The changes are to para 2.7 – Specified Supplies which sets out what needs to be included during the application process when describing business activities.

Businesses affected

Those that supply; finance, insurance services, or investment gold to customers in countries outside the UK, or make supplies of insurance or finance services which are directly linked to the export of goods outside the UK.

Specified Supplies

These are supplies which would be exempt from VAT if they were made in the UK, but are treated as taxable if made outside the UK.

Benefit to business

A business making Specified Supplies may register for VAT on a voluntary basis and claim UK input tax incurred in making those supplies. We strongly recommend that all businesses in the above categories consider registering in the UK.

The amendment

If a business is registering because it makes Specified Supplies, it must ensure that it clearly states ‘SPECIFIED SUPPLIES’ in the free-text box when asked to describe the business activities during the application process. Failure to do this will likely cause delays and create additional HMRC queries.

VAT: Definition of insurance

By   5 September 2023
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Further to my article on insurance and partial exemption, HMRC has published a new definition of what insurance means for VAT as a consequence of the CJEU United Biscuits (Pension Trustees) Ltd and another v HMRC [2020] STC 2169 case.

It is set out in para 2.2 of Public Notice 701/36

What insurance is

There is no statutory definition of insurance, although guidance can be gained from previous legal decisions in which the essential nature of insurance has been considered.

The Court of Justice of the European Union , in the case of United Biscuits (Pension Trustees) Ltd & Anor v R & C Commrs (Case C235-19) [2020], upheld the definition given in the case of Card Protection Plan Ltd v C & E Commrs (Case C-349/96) [1999] which concluded that:

“…the essentials of an insurance transaction are… that the insurer undertakes, in return for prior payment of a premium, to provide the insured, in the event of materialisation of the risk covered, with the service agreed when the contract was concluded”.

HMRC also accept that certain funeral plan contracts are insurance (and therefore exempt from VAT), even though they are not regulated as such under the FSMA insurance regulatory provisions.

Vehicle breakdown insurance is also seen as insurance even though providers are given a specific exclusion under the FSMA from the requirement to be authorised.

VAT: B2B and B2C – The distinction and importance

By   1 August 2023
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A key feature of the place of supply rules is the distinction between B2B (business to business) and B2C (business to consumer) supplies. The distinction is important because it determines, inter alia, whether GB VAT is applicable to a supply made by a GB supplier.

Status of the customer:

  • B2C: A supply is B2C when the customer is a private individual, an organisation with only non-business activities or the supply is wholly for private use (eg for the private use of a business owner)
  • B2B: A supply is B2B when the customer has any level of business activity (though if a supply is wholly for private use it remains B2C). It does not matter if the supply is for a non-business activity of the customer or if the customer is not VAT registered. All that matters is the customer has some level of business activity – this includes VAT exempt activity and taxable activity below the VAT registration threshold VAT place of supply.

To apply the B2B treatment a GB supplier must obtain evidence that the customer has business activities. If the supplier cannot obtain any evidence, they should apply B2C treatment.

  • If the customer is VAT registered, the customer’s VAT number is evidence of status and it is good practice to quote this on the supplier’s invoice. A GB supplier should check the customer’s VAT registration number is in the correct format for the country concerned. This can be done via the EC Vies website. for EU customers. NB: Special evidence rules apply to electronically supplied services.
  • If the customer is not VAT registered, a GB supplier should obtain and retain evidence that the customer has business activities. HMRC state “If your customer is unable to provide a VAT number, you can accept alternative evidence.This includes certificates from fiscal authorities, business letterheads or other commercial documents indicating the nature of the customer’s activities”.

A supplier needs to identify where his customer belongs in order to establish the place of supply.

VERY broadly, depending on the nature of the supply, the rule of thumb is that a B2B service is GB VAT free (it is subject to a reverse charge by the recipient as it is deemed to be “supplied where received”) but a B2C service is generally subject to GB VAT, regardless of the place of belonging of the recipient. There are exceptions to these rules however, such as the use and enjoyment provisions, land related services, hire of transport and admission to events.

VAT: HMRC yearly average and spot rates

By   3 March 2023
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HMRC has published the annual yearly and spot foreign exchange rates in CSV format.

You should use these exchange rates if you have to convert any foreign currency to sterling for Customs and VAT purposes.

When searching for exchange rates a business should consider what it requires the rates for and and the type of rate needed.

HMRC have published guidance on the use of exchange rates for tax and accounting purposes:

 

VAT: Exemption of fund management services

By   8 February 2023
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HM Treasury has published a consultation paper on the treatment of the service of management of special investment funds (SIFs).

SIF meaning in VAT terms

There is no definition of a SIF in existing legislation.

Morgan Fleming Claverhouse Trust plc (case C-363/05) ruled on the interpretation of the term ‘Special Investment Funds as defined by Member States’.

The key points in this judgment are:

  1. the term ‘special investment funds’ is capable of including closed-ended investment funds, such as investment trust companies (ITCs)
  2. Member States have a discretion to define ‘special investment funds’ for the VAT exemption but, in doing so, must pay due regard to:
  3. the purpose of the exemption
  4. the principle of fiscal neutrality.

According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings. This requires there to be VAT neutrality between the direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption.

As a result of the case, the exemption was extended so that there was a level VAT playing field for all similar collective investment undertakings which compete in the UK retail market. This includes closed and open-ended collective investment undertakings, umbrellas and sub-funds, as well as some pension schemes.

The fund management exemption is limited to the management of SIFs. Consequently, the management of other investment funds will generally be standard-rated.

Legislation

The current VAT fund management regime is provided for by UK legislation, retained EU law and case law. The VAT Act 1994 implemented the Directive. Schedule 9, Group 5, Items 9 and 10 of the Act lists specific types of funds, the management of which is exempted from VAT.

Place of supply

This is important for SIFs management as if the supply is in respect of overseas funds the services are excluded from the exemption (they are outside the scope of UK VAT) when received overseas. This means that there is no output tax on the supply, but unlike exemption, it affords full recovery on input tax incurred in the UK. The perfect VAT outcome.

HMRC Consultation

The technical consultation sets out proposed reform of the legislation that provides for the VAT treatment of fund management. This is required because the fund management industry continues to innovate and introduced new types of funds to the marketplace, and the existing approach has struggled to keep pace with the evolution of the industry and proliferation of fund types.

The purpose of the exercise is to improve the legislative basis of the current VAT treatment of fund management.

Danger?

It is proposed that the following criteria for a fund to be considered a SIF would be legislated for:

a) the fund must be a collective investment

b) the fund must operate on the principle of risk-spreading

c) the return on the investment must depend on the performance of the investments, and the holders must bear the risk connected with the fund; and

d) the fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertakings for Collective Investment in Transferable Securities), that is funds intended for retail investors

There is a danger that if the exemption is broadened, fund managers which can now recover input tax may be denied so in the future.

If you have any queries, please contact us.