Tag Archives: indirect-tax

VAT – Spot The Ball – Latest from the courts

By Marcus Ward 9 May 2016

Is Spot The Ball a game? And if it is, is it a game of chance? (And therefore exempt from VAT).

In the case of IFX Investment Company Ltd & ORS the main issue was whether the First-tier Tribunal (FtT) were wrong to hold that the appellants’ “Spot The Ball” competitions was exempt under the gaming exemption in Value Added Tax Act 1994, Schedule 9 Group 4. To fall within the gaming exemption, Spot The Ball must be a “game of chance” within the meaning of the Gaming Act 1968. The dispute was over the word “game” and the words “of chance”.

The Court of Appeal (CoA) considered whether the FtT decision in favour of the appellant that the supply was exempt or whether HMRC’s successful appeal to the Upper-tier Tribunal (UtT) should stand.

The court heard form the promoters that while there was an element of skill in determining roughly where the panel that decided where the ball should be would actually place it, the precise placement of the cross was essentially a matter of chance. HMRC insisted that the competitors were not “playing a game” as they advanced the argument that a “game” required interaction between the players. and therefore Spot The Ball could not be considered playing a game of chance such that the supply is standard rated.

The UtT deemed that Spot The Ball is “played” in “solitary isolation” and does not involve any interaction between competitors. The only contract is between the operator and the individual competitor. Additionally the act of placing a cross on the coupon was not “playing”

The CoA disagreed with the UtT’s decision and concluded that the FtT made a finding that Spot The Ball was a game of chance and there was no reason to disturb this decision. The FtT was correct to hold that there is no inter-player interaction rule. Previous case law clearly contemplates that there can be a game without the contestants being in communication with each other. Consequently, it restored the FtT’s decision and the supplies are exempt.

This case has brought home to me two (non-VAT) things; 1) That Spot The Ball is still around, and that 2) I always thought that one had to actually put a cross where the ball actually was, rather than where a judging panel thought the ball was likely to be. One lives and learns. I’m also constantly surprised that “the pools” still exist in these days of lotteries and lotto and other promotions.

Case here

VAT – Disbursements Q&As

By Marcus Ward 6 May 2016

Disbursements

A very common query regarding VAT is “I pass on charges incurred on behalf of my client/customer – do I add VAT?” In other words, does the payment qualify as a disbursement?

Does it matter if the original supply has VAT on it?

Yes. Whether a payment is a disbursement is only a practical issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on “in the same state”. The points below assume that the charge in question is VAT free, eg; statutory fees (land registry, stamp duty, search fees, MOTs etc) insurance, financial products etc although benefits may also be obtained if the original supply is reduced rated.

So only if a supply is a disbursement can I pass it on in the “same state; ie; VAT free?

Yes

So when can I pass on a payment VAT free?

A disbursement is passed on without any alteration (eg; not marked up or changed in any way) and the supply must be to the final customer by the original provider. If the supply is VAT free then the recovery of the costs is also VAT free. The passing on of the payment from the final customer to the supplier is done as agent. Therefore, in these circumstances, a supplier may be acting as principal for part of a supply, and agent for another part. The disbursement should not appear on the “agent’s” VAT return.

When do I have to add VAT onto a supply which is originally VAT free?

When the onward supply is not a disbursement.

A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement. An example is zero-rated travel. A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge. It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his overall VATable service.

What are the rules for treating a payment as a disbursement?

The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:

you acted as the agent of your client when you paid the third party
your client actually received and used the goods or services provided by the third party
your client was responsible for paying the third party
your client authorised you to make the payment on their behalf
your client knew that the goods or services you paid for would be provided by a third party
your outlay will be separately itemised when you invoice your client
you recover only the exact amount which you paid to the third party, and
the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

What if I get it wrong?

If you add VAT to a properly VAT free disbursement HMRC will treat the amount shown on the invoice as VAT. However, it will not permit the recipient of the supply to recover input tax (as it is not VAT) thus creating an actual VAT cost. if you treat a supply as a VAT free disbursement when it actually forms part of your taxable supply, HMRC will issue and assessment and potentially penalties and interest. Unfortunately, I have seen this course of action taken a number of times and the amounts of VAT involved were significant.

Please contact us if you have any queries on this matter. Sometimes the matter is less than straightforward and getting it wrong can be very expensive for a business. If you have been charged VAT on what you believe to be a VAT free disbursement, it may also be worth challenging your supplier.

A guide with helpful diagrams is available here

VAT – Latest from the courts; use and enjoyment provisions

By Marcus Ward 25 April 2016

Telefonica Europe Plc and Telefonica UK Limited

The VAT Use and Enjoyment provisions set out an additional layer of rules which establish the place of supply of certain services. They apply to; telecommunications and broadcasting services; electronically supplied services (for business customers); hired goods; and hired means of transport. Broadly, effective use and enjoyment takes place where a recipient actually consumes the services, regardless of any contractual arrangements, payment, or beneficial interest. The intention of this provision is to correct instances of distortion which remain as a result of considering only where the provider and the customer belong. HMRC give the example of supplies such as telecommunications services which are actually consumed outside the EC, to be subject to UK VAT. Of course, the converse is that it would be distortive for there to be no EC VAT on such services where they are consumed in the UK.

In the Upper Tribunal case of Telefonica Europe Plc and Telefonica UK Limited the dispute involved the way in which the appellant calculated the value of its mobile telephone services which were used and enjoyed outside the EC (and thus UK VAT free). Over a number of years Telefonica had an agreement with HMRC whereby the amount of outside the EC supplies was calculated by reference to revenue, ie; comparing call, text and data income relating to non-EC supplies to total income.

HMRC subsequently formed the view that this method of calculation was distortive because higher charges were made to non-EC users than EC consumers. HMRC proposed a “usage methodology” which used call times, texts sent and volume of data used. As may be expected, this resulted in a lower percentage of supplies that were outside the scope of UK VAT thus increasing HMRC’s VAT take.

The appellant contended that the usage methodology was contrary to EC and UK VAT legislation. Not surprisingly, the UTT rejected this argument, deciding that Telefonica had not established that HMRC’s proposal was unlawful.

So then the outcome would be expected to be that the usage methodology should be used, but no. It was decided that the most accurate method would be one based on the time a customer has access to the network outside the EC; which differs from both the usage and revenue methods.

This type of dispute is quite common and also appears regularly in partial exemption situations. There are nearly always alternative ways to view apportionment calculations and it pays to obtain professional advice; not only to ensure that a fair result is achieved, but as assistance with negotiations (which may avoid having to go to Tribunal).

VAT Latest from the courts: Stocks Fly Fishery – single or multiple supply?

By Marcus Ward 19 April 2016

As many will know, there is a significant amount of case law concerning what may be treated as a composite supply at one VAT rate, and what are separate supplies at different VAT rates. The latest in this series is the First Tier Tribunal case of Stocks Fly Fishery

The appellant is a trout fishery in the Forest of Bowland. They argued that they supplied standard rated fishing and a distinct zero rated supply of fish for human consumption.

They provided two types of daily ticket which was required to fish the reservoir. The first was a sporting ticket, which entitled an angler to fish, but any fish caught must be returned to the water. The second was a take ticket which also enabled a person to fish but any fish caught (up to a certain number) may be taken away for food. A take ticket was more expensive than a sporting ticket. The more fish that were taken away, the more expensive the take ticket was. The taxpayer formed the opinion that it made two supplies; one of fishing which was agreed to be standard rated, and one of food for human consumption (the trout) which was zero rated. The value of the zero rated element was said to be the difference between the sporting ticket price and that of the take ticket.

The issue was whether the ability to take away the fish for food was a separate supply, or ancillary to the substantive supply of fishing.

The appellant cited Hughes v Pendragon Sabre Ltd (t/a Porsche Centre Bolton) while HMRC relied on Chalk Springs Fisheries (1987) (LON/86/706) Roger Cambrai Haynes (1988) (LON/87/624) and Card Protection Plan Ltd v Commissioners of Customs and Excise.

As an observation, the chairman in the Chalk Springs Fisheries case stated “…No trout is, in my view, supplied to him at all. Instead the fisherman must go out and catch them, if he can.” This was obviously quite unhelpful to the appellant. Additionally, the chairman was obliged to follow the well-known Card Protection Plan case which sets out guidance on matters such as this.

Decision

The FTT decided that the essential feature of the transaction was fishing and the dominant motive of anglers going to the fishery was to fish, regardless of which type of ticket was purchased. Therefore, the right to fish had to be regarded as constituting the principal service and the right to kill and keep the trout fish, if caught, should be regarded as ancillary to that principal purpose. Therefore there was a single standard rated supply of fishing.

It is always worth reviewing whether supplies made by a business can, and ought, to be treated separately, or as a single bundle. The existence of such a massive amount of case law on this subject indicates that this issue will continue to run and run.

Please contact us should this matter raise any concerns or present a possible opportunity.

VAT – The Capital Goods Scheme (CGS)

By Marcus Ward 13 April 2016

The CGS

If a business acquires or creates a capital asset it may be required to adjust the amount of VAT it reclaims. This mechanism is called the CGS and it requires a business to spread the initial input tax claimed over a number of years. If a business’ taxable use of the asset increases it is permitted to reclaim more of the original VAT and if the proportion of the taxable supplies decreases it will be required to repay some of the input tax initially claimed. The use of the CGS is mandatory.

How the CGS works

Normally, VAT recovery is based on the initial use of an asset at the time of purchase (a one-off claim). The CGS works by applying a longer period during which the initial recovery may be adjusted if there are changes in the use of the asset. Practically, the CGS will only apply in situations where there is exempt or non-business use of the asset. A business using an asset for fully taxable purposes will be covered by the scheme, but it is likely that full recovery up front will be possible with no subsequent adjustments required. This will be the position if, say, a standard rated property is purchased, the option to tax taken, and the building let to a third party. The CGS looks at how capital items have been used in the business over a number of intervals (usually, but not always; years). It adjusts both for taxable versus exempt use and for business versus non business use over the lifetime of the asset. Example; a business buys a yacht that is hired out (business use) and it is also used privately by a director (non-business use). However, a more common example is a business buying a property and occupying it while its trade includes making some exempt supplies.

Which businesses does it affect?

Purchasers of certain commercial property, owners of property who carry out significant refurbishment or carry out civil engineering work, purchasers of computer hardware, aircraft, ships, and other vessels over a certain monetary value who incur VAT on the cost. (As the CGS considers the recovery of input tax, only VAT bearing assets are covered by it).

Assets not covered by the scheme

The CGS does not apply if a business;

acquires an asset solely for resale
spends money on assets that it acquired solely for resale
acquires assets, or spends money on assets that are used solely for non-business purposes.

Limits for capital goods

Included in the CGS are:

Land, property purchases – £250,000 or over
Refurbishment or civil engineering works costing £250,000 or over
Computer hardware costing £50,000 or over (single items, not networks)
From 2011, aircraft, ships, and other vessels costing £50,000 or more.

Assets below these (net of VAT) limits are excluded from the CGS.

The adjustment periods

Five intervals for computers
Five intervals for ships and aircraft
Ten intervals for all other capital items

Changes in your business circumstances

Certain changes to a business during a CGS period will impact on the treatment of its capital assets. These changes include:

leaving or joining a VAT group
cancelling your VAT registration
buying or selling your business
transferring a business as a going concern (TOGC)
selling an asset during the adjustment period

Specific advice should be sought in these circumstances.

Examples

A retailer purchases a brand new property to carry on its fully taxable business for £1 million plus £200,000 VAT. It is therefore above the CGS limit of £250,000. The business recovers all of the input tax on its next return. It carries on its business for five years, at which time it decides to move to a bigger premises. It rents the building to a third party after moving out without opting to tax. Under the CGS it will, broadly, have to repay £100,000 of the initial input tax claimed. This is because the use in the ten year adjustment period has been 50% taxable (retail sales) for the first five years and 50% exempt (rent of the property for the subsequent five years).
A company purchases a helicopter for £150,000 plus VAT of £30,000. It uses the aircraft 40% of the time for hiring to third parties (taxable) and 60% for the private use of the director (non-business). The company reclaims input tax of £12,000 on its next return. Subsequently, at the next interval, taxable use increases to 50%. It may then make an adjustment to increase the original claim: VAT on the purchase £30,000 divided by the number of adjustment periods for the asset (five) and then adjusting the result for the increase in business use: £30,000 / 5 = 6000 50% – 40% = £600 additional claim

Danger areas

Overlooking CGS at time of purchase or the onset of building works
Not recognising a change of use
Selling CGS as part of a TOGC
Failing to make required CGS adjustments at the appropriate time
Overlooking the option to tax when renting or selling a CGS property asset
Sale during adjustment period (not a TOGC)
Complexities re; first period adjustments and pre-VAT registration matters
Interaction between CGS and partial exemption calculations

Summary

There is a lot of misunderstanding about the CGS and in certain circumstances it can produce complexity and increased record keeping requirements. There are also a lot of situations where overlooking the impact of the CGS or applying the rules incorrectly can be very costly. However, it does produce a fairer result than a once and for all claim, and when its subtleties are understood, it quite often provides a helpful planning tool.

VAT Worldwide update – Gulf Cooperation Council Countries

By Marcus Ward 7 April 2016

VAT introduction in the Gulf Cooperation Council countries.

The following countries have indicated that they intend to introduce a VAT system for the first time from 1 January 2018:

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

This is a likely result of costly military campaigns and a drop in global oil prices. Although it has been agreed that, to limit smuggling and competitiveness, the countries aim to introduce the tax at the same time it is likely that some countries may defer implementation to a later date. It is thought that healthcare, education, social services and a limited list of food items will be excluded and that introductory rate will be 5%.

Tip: Businesses trading with customers and clients in these countries may need to review their tax obligations, budgets, contracts and other arrangements before the introduction of VAT.

The VAT gap for 2014-15

By Marcus Ward 6 April 2016

What is the VAT gap?

The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected. The ‘VAT total theoretical liability’ (VTTL) represents the VAT that should be paid if all businesses complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).

In other words, VTTL – VAT receipts = VAT gap.

This is HMRC’s second estimate of the VAT gap for 2014-15 (£ billion) and may be summarised as:

Net VTTL £124.9

Net VAT receipts £111.4

VAT gap £13.5

VAT gap 10.8%

The previous year’s figures (2013-2014) estimated the VAT gap at £13.1 billion (11.1% of the VTTL).

The consumer expenditure data accounts for around two thirds of the VTTL. The remaining one third of the VTTL is comprised of government and housing expenditure data, and businesses making exempt supplies.

For those of a statistical nature, the methodology behind the figures is here

VAT – Latest from the courts: Frank A Smart & Son Limited

By Marcus Ward 4 April 2016

Recovery of input tax incurred on the purchase of Single Farm Payment Entitlement (SFPE) units.

HMRC often reject claims for input tax as they consider that they relate to non-business activities, or more nebulously the costs are not reflected in the prices of supplies made by the claimant (the so called “cost component” approach). This very helpful Upper Tribunal (UT) case provides insight into the logic applied by HMRC in reaching a decision to disallow a claim for VAT incurred.

This was a company which farmed land and also paid VAT on the purchase of SFPE units. These units entitled the company to receive benefits via the EC Single Farm Payment Scheme. HMRC contended that the receipt of the SFPE payments was non-business, or in the alternative, they were not a cost component of any taxable supply made by the farming company.

The UT refused HMRC’s appeal against the initial FT-T decision in favour of the appellant. It found that there was sufficient evidence that the purchase of the SFPE units (and the income which resulted in the acquisition of them) was not a separate activity to the farming supplies so the non-business argument did not apply. Further, the Chairman stated that “…it is unnecessary for the company to prove that the cost in question was actually built into the price charged for the supply”. Therefore the cost component contention put forward by HMRC also failed.

The Chairman’s comments appear to go against HMRC’s published guidance on “direct and immediate link with the taxable person’s business”, particularly in respect of holding companies.

If you are aware of any situation where HMRC have disallowed claims for input tax for either non-business or non-cost component reasons please contact us as this case may be of benefit.

Full decision here

VAT Self-billing. What is it? The pros and cons

By Marcus Ward 24 March 2016

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. Rather than the supplier issuing a tax invoice in the normal way, the recipient of the supply raises a self-billing document. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.

If a business wants to put a self-billing arrangement in place it does not have to tell HMRC or get approval from them, but it does have to get its supplier or customer to agree to the arrangement and meet certain conditions.

The main advantage of self-billing is that it usually makes invoicing easier if the customer (rather than the supplier) determines the value of the purchase after the goods have been delivered or the services supplied. This could apply more in certain areas such as; royalties, the construction industry, Feed-In-Tariff, and scrap metal. A further benefit is that accounting staff will be working with uniform purchase documentation.

However, there is a high risk of errors, significant confusion and audit trail weaknesses. The wrong rate of VAT may easily be applied, documents can go missing, invoices may be raised as well as self-billing documents, the conditions for using self-billing may easily be breached (a common example is a supplier deregistering from VAT) and essential communication between the parties can be overlooked. As the Tribunal chairman in UDL Construction Plc observed: “I regard the self-billing procedure as a gross violation of the integrity of the VAT system. It permits a customer to originate a document which enables him to recover input tax and obliges his supplier to account for output tax. It goes without saying that such a dangerous procedure should be strictly controlled and policed.”

The rules

For the customer

You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:

Enter into an agreement with each supplier
Review agreements with suppliers at regular intervals
Keep records of each of the suppliers who let you self-bill them
Make sure invoices contain the right information and are correctly issued. This means including all of the details that make up a full VAT invoice – details here

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices (and you cannot claim any input tax). Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

The Agreement

A self-billing arrangement is only valid if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid VAT invoices – and you won’t be able to reclaim the input tax shown on them.

You’ll both need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

Your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
Your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
An expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
Your supplier’s agreement that they’ll let you know if they stop being registered for VAT, get a new VAT registration number or transfer their business as a going concern
Details of any third party you intend to outsource the self-billing process to.

An example of an agreement here

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you’ll need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Records

If you are a self-biller you’ll need to keep certain additional records:

Copies of the agreements you make with your suppliers
The names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

Invoices

Once a self-billing agreement is in place with a supplier, you must issue self-billed invoices for all the transactions with them during the period of the agreement.

As well as all the details that must go on a full VAT invoice you will also need to include your supplier’s:

name
address
VAT registration number

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC” and you must clearly mark each self-billed invoice you raise with the reference: ‘Self Billing’ (This rule has the force of law). Details required on invoice here

Input tax

You’ll only be able to reclaim the input tax shown on self-billed invoices if you meet all the record keeping requirements. When you can reclaim the input tax depends on the date when the supply of the goods or services takes place for VAT purposes. This is known as the the tax point, details here

For the supplier

If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.

The terms of the agreement are a matter between you and your customer, but there are certain conditions you’ll both have to meet to make sure you comply with VAT regulations:

Sign and keep a copy of the self-billing agreement
Agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
Agree to accept the self-billing invoices that your customer issues
Tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern.

Accounting for output tax

The VAT figure on the self-billed invoice your customer sends you is your output tax.

You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

Tips

As a supplier, take care not to treat self-billed invoices as purchase invoices and reclaim the VAT shown as input tax
As a customer, carry out an instant check of VAT registration numbers here
As a supplier or customer regularly check that the conditions for self-billing continue to be met and ensure good communications
As a supplier or customer ensure that the documentation accurately reflects the relevant transactions and the correct VAT rate is applied
As a supplier or customer ensure that there is a clear audit trial and that all documentation is available for HMRC inspection
It is possible to use self-billing cross-border intra-EC, but additional rules apply.

VAT – New road fuel scale charges from 1 May 2016

By Marcus Ward 22 March 2016

If a VAT registered business purchases fuel for business use of its vehicles, but there is also private use of cars and other vehicles, an adjustment is required to ensure no VAT is claimed on the private consumption of fuel. This is called the VAT fuel scale charge

To make accounting for VAT on private use of fuel by car drivers a business may apply a VAT fuel scale charge, this adds back a fixed sum, per VAT period, to account of private consumption of fuel.

The scale charge is calculated according to a car’s CO2 emissions and the charge is added to Output VAT it reflects a charge for the private use of the fuel. The road fuel scale charges are amended at each Budget. The new rates come into effect from 1 May 2016 and may be found here

Businesses must use the new scale charges from the start of the next prescribed accounting period beginning on or after 1 May 2016.

Other Budget changes

Apart from the VAT registration limit being raised by £1,000 to £83,000 and the deregistration limit has been increased to £81,000 both with effect 1 April 2016, there were few VAT changes in the budget.