Tag Archives: input-tax

VAT Success Stories

By   1 April 2019
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I often write about how it is important to seek VAT advice at the right time, see triggerpoints. So, I thought that I’d give some practical examples on where we have saved our clients money, time and aggravation.

Investment company

HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.

We were able to persuade HMRC that our client had a right to be VAT registered because It intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.

This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid.

Restaurant

We identified and submitted a claim for a West End restaurant for nearly £200,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.

Developer

Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.

Charity

A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome.  We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way.  If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.

Shoot

A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.

After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.

Chemist

We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years.  We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due.  We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.

The message? Never accept a HMRC decision, and seek good advice!

VAT: Partial exemption, the N Brown case

By   18 March 2019
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Latest from the courts.

Partial exemption has always been, and probably always will be, the most complex and oft debated area of the tax.

Attribution

In the First Tier Tribunal (FTT) case of N Brown Group plc the issue was how to attribute input tax incurred on marketing. This included:

  • online
  • catalogues and leaflets
  • parcel packs
  • inserts in magazines and newspapers
  • direct mailings
  • advertisements in publications
  • TV advertisements
  • telemarketing
  • brand development
  • PR
  • celebrity endorsements
  • market research
  • photo shoots

Background

N Brown, as you may know, sells clothing and household goods online to the public. It has only a few retail stores so does not have the facility that a “bricks and mortar” retailer would have of displaying goods in its stores. It therefore has to incur significant marketing costs to bring its products to the attention of its customers and present them in an attractive way that encourages sales. The activities of the appellant include the sale of these goods, which is standard-rated for VAT purposes, and the provision of finance, which is exempt for VAT purposes. The finance element is the provision of credit which produces significant income from the interest on monthly balances which consumers do not pay off.

Issue

The issue was whether the input tax incurred on the marketing was attributable to the sale of goods which were advertised or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. HMRC’s position was that the input tax which N Brown incurred in respect of the marketing is residual because, although they did not seek to deny the existence of a “direct and immediate link” between the relevant goods and services and taxable supplies that the appellant made, they consider that there is also a direct and immediate link to the exempt credit provided.

Unsurprisingly, N Brown’s position was that the vast majority of goods and services received in connection with the marketing had a “direct and immediate link” only with taxable supplies that it made and so the relevant input tax was not residual and is therefore recoverable in full.

A subtle distinction, however, as £42 million of VAT was at stake, quite a vital one!

Technical

A general guide to partial exemption is available here

Broadly, a partially exempt business is required to attribute input tax incurred to three categories:

  • Taxable activities (here, the sale of goods) fully recoverable
  • Exempt activities (here the provision of credit) not recoverable
  • Non-attributable (residual) – input tax attributable to both taxable and exempt activities, or neither. This input tax must be apportioned either by the “standard method” or special method agreed with HMRC.

Decision

The judge found that there was a two-way relationship between the sale of the goods and the provision of credit terms. As a consequence, the input tax fell into the category of non-attributable (residual) even if the relevant advertisements made no mention of credit at all. It was also found that the standard method (used by HMRC) did not produce a reasonable outcome so the assessment issued by HMRC would need adjustment in the taxpayer’s favour. This required a different method to be devised and that certain elements of exempt income could be ignored in the calculation. I suspect that negotiations on an agreeable method might take some time…

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution and thus the outcome of the calculation. It is an area which always requires specialised advice.

VAT: Input tax recovery on director’s costs

By   18 March 2019
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Latest from the courts: Directors expenditure – what may be recovered as input tax?

The Praesto Consulting UK Limited  Court of Appeal (CoA) case.

This is a subject that pops up every now and again: Is a purchase for the director’s business purposes (input tax usually recoverable by the company) or for a director personally (so non-business and not recoverable)?

Background

Mr Ranson was an ex-employee of a claimant in civil proceedings; Customer Systems plc (“CSP”). Mr Ranson resigned to set up a company of which he was sole director, “Praesto”, which then carried on a consultancy business competing with CSP. CSP issued proceedings against Mr Ranson (and three other employees) over the nature of the departure from the company, but not against Praesto itself. The acting solicitor firm issued eight invoices (containing the VAT in question) to Mr Ranson personally, and not his company. The invoices were paid by Praesto

Issue

Praesto paid the legal fees relating to the defence of the civil proceedings brought by CSP against its sole director. Is the company entitled to credit for VAT input tax charged in relation to those fees? That is, was it proper business expenditure by the company, or was the defence of the case a personal cost of the director as a (distinct) individual?

HMRC laid great stress on the fact that the invoices were addressed to Mr Ranson personally, that they related to services provided in relation to the claim brought by CSP against him and that Praesto was never joined as a party to the proceedings.

Decision

The CoA ruled that Praesto could recover VAT on the fees. The action against Mr Ranson was the first phase of litigation which would ultimately seek damages from Praesto (and therefore Praesto had a direct interest in CSP’s claim being dismissed). This was an indication that there was a direct and immediate link between the legal services provided and the business. In reality, Praesto was throughout the proceedings, the main target of the litigation: It was Praesto which had made the profits which CSP sought to claim.

The fact that the invoices were addressed to Mt Ranson provided no legal bar to the company recovering the associated input tax. The judge observed that there was a joint retainer whereby the solicitor firm was being instructed by, and acting on behalf of, both Mr Ranson and Praesto. Under such a retainer both Mr Ranson and Praesto would be entitled to the solicitor’s’ services and both would be jointly and severally liable for the fees. That is a legal relationship involving reciprocal performance. As both parties were jointly and severally liable for the fees, there would be no particular significance in addressing invoices to only one of the parties so liable.

This seems an entirely sensible decision.

Commentary

This has echoes of the P&O case: P&O Ferries (Dover) Ltd v Commissioners of Customs & Excise [1992] VATTR 221 referred to in this case, where criminal proceedings were brought against various P&O employees and the company itself arising out of the Herald of Free Enterprise Zeebrugge disaster – the company paid for the legal representation of all the individual defendants and claimed input tax on the costs of so doing. It was held that the conviction of even one of the individual employees would have caused severe damage to the public perception of the company’s business. To mitigate the real risk of being driven out of business the board took the view that the company had to take every step available to it to guard against the successful prosecution of each of the individual employees. The legal services in question were, therefore, used for the purpose of the company’s business.

Another area where VAT on costs invoiced to a (future) director personally are recoverable is in pre-incorporation cases where (obviously) the company does not exist so cannot, at that time, recover the VAT. HMRC permit recovery in such cases if the recipient of the invoice does indeed become a director of the company and the supply is used by that company for business purposes

Please contact us if you have any queries.

VAT: Property – The Option To Tax

By   13 March 2019
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Opting To Tax commercial property

Opting to tax provides a unique situation in the VAT world. It is the only example of where a supplier can choose to add VAT to a supply….. or not.

What is an option to tax?

The sale or letting of a property is, in most cases, exempt (VAT free) by default. However, it is possible to apply the option to tax (OTT) to commercial property. This has the result of turning an exempt supply into a taxable supply at the standard rate. It should be noted that an OTT made in respect of a residential property is disregarded and consequently, the supply of residential properties is always exempt.

Why opt?

Why would a supplier then deliberately choose to add VAT on a supply?

The only purpose of OTT is to enable the optor to recover or avoid input tax incurred in relation to the relevant land or property. The OTT is a decision solely for the property owner or landlord and the purchaser or tenant is not able to affect the OTT unless specific clauses are included in the lease or purchase contracts. Care should be taken to ensure that existing contracts permit the OTT to be taken.  Despite a lot of misleading commentary and confusion, it is worth bearing in mind that the recovery or avoidance of input tax is the sole reason to OTT.

Once made the OTT is usually irrevocable for a 20-year period (although there are circumstances where it may be revisited within six months of it being taken – see below).  There are specific rules for circumstances where the optor has previously made exempt supplies of the relevant land or property. In these cases, HMRC’s permission must usually be obtained before the option can be made.

What to consider

The important questions to be asked before a property transaction are:

  • Was VAT incurred on the purchase price?
  • Is the purchase with the benefit of an existing lease (will the tenant remain?) if so, it may be possible to treat the transaction as a VAT free TOGC (see below)
  • Is the property subject to the Capital Goods Scheme (CGS here)?
  • Is it intended to spend significant amounts on the property, eg; refurbishment?
  • What other costs will be incurred in respect of the property?
  • If renting the property out – will the lease granted be full tenant repairing?
  • Will the tenant or purchaser be in a position to recover any or all VAT charged on the rent/sale?

These are the basic questions to be addressed; further factors may need to be considered depending on the facts of a transaction.

Input tax recovery

Input tax relating to an exempt supply is usually irrecoverable. In fact, a business only making exempt supplies is unable to register for VAT. A guide to partial exemption here. So input tax incurred on, say; purchase, refurbishment, legal costs etc would be lost if a property was sold or rented on an exempt basis. In order to recover this tax, it must relate to a taxable supply. If an OTT is taken, the sale or rent of the property will be standard rated which represents a taxable supply. VAT on supply = input tax claim.

Two-part process

The OTT is a two-part process.

  • The first part is a decision of the business to take the OTT and it is prudent to minute this in Board meeting minutes or similar. Once the decision to OTT is taken VAT may be added to a sale price or rent and a valid tax invoice must be raised.
  • The second part is to formally notify HMRC. If the OTT is straightforward the form on which this is done is a VAT1614A. Here. In some cases, it is necessary to obtain HMRC’s permission in which case separate forms are required. HMRC guidance here – para 5.

There can be problems in cases where the OTT is taken, but not formally notified.

Timing

It is vital to ensure that an OTT is made at the correct time. Even one day late may affect the VAT treatment. Generally speaking, the OTT must be made before any use of the property, eg; sale or rent. Care should also be taken with deposits which can trigger a tax point before completion.

Disadvantages

As mentioned above (and bears repeating) the benefit of taking the OTT is the ability to recover input tax which would otherwise fall to be irrecoverable. However, there are a number of potential disadvantages.

  • opting a commercial property may reduce its marketability. It is likely that entities which are unable to recover VAT would be less inclined to purchase or lease an opted property. These entities may be; partly exempt business, those not VAT registered, or charities/NFP organisations.
  • the payment of VAT by the purchaser may necessitate obtaining additional funding. This may create problems, especially if a VAT charge was not anticipated. Even though, via opting, the VAT charge is usually recoverable, it still has to be paid for up-front.
  • an OTT will increase the amount of SDLT payable when a property is sold. This is always an absolute cost.

Transfer of a Going Concern (TOGC)

I always say that advice should be taken in all property transactions and always in cases of a TOGC or a possible TOGC. This is doubly important where an opted building is being sold, because TOGC treatment only applies to a sale of property when specific tests are met. A TOGC is VAT free but any input tax incurred is recoverable, so this is usually a benefit for all parties.

Revoking an Option To Tax

  • The cooling off period – If an OTT has been made and the opter changes his/her mind within six months it can be revoked. This is as long as no tax has become chargeable on a supply of the land, that no TOGC has occurred, and the OTT has actually been notified to HMRC. There are additional considerations in certain cases, so these always need to be checked.
  • No interest has been held for more than six years – An OTT is revoked where the opter has not held an interest in the opted building for a continuous period of six years. The revocation is automatic, and no notification is required.
  • 20 years – It is possible to revoke an OTT which was made more than 20 years ago. Certain conditions must be met, and advice should be taken on how such a revocation affects future input tax recovery.

Summary

Property transactions are high value and often complex. The cost of getting VAT wrong or overlooking it can be very swingeing indeed. I have also seen deals being aborted over VAT issues.  of course, if you get it wrong there are penalties to pay too. For these reasons, please seek VAT advice at an early stage of negotiations.

More on our land and property services here

VAT: Input tax claims – alternative evidence

By   7 March 2019
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What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by EC law. The right to deduct is given by Article 167 of the Principal VAT Directive (via VAT Regulations 1995/2518 Reg 29(2) in the UK). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

 What HMRC consider

HMRC staff are required to work through the following checklist:

  • Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
  • Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
  • Does the business have evidence of payment?
  • Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
  • How did the business know the supplier existed?
  • How was the business relationship with the supplier established? For example: How was contact made?
  • Does the business know where the supplier operates from (have staff visited?)
  • How did the business contact them?
  • How does the business know the supplier can supply the goods or services?
  • If goods, how does the business know they are not stolen?
  • How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC are required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce and Scandico Ltd.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT: More on the Mercedes Benz Financial Services case – PCP

By   1 March 2019
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Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs

HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:

“The correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:

  • if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
  • if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT”

This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.

Claiming EU VAT refunds after Brexit

By   25 February 2019
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HMRC has confirmed that in the event of a No Deal Brexit businesses belonging in the UK will no longer be able to make claims for VAT incurred in other EU Member States using the electronic refund system.

Businesses claiming via the EU VAT refund electronic system need to submit a refund claim for 2018 by 5pm on 29 March 2019. If claims are submitted after that date HMRC will be unable to send the claim to the relevant EU Member State.

If a business incurs VAT in an EU Member State in 2019 it should not use the EU VAT refund system to make a claim as it is likely to be rejected by that Member State.

After 29 March, a business must claim VAT refunds from EU Member States directly by using the existing process for businesses based outside the EU (similar to the previous EC Eighth Directive claims for those with a good memory and in line with current the EC Thirteenth Directive). This includes outstanding claims that relate to 2018 expenses, and claims relating to 2019.

It is important to understand the process for each EU Member State as it can vary. For example:

  • the deadline for making your claim may be different
  • you may need to supply a certificate of Taxable Status to support a claim
  • you may need to appoint a tax representative in the EU Member State of refund

Check the EU’s Europa website for country specific information on VAT.

This is yet another reason (should one be needed) that a No Deal Brexit will create significant burdens on businesses. It will mean that up to 27 separate claims, in the language of the Member State in which the claim is made, rather than a single application. Good luck everybody!

VAT: Preparing for a No Deal Brexit. A checklist

By   13 February 2019
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A guide for Customs, Excise and VAT for exporters

This is a brief overview of certain issues that an exporter needs to consider if, as seems increasingly likely, there is a No Deal Brexit. There are a number of helpful links to assist. This could be an enormous change. HMRC estimate the number of customs declarations will rise from 55m to 255m annually and the EU requires eight copies of each customs declaration.

UK businesses need to plan for Customs and VAT processes, which will be checked at the EU border. They should check with the EU or Member State the rules and processes which need to apply to their goods.

Distance selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate sales of goods to EU consumers. Current EU rules would mean that EU Member States will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties due when the goods arrive into the EU.

Checklist

  • Get an EORI number
  • Check if you can use transitional simplified procedures
  • Apply the correct customs procedure code
  • Identify the UK tariff codes for all your products by searching trade tariffs on gov.uk. A tariff code allows you to:
    • complete declarations and other documentation
    • check if there is duty or VAT to pay and any potential duty reliefs
  • If you use a UK roll on roll off location you will need to declare your goods before they board the ferry or train
  • Pay Customs Duty on goods
  • Research the destinations you want to export to. This background information, along with the commodity code of the goods will enable you to establish if goods will incur import duty in the destination country
  • Check if you need a licence to import or export your goods
  • Obtain software or an agent to make declarations
  • Identify what documentary requirements apply for your products when exported to EU countries by searching the EU Commission Market Access Database. (When choosing a market, you cannot currently select the UK so, assuming the UK would have no tariff preferences under a no-deal scenario, select a country such as the US or China, where no preferential arrangements exist, to establish a comparable level of duty your product would face)
  • Check for updates. Check the EU Brexit Preparedness portal, to understand the potential outcomes for your sector
  • Check the origin of all products when exported to, or imported from EU countries. Identify the UK/EU/non-EU content (including all components and raw materials) and whether your goods may qualify as being of UK or EU origin. Access further information on rules of origin
  • Customs delay – If working in time sensitive sectors, consider how your EU customers may be affected by customs delays. These may include; just-in-time practices, timed deliveries and potential penalties and short shelf-life goods
  • Identify EU customers and suppliers who are cost-sensitive and who might be reluctant to pay more for goods with the addition of import duties, customs clearance costs, higher freight costs, or currency fluctuations.
  • Identify exports to countries which have Free Trade Agreements (FTA) with the EU. Are they dependent on duty preferences or other FTA provisions? Consider the implications, particularly where main competition is with other EU businesses
  • Access details of which countries have FTA with the EU
  • Identify purchases from other countries which have FTA or Generalised System of Preferences (GSP) agreements with the EU.
  • Identify sales to EU customers who incorporate those goods into their products, for re-export to countries with FTAs. Check whether supplier declarations are provided
  • Cash flow – Consider protecting against foreign exchange fluctuations within your business
  • Map and audit supply chains. Even if a company is ready for Brexit, it will be disrupted if a supplier is not prepared and cannot meet its contracts
  • Check international contracts and renegotiate if required. Some intra-EU contracts will not include incoterms, the legal provisions for importing and exporting that define who is responsible for shipping goods across borders
  • Develop a contingency plan – There is no guarantee that border procedures will operate smoothly immediately after Brexit, and businesses may need a contingency plan in case systems fail
  • Stay up to date by registering for HMRC’s EU Exit update service www.gov.uk/hmrc/business-support, select ‘business help and education emails’, add your email address, select ‘Submit’, select ‘Add subscription’, choose ‘EU Exit’ then ‘Submit’
  • Customs checks – Establish what level of risk of physical or documentary examination might apply for your goods imported from, or exported to EU countries
  • For goods being exported to the EU which are not “wholly obtained” in the UK, and which have undergone processing in another third country as part of their production, it is important to understand the supply chain of components going into the product.  Goods with components coming from non-UK countries will mean that that product is not able to benefit from any continued zero-tariff trade with the EU unless arrangements are put in place between the EU and UK

I hope that this is helpful. Please contact us if you have any queries.

VAT: New reverse charge for the construction industry

By   4 February 2019
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Further to my article which sets out the basis of these changes, I look further at the measures which will be introduced on 1 October 2019. Time is running out for businesses in the building and construction sector to understand the impact of the new rules and to make arrangements to implement the required changes. These will include:

  • cashflow implications
  • accounting procedures
  • processes
  • tax compliance
  • documentation
  • systems

Background

HMRC will introduce the Reverse Charge (RC) to combat Missing Trader Fraud (MTF). The rules avoid suppliers charging and being paid VAT but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past. The UK has introduced similar measures in response to criminal threats for mobile telephones, emissions allowances, gas, electricity and electronic communications. A domestic reverse charge only applies to supplies between UK taxable persons therefore unless the customer is registered or liable to be registered for VAT it will not apply.

The RC will make supplies of standard or reduced rated construction services between construction or building businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier. Consequently, the customer in the construction industry receiving the supply of construction services will be required to pay the VAT directly to HMRC rather than paying it to the supplier. It will be able to reclaim this VAT subject to the normal VAT rules. The RC will apply throughout the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services (a so-called end user, see below).

The supplies to which the RC will apply are set out here

Further information on the RC in general, including invoicing requirements are to be found in VAT Notice 735

Technical

As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.

The final version of the draft legislation has now been published. In addition HMRC have issued guidance notes which include a helpful flowchart.

Mixed supplies

If there is a RC element in a supply, then the whole supply will be subject to the RC. This is to make it simpler for both supplier and customer and to avoid the need to apportion the supply.

End user

End users will usually be recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

VAT Returns

Suppliers

Suppliers applying the RC do not enter a figure for output tax in box 1 of the VAT Return, but should enter the value of such sales in box 6.

Customers

Customers must enter the output tax on purchases to which the RC applies in box 1 of the VAT Return, but must not enter the value of such purchases in box 6. They may reclaim the input tax on the RC purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Implementation

HMRC state that it understands the difficulties businesses may have in implementing the domestic RC and say it will apply a light touch in dealing with related errors that occur in the first six months after introduction.

 Action

It is prudent to check whether you, or your clients’ businesses will be affected by these changes. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties. It will also be helpful for smaller construction providers affected by the RC to examine the impact on their cashflow.

Please contact us if you have any queries or require further information.

VAT: Latest on holding companies and input tax recovery

By   21 January 2019
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Latest from the courts

In the First Tier Tribunal (FTT) case of W Resources plc (WRP) the enduring matter of input tax recovery by a holding company was considered. This follows similar considerations in the cases of Norseman and BAA and HMRC’s updated guidance on the matter. This case considered whether a holding company could recover input tax incurred on certain costs.  This is turn depended on whether the holding company intended to make taxable supplies. Specifically; the intention to recharge professional expenses incurred to two non VAT-grouped subsidiary companies contingent on those companies receiving income at a future time.

Background

WRP acquired two subsidiary companies. The subsidiary company’s business the exploration and exploitation of tungsten in the EU. WRP contended that it incurred the relevant input tax

  • to enable the subsidiaries to raise funds to carry out their exploration activities
  • to exercise financial control over the subsidiaries
  • to obtain geological expertise, project management and supervision and day to day management and supervision for the subsidiaries so that they could carry on their exploration and exploitation activities

HMRC denied the claim of input tax on the basis that the WRP was not carrying on an economic activity or making supplies for a consideration (such that it should not be VAT registered).

It was common ground that, if it was decided that all of the supplies which were made by the WRP to the subsidiary companies (following their acquisition by the appellant) were supplies made for a consideration and in the course of carrying on an “economic activity”, then the input tax which was incurred during the preparatory phase should be recoverable.

So, the issue was – were the intended recharges so uncertain such that there could be no direct link to an economic activity?

Decision 

The appeal was dismissed.

Although the judge distinguished Norseman (above) where there was only a vague intention to make charges to subsidiary companies and here the position was different because there was a fixed intention that WRP would be able to invoice in due course for its supplies of services at an amount quantified by reference to the value of the services received but only if the relevant subsidiary began to generate revenues, the fact that it was uncertain whether the subsidiaries would generate income was to sufficient to break the link between supply and consideration. The fact that the intended charges were contingent was fatal to the appeal.

Commentary

The judge appears to have come to the decision reluctantly and entertained the thought that “the contrary is certainly arguable”. This case demonstrates, yet again, the difficulties in determining future intentions of a business. Such intentions dictate whether a business may VAT register and/or recover input tax. It is often difficult to evidence intentions and HMRC seem intent to challenge input tax recovery in such circumstances and will be buoyed by this result.

This case again emphasises the importance of holding companies having appropriate processes and ensuring that proper documentation is in place to evidence, not only the intention to make taxable supplies of management charges, but that those charges were actually made to subsidiaries.

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

Further information and advice on inter-company charges may be found here