The Irish Supreme Court ruled that the bread sold by the restaurant chain Subway was too sweet to be classified as bread and that the high sugar content meant that it could not be zero rated.
Category Archives: VAT- Output Tax
VAT: Tax point of telecommunications – The Lycamobile case
Latest from the courts
In the Lycamobile UK Ltd First-Tier Tribunal (FTT) case, the issue was whether VAT was chargeable on the supply of a “Plan Bundle” at the time when it was sold and by reference to the whole of the consideration that was paid for it, or whether VAT was instead chargeable only when, and only to the extent that, the allowances in the Plan Bundle were actually used. The time of supply (tax point) was important because not only would it dictate when output tax was due, but more importantly here, if the appeal succeeded, there would be no supply of the element of the bundle which was not used, so no output tax would be due on it.
Background
The Plan Bundles comprised rights to future telecommunication services; telephone calls, text messages and data (together, “Allowances”). There were hundreds of different Plan Bundles sold by the Appellant and the precise composition of those Plan Bundles varied.
Contentions
Lycamobile considered that that the services contained within each Plan Bundle were supplied only as and when the Allowances were used, so that the consideration which was received for each Plan Bundle would be recognised for VAT purposes only to the extent that the Plan Bundle was actually used. In the alternative, these supplies could be considered as multi-purpose vouchers such that output tax was not due when they were issued, but when the service was used. Very briefly, the contention was that it was possible that not all of the use would be standard rated in the UK.
Unsurprisingly, HMRC argued that that those services were supplied when the relevant Plan Bundle was sold (up-front) and output tax was due on the amount paid, regardless of usage.
Decision
The Tribunal placed emphasis on “the legal and economic context” and “the purpose of the customers in paying their consideration”.
It decided that the terms of the Plan Bundle created a legal relationship between Lycamobile and the customer. The Bundle was itself the provision of telecommunication services when sold. The customers were aware that they were entitled to use their Allowances and could decide whether to, or not. As a consequence, consumption was aligned with payment and created a tax point at the time of that payment. There was a direct link between those services and the consideration paid by the customer.
The Tribunal also considered the vouchers point. There were significant changes to the rules for Face Value Vouchers on 1 January 2019 (the supplies spanned this date), but the FTT found that the Plan Bundles were not monetary entitlements for future services under either set of rules, so the tax point rules for vouchers did not apply here.
The appeal was dismissed and HMRC assessments totalling over £51 million were upheld.
Commentary
Not an unexpected result, but an illustration of the importance of; tax points, legal and economic realities, and what customers think they are paying for. All important aspects in analysing what is being provided, and when.
A VAT Did you know?
Toffee apples are zero-rated, however, any other fruit which is covered in sugar (or toffee) sold as confectionary is standard rated.
Inter-company charges: Do I add VAT?
Do I charge VAT on a management charge?
An easy yes or no question one would think, however, this being VAT, the answer is; it depends. Typically, management charges represent a charge by a holding company to its subsidiaries of; a share of overhead costs, the provision of actual management/advisory services or office facilities or similar (the list can obviously be quite extensive).
Consideration for a supply
The starting point is; is something (goods or services) supplied in return for the payment? If the answer is no, then no VAT will be due. However, this may impact on the ability to recover input tax in the hands of the entity making the charge. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided, and VAT is charged, HMRC may challenge the VAT treatment and any input recovery of the company making the payment.
Composite of separate supply?
This is a complex area of the tax and is perpetually the subject of a considerable amount of case law. This has been so since the early days of VAT and there appears no signs of disputes slowing down. I have written about such cases here here here here and here
“Usually” if a combination of goods or services are supplied it is considered as a single supply and is subject to the standard rate. However, case law insists that sometimes different supplies need to be divided and a different rate of VAT applied to each separate supply. This may be the case for instance, when an exempt supply of non-opted property (eg; a designated office with an exclusive right to occupy) is provided alongside standard rated advice.
Approach
What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided?
Can the VAT treatment of a supply change when recharged?
Simply put; yes. For example, if the holding company pays insurance (VAT free) and charges it on as part of a composite supply, then VAT will be added to an original non-VAT bearing cost. It may also occur when staff are employed (no VAT on salaries paid) but the staff are supplied to a subsidiary company and VAT is added (but see below).
Staff
The provision of staff is usually a standard rated supply. However, there are two points to consider. One is joint contracts of employment which I look at below, the other is the actual definition of the provision of staff. Care must be taken when analysing what is being provided. The question here is; are staff being provided, or; is the supply the services that those staff carry out? This is relevant, say, if the services the staff carry out are exempt. There are a number of tests here, but the main issue is; which entity directs and manages the staff?
Directors
There can be different rules for directors compared to staff.
If a holding company provides a subsidiary company with a director to serve as such, the normal rules relating to supplies of staff apply and VAT applies.
However, there are different rules for common directors. An individual may act as a director of a number of companies. There may be an arrangement where a holding company pays the director’s fees and then recover appropriate proportions from subsidiaries. In such circumstances, the individual’s services are supplied by the individual to the companies of which (s)he a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore, there is no supply between the companies and so no VAT is due on the share of money recovered from each subsidiary.
Accounting adjustments
Just because no “cash” changes hands, this does not mean there is no supply. Inter-company recharges may involve the netting off of supplies so that no cash settlement is made. However, consideration is passing in both directions, so, prima facie, supplies have been made. This applies when there are accounting adjustments in both parties’ accounts.
Inter-company loans
The making of any advance or the granting of any credit is exempt via The VAT Act 1994, Schedule 9, Group 5, item 2. This exemption covers most normal types of credit, eg; loans and overdrafts.
Planning
Planning may be required if;
- the subsidiary cannot reclaim all VAT charged to it as input tax
- there are cashflow/timing disadvantages
- there are management or administrative complexities
Specific planning
VAT grouping
If commercially acceptable, the holding company and subsidiary companies may form a VAT group. By doing so any charges made between VAT group members are disregarded and no VAT is chargeable on them.
There are pros and cons in forming a VAT group and a brief overview is provided here
A specific development in case law does mean care must be taken when considering input tax recovery in holdco, details here
Joint contracts of employment
If members of staff are employed via joint contracts or employment no VAT is applicable to any charges made between the two (or more) employers. In addition, where each of a number of associated companies employs its own staff, but one company (the paymaster) pays salaries behalf of the others who then pay their share of the costs to the paymaster the recovery of monies paid out by the paymaster is VAT free as it is treated as a disbursement.
Disbursements
Looking at disbursements is a whole article in itself, and in fact there is a helpful one here
But, briefly, if a charge qualifies as a disbursement, then the costs is passed on “in the same state” so if it is VAT free, the onward charge is also VAT free, as opposed to perhaps changing the VAT liability as set out above. It is important to understand the differences between a disbursement and a recharge as a VAT saving may be obtained.
Overseas
The above considers management charges within the UK. There are different rules for making or receiving management charges to/from overseas businesses. These charges are usually, but not always, VAT free (an example is the renal of opted office space which is land related, so is always standard rated) and it is worth checking the VAT treatment before these are made/received. VAT free services received from overseas may be liable to the reverse charge.
Same legal entity
There is no supply if management charges are made between branches of the same legal entity.
Charities
There may be more planning for charities and NFP entities via cost-sharing arrangements, but this is outside the scope of this article.
Summary
As may be seen, the answer to a simple question may be complex and the answer dependent upon the precise facts of the case. It is unusual to have two scenarios that precisely mirror each other, so each structure needs to be reviewed individually. Inter-company management charges must be recognised, especially if the recipient is partly exempt. Please contact us if you have any queries or would like more information on any of the above.
VAT – Understanding land and property issues
Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.
Why is VAT important?
The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. This is increased by the fact that these are often one-off transactions by a business, and in-house, in depth tax knowledge is sometimes absent. Such activities can result in large penalties and interest payments, plus unwanted attentions from VAT inspectors. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.
Problem areas
Certain transactions tend to create more VAT issues than others. These include;
- whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
- conversions of properties from commercial to residential use
- whether to opt to tax (OTT) a commercial property
- the recovery of VAT charged on a property purchase
- supplies between landlord and tenants
- the Capital Goods Scheme (CGS)
- the anti-avoidance rules
- mixed developments
- apportionment of VAT rates
- changes in number of dwellings in a building(s)
- changes in intention of use of a building
- sale of partially completed developments
- partial exemption
- charity use
- non-business use
- relevant residential use
- the place of supply (POS) of services
- holiday lets
- serviced apartments
- contracts
- new build residential
- DIY Housebuilders
- tax points (time of supply)
- HMRC queries
- deposits
- and even seemingly straightforward: VAT registration
Additionally, the VAT treatment of building services throws up its own set of VAT complications.
The above are just examples and the list is not exhaustive.
VAT Planning
The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.
Don’t leave it to chance!
For more information, please see our Land & Property services
A VAT: Did you know?
In the current election the Liberal Democrats’ manifesto stated that they would apply zero-rating to children’s toothbrushes and toothpaste. Whether this impacts the money left by the tooth fairy remains to be seen…
VAT: What is an exempt supply, and what does it mean?
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:
- Betting, gaming, dutiable machine games and lotteries
- Burial and cremation
- Cultural services
- Museums, galleries and zoos
- Live performances
- Education
- Education
- Vocational training
- Examination services
- Individual tuition
- Finance
- The issue, transfer or receipt of money, or any security for money
- Granting credit
- intermediary services
- Dealing in shares, stocks, bonds, notes debentures and similar
- Dealings in currency
- Banking
- Management of some investments
- Fund raising events by charities and other qualifying bodies
- Health and welfare
- Medical care
- Dentistry
- Pharmacy services
- Opticians
- Welfare services
- Insurance
- Generally; insurance and reinsurance transactions and intermediary services
- Investment gold
- Land*
- Generally; selling or letting land or property
- Postal services
- Sport, sports competitions and physical education
- Competition entries
- Sporting facilities
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.
VAT: Education – what, precisely, is exempt?
The legislation covering education is VAT Act 1994, Schedule 9, Group 6.
What does the term education mean?
It means a course, class or lesson of instruction or study in a subject. This includes:
- lectures
- educational seminars
- conferences and symposia
- recreational and sporting courses
- distance teaching and associated materials
Schools etc
The first type of education exemption is relatively clear: It is the provision of education by an eligible body. An eligible body is, broadly; a school, college, or university (supplies by Local Authority schools, city technology colleges, sixth form colleges, academies and free schools – where education is provided for no charge, are non-business activities rather than exempt, and have their own set of rules). More on academies here
It is also worth noting that any ‘closely related” goods or services provided with exempt education are themselves exempt. This may cover items such as; certain stationery, accommodation, transport and catering.
There is usually very little disagreement about the VAT treatment of these entities.
Charities/ non-profit making organisations
If a charity/NFP entity is an eligible body supplies of education and vocational training (see below) by it are exempt. Such an organisation is likely to be an eligible body, where it’s a charity, professional body or company which:
- cannot and does not distribute any profit it makes, and
- any profit that does arise from its supplies of education is used solely for the continuation or improvement of such supplies.
There can be disputes over the term “does not distribute any profit” so care should be taken in this respect and advice sought if there is any doubt.
Tuition
Exemption applies to the supply of “private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer” – VAT Act 1994 Schedule 9, Group 6, item 2.
Taking each of these tests in turn:
- What is “private tuition?
In order to qualify, the provider of tuition must act independently and not be an employee. Practically, this means that the person providing the tuition must either be a sole proprietor, a partner in a partnership, or a member of a Limited Liability partnership (LLP). Consequently, exemption does not apply if the teaching is carried out by a company or an employee. This is a matter of fact, however, it is possible to structure matters such that the exemption applies if it does not currently (and the restructure is possible commercially).
- What does “ordinarily taught” in schools/universities mean?
This is often a moot issue and the significant amount of case law highlights this. Most of the mainstream subjects are covered of course, but what about subjects like; golf, horse riding and dance? Would they be ordinarily taught in schools? (The answer according to case law is; yes). However, there are many other subjects which are debatable and HMRC usually take an uncompromising line on this area, especially around sporting activities. If there is any doubt, we recommend seeking advice.
- What does tuition mean?
Clearly, if a person teaches or coaches a subject to an individual or group, then this qualifies as tuition. However, a distinction must be made between this and a recreational type of activity which may be called a “class”, but no actual tuition is provided. Exemption does not apply, for example, for the simple provision of gymnasium or swimming pool facilities, or a yoga class where no coaching takes place (however, it is possible that these may be exempt under different parts of the legislation, but that is not the subject of this article).
Vocational training
Vocational training means training or re-training and work experience for paid employment or voluntary employment in areas beneficial to the community.
If vocational training is provided for a charge the VAT consequences are either:
- for an eligible body (see above) vocational training is exempt
- for a non-eligible body vocational training is still exempt to the extent that it is funded under an approved government funding scheme. Otherwise the supply is taxable.
English as a Foreign Language (EFL)
If a commercial entity makes supplies of tuition of EFL they will qualify for exemption. In these cases, tuition includes all elements that are integral to the course, held out for sale as such, and are the means by which it is intended to promote fluency in the use of the English language.
General
In respect of all of the above, if exemption does not apply the supply of education falls to be taxable as a default.
For completeness, exemption may also apply to; research, examination services, youth clubs, day nurseries, crèches and playgroups but these activities are outside the scope of this article.
Summary
There are many traps for the unwary here. Planning is always advisable and I recommend that any entity which provides education is conscious of the VAT implications and seeks advice where/when necessary.
VAT Registration: Extension of time limit
HMRC has extended the time limit for taxpayers to receive a reply after applying for VAT registration.
The previous 30-day response deadline is now 40-days.
Notices (VAT Notice 700/11) – Cancelling your VAT registration and (VAT Notice 700/2) – Group and divisional registration have been updated.
VAT: More on separate and single supplies. The KFC dip pot case
Latest from the courts
In the First-Tier tribunal case of Queenscourt Limited the issue was whether dip pots supplied as part of a takeaway meal deal are a separate zero-rated supply (of cold food) or whether they are part of a single VATable supply of hot food.
Background
The appellant had originally accounted for output tax on the basis that dip pots formed part of a single standard rated supply with other food. However, following advice, it then formed the view that zero-rating applied to these pots and submitted a claim for overpaid output tax. HMRC agreed to repay the VAT claimed.
Subsequently, a further claim as made on a similar basis for a later period. This was considered by a different officer who refused to make the repayment on the basis that there was no separate supply of the dip pots. This called into question whether the payment of the initial claim was correct. The officer considered the previous repayment to have been incorrect and issued assessments in order to recover the amount which had been repaid.
Queenscourt now appealed both against the decision to refuse the repayment claimed in the second error correction notice and also against the recovery assessment relating to the first error correction notice. Moreover, the recovery assessments are invalid as there has been no change in circumstances and no new facts have come to light since HMRC agreed to repay the tax. Alternatively, it argues that HMRC are prevented from recovering the tax, either on the basis of legitimate expectation or estoppel by convention, in each case arising as a result of HMRC’s original agreement that that tax should be repaid.
Decision
The appeal was dismissed.
- On the dip point issue, the FTT stated that it was unlikely the dip would be eaten on its own, or as an end in itself, unlike the coleslaw or cookie elements – It is a means of better enjoying the hot food. Consequently, it is an element of a standard rated single composite supply of hot takeaway food.
- Legitimate expectation – Whilst the Tribunal did have jurisdiction to consider arguments based on legitimate expectation in the context of an appeal against a recovery assessment, it is not in this case sufficiently unfair for HMRC to resile from their initial acceptance of the claim made in the first error correction notice and to apply the correct tax treatment.
- Estoppel – HMRC is not estopped from making or relying on their recovery assessments as there has been no detrimental reliance on the original position taken by HMRC in connection with any subsequent mutual dealings.
Commentary
It is difficult to see the end of single/multiple supply cases, as my previous articles consider:
Here, here, here, here, and how to categorise a supply here.