Tag Archives: HMRC

VAT: Exemption of fund management services

By Marcus Ward 8 February 2023

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:

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

VAT: DIY Housebuilders’ Scheme – The Dunne case

By Marcus Ward 6 February 2023

Latest from the courts

The First-Tier Tribunal (FTT) case of Daniel Dunne demonstrates the fact that the details of the construction are very important when making a claim under the DIY Housebuilders’ Scheme (the scheme)

Background

Mr Dunne applied for planning permission (PP) for a rear extension to his existing house, which was granted. After completion of the building works a Building Control Completion Certificate was issued which described the relevant works as “construction of a single storey extension to the rear” of the property. The appellant submitted a scheme claim which HMRC rejected.

Technical

Superficially, the legislation covering the scheme: The VAT Act 1994 section 35 states, as relevant:

“(1) Where—

(a) a person carries out works to which this section applies,

(b) his carrying out of the works is lawful and otherwise than in the course or furtherance of any business, and

(c) VAT is chargeable on the supply. or importation of any goods used by him for the purposes of the works,

the Commissioners shall, on a claim made in that behalf, refund to that person the amount of VAT so chargeable.

(1A) The works to which this section applies are—

- the construction of a building designed as a dwelling or number of dwellings…
- The notes to Group 5 of Schedule 8 shall apply for construing this section as they apply for construing that Group.

The notes to Group 5 of Schedule 8 state, as relevant:

…(2) A building is designed as a dwelling or a number of dwellings where in relation to each dwelling the following conditions are satisfied—

(a) the dwelling consists of self-contained living accommodation;

(b) there is no provision for direct internal access from the dwelling to any other dwelling or part of a dwelling;

c) the separate use, or disposal of the dwelling is not prohibited by the term of any covenant, statutory planning consent or similar provision; and

(d) statutory planning consent has been granted in respect of that dwelling and its construction or conversion has been carried out in accordance with that consent….

…For the purpose of this Group, the construction of a building does not include—

(a) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c)…, the construction of an annexe to an existing building…”

excludes a claim as the construction was an extension rather than a “dwelling”. The PP plans showed the extension as a square building connected to the existing residential property by a corridor.

However, Mr Dunne’s evidence was that although the initial plan had been for the rear extension to be attached to the existing property, the plans were changed so that it became a standalone detached building, unconnected to the existing property and the building is therefore a detached bungalow. He discussed the changes informally with the local authority building control, who agreed that he did not need to build the corridor connecting the building to the existing property. The fact that they had issued the planning certificate was, he contended, evidence that the building was compliant with the planning department requirements and so should be regarded as being PP for a dwelling.

HMRC contended that, even without the corridor, the PP was for an extension of the existing building and not for a separate dwelling. An extension is specifically precluded from being the construction of a building by note 16 of the notes to The VAT Act 1994, Schedule 8, Group 5. The construction was not in accordance with the planning consent given by the local authority and so the claim could not be accepted.

The respondents further submitted that the building could not be disposed of separately to the existing building and that although the building had a separate postal address this did not create a separate dwelling.

Decision

The FTT found that for a claim to succeed, it is not sufficient that a standalone building was created; the PP must be for a dwelling. The PP, as informally amended, was for the extension of an existing dwelling and not for the creation of a new dwelling.

The relevant PP correspondence did not contemplate, let alone confirm, that approval was given for a new dwelling. The agreed informal amendment, to remove the connecting corridor from the plans, cannot be interpreted to imply a grant of permission for a dwelling.

The statutory requirements for a claim include the requirement that PP has been granted in respect of a dwelling and that the construction is in accordance with that planning consent. It was found that PP (and its informal amendment) was granted for an extension and not a dwelling, and so it followed that appeal could not succeed.

Commentary

It is crucial for a claim to succeed that all of the conditions of the scheme are met. Any deviation will result in a claim being rejected. It is usually worthwhile having any claim reviewed professionally before submission.

Further

More information and Scheme case law here, here and here, here and here.

VAT: How claims are processed

By Marcus Ward 2 February 2023

Further to my article on repayment interest, I thought it may be helpful if I looked at how HMRC process repayment returns, and what can delay payments.

Once a business submits a repayment return it is subject to a number of set steps:

Step 1

HMRC records the date a return is submitted online via MTD.

Step 2

Automated credibility checks are applied to all claims. HMRC say that most returns pass these tests. If this is the case, they proceed immediately for payment.

Step 3

Credibility queries (or “pre-cred” queries) – returns that fail the automated tests are checked manually and are either resolved by the credibility team, or sent to officers to carry out further investigation.

Step 4

Returns sent for further checks – HMRC say that high priority is given to these verifications and any queries are handled with the minimum involvement of, or inconvenience to, a business. Experience insists that this is not always the case.

Step 5

Credibility queries are returned to the credibility team – results of the officer’s action, including any amendments required, are returned with a certificate detailing the amount of time taken and any official delay. Claims are passed for payment.

Step 6

Payment of the claim – once a claim has been accepted, repayment is made immediately. HMRC’s systems check whether repayment interest is applicable. If it is, the interest is paid automatically at the same time as the repayment.

Commentary

Most issues usually arise when returns show “unexpected” repayments – eg; a business regularly submitting payment returns submits an one-off claim, or when a first return shows a significant repayment. The pre-cred checks are undertaken to protect the revenue, that is; to ensure that the claim is valid before money is released. Normally, these checks involve a request for copies of purchase invoices, a telephone conversation, or a physical visit by an officer. Not unreasonably, the quantum of the claim impacts significantly the way HMRC handle it.

However, delays can occur on both sides. A business will have to reply to all HMRC requests timeously (and this is in its interest) but more often a claim will be ‘lost” in the system, or inspectors take an unacceptable time to deal with queries. I have one claim that is still in the system after being lodged in January 2021, despite us providing all information requested immediately.

Reasons for unexpected repayments

There are a number of reasons why a return may be an unusual repayment, which include, but are not limited to a:

large one-off VAT bearing purchase, eg; machinery, computer system, or land/property
premises refurbishment
concentration of professional/advisory fees
large export order
change in business structure
new line of business
change of a product’s liability
change of government policy
new product launch

VAT: New guidance on repayment interest

By Marcus Ward 2 February 2023

HMRC has published new guidance on repayment interest – in cases where HMRC is late in settling a repayment claim for overpaid VAT.

If HMRC is late in paying an amount representing a repayment, ie; when a return shows more input tax than output tax, or a claim is made for VAT previously overpaid, a business may be entitled to repayment interest on the VAT that it is owed. From 1 January 2023 repayment interest replaced the repayment supplement.

Amount of interest

Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

Start date

VAT already paid to HMRC

The day after the later of these two dates:

when the VAT was paid to HMRC
the payment deadline for your accounting period

VAT not paid to HMRC

The day after the later of these two dates:

the payment deadline for the accounting period
when the VAT return or claim was submitted

End date

Repayment interest ends when HMRC either repays the VAT or sets it off against a different VAT or tax amount that is deemed to be owed.

Notes

any retrospective claims are subject to the unjust enrichment rules
repayment interest is not due if there are any outstanding VAT returns
HMRC will not pay interest on early payments of VAT
if payment on account businesses pay instalments that exceed VAT owed, repayment interest begins on the date the return was due
in cases where HMRC demand a VAT security, and it is not paid, no repayment interest will be due

VAT: TOMS – negative margin permitted? The Square case

By Marcus Ward 31 January 2023

Latest from the courts

In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).

Background

TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.

These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.

The Issue

The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.

The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.

Legal

The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.

Decision

The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.

The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.

When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).

Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.

Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.

There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.

Commentary

Another demonstration of the complexities of TOMS and the potential pitfalls.

It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS

A VAT Did you know?

By Marcus Ward 30 January 2023

Children’s clothing made from the skin of goats is zero rated, but only if not made from Yemen, Mongolian or Tibetan goats.

VAT: Selling goods using an online marketplace – new guidance

By Marcus Ward 3 January 2023

HMRC has published new guidance for use when a business sells goods using an online marketplace (an e-commerce site that connects sellers with buyers where transactions are managed by the website owner) or direct to customers in the UK.

It can be used to check when a seller is required to pay UK VAT.

It is important, especially for sellers based outside the UK, to understand the tax consequences when such marketplaces are used. It is not always possible to rely on the platforms to deal with output tax on sales made to UK recipients.

The guidance covers:

selling goods using an online marketplace
selling goods direct to customers in the UK
checks online marketplaces need to do
VAT when goods are returned to the seller

VAT: New process to support repayment claims

By Marcus Ward 14 November 2022

HMRC has announced a useful new tool for speeding up repayment payments.

When a business submits a repayment return (when input tax exceeds output tax) HMRC may carry out a “pre-cred” (pre-credibility check) inspection or queries. This is to ensure that a claim is valid before money is released.

If not subject to a visit, a business is likely to be asked for information to support a claim. Such requests are more common if a business normally submits payment returns or it is a first return. The requested information is usually in the form of copy purchase invoices or import documentation.

Prior to the changes, HMRC sent a letter by snail mail and the information would also be returned by post. This was often subject to delays and “misunderstandings”.

From this month, HMRC has launched an online form so that a claimant, or an agent, can upload documents to support the claim via the Government Gateway. It is hoped that this will result in businesses receiving a repayment in shorter order.

HMRC require:

the VAT registration number
the CFSS reference number from the HMRC letter
details of the main business activities
the date the business began
the VAT rates that apply to sales
details of any VAT schemes
the detailed VAT account
the five highest value purchase invoices, and
any additional specific information requested by HMRC

Depending on circumstances, HMRC may also need:

bank statements
export sales invoices or supporting documents
import VAT documents
hire purchase or lease agreements
completion statements and proof of transfer of funds for the purchase of land or property
the planning reference and postcode of construction
sales invoices where non-standard VAT rates were charged

HMRC aim to look at this information within seven working days and will contact the claimant or agent when a decision is made, or if any further information is required.

Let us hope that speeds up the process.

VAT: Which entity receives a supply? The Star Services case

By Marcus Ward 8 September 2022

Latest from the courts

In the Star Services Oxford Limited (Star) First Tier Tribunal (FTT) case the issue was the identity of the entity receiving the supply, whether it held a valid tax invoice, and whether input tax could be claimed.

Background

The appellant claimed input tax incurred on rental payments to Oxford City Council. This was disallowed by HMRC on the grounds that the rental agreement was with Mr Latifi (a sole proprietor in a property rental business) and not the company which was VAT registered.

After the rental agreement was signed the business was incorporated and carried on a bed and breakfast activities from the premises, along with two separate sub-lets to third parties. One party paid rent to Star and one directly to Mr Latifi.

Contentions

HMRC argued that:

Mr Latifi and the Appellant are separate legal entities, both of whom are required to register for VAT separately if carrying on taxable business activities
the assessment was correct as the company was not entitled to an input tax credit as it was not the person who had incurred the liability
the Appellant did not hold a valid VAT invoice, which entitles it to deduct the input tax

Star contended:

there was a technical error in the lease agreement
the assessment was excessive
subsequent to the assessment, the lease was registered to the Appellant
the lease was acquired in Mr Latifi’s name because the Appellant did not exist at the time that the lease agreement was entered into. At the relevant time there was an innocent omission to transfer the lease from Mr Latifi’s name to the Appellant’s name, and the delay was caused by forgetfulness
a company may, under The VAT Act 1994 s. 24(6)(c) and if permitted by Regulations, claim input tax on the pre-incorporation supplies received for its business
the Appellant has accounted for the VAT (therefore there was no loss of tax)
the fact that Mr Latifi is beneficial owner of both “the company” (by virtue of controlling shares and directorship) and “the property” must have an impact on the decision to assess

Decision

The appeal was dismissed.

The Appellant was not entitled to claim input tax on the invoices and HMRC were correct to disallow input tax. It did not receive the supply and it did not hold a VAT invoice.

It was decided that the legal relationship was between Oxford City Council and Mr Latifi. This is because the lease agreement was between these parties and not the Appellant.

It was found that the rent from one sub-tenant was paid to Mr Latifi directly and is not accounted for by the Appellant and that the reassigned lease has no bearing on the property rental activities undertaken by Mr Latifi prior to the reassignment.

The rules on pre-incorporation supplies* do not apply in this case because Mr Latifi, as sole proprietor, and the Appellant, are separate legal entities, requiring separate VAT registration.

Interestingly, a recent case was relied on: In Tower Bridge GP Ltd the Court of Appeal ruled that absent a valid VAT invoice showing the supplier’s VAT number and the customer’s name, the right to deduct input tax on that invoice could not be exercised.

Summary

An unfortunate oversight was sufficient for HMRC to refuse the input tax claim. This case does have a whiff of unfairness about it, but by applying the letter of the law the outcome is unarguable. The contentions here are similar to those in the Aitmatov Academy case.

Another case of taking care with claims.

* A business may, generally, claim the VAT incurred on services it has purchased for its taxable business purposes during the six months prior to VAT registration .
The VAT Act 1994, s 24(6) (c) and The Value Added Tax Regulations 1995, Reg 111.

VAT: Welfare services – School Holiday Clubs

By Marcus Ward 27 June 2022

HMRC has published updated guidance on childcare following the decision in the RSR Sports Limited (RSR) case. The issue being what supplies fell within the definition of “services… closely linked to the protection of children and young persons” and supplies of “welfare services” – VAT Act 1994, Schedule 9, Group 7, item 9.

The guidance in VATWELF3032 states that RSR could be distinguished from Sports Academies (Decision No TC05171), a case where the tribunal had held that the activities element predominated.

The important key features were:

the members of staff were merely supervising activities
they did not hold any coaching or teaching qualifications
there was no external standard to which the services were being provided
the activities were merely an adjunct to the essential service which was childcare

Other providers supplying services can similarly exempt their supplies where the facts demonstrate that they qualify and exhibit the key features set out by the FTT in RSR.

HMRC no longer interprets activity-based clubs to include those clubs exhibiting these key features. Such clubs can therefore, qualify for the welfare exemption if they otherwise meet the conditions.