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VAT: Payment handling charges – The Virgin Media case

By Marcus Ward 5 February 2020

Latest from the courts

In the Virgin Media Ltd First Tier Tribunal (FTT) case a number of issues were considered. These were:

whether payment handling charges were exempt via: The VAT Act 1994, Schedule 9, Group 5, items (1) and (5)
whether the supply was separate from other media services
which VAT group member made the supply?
whether there was an intra-group supply
whether there was an abuse of rights

Background

Virgin Media Limited (VML) provided cable TV, broadband and telephone services (media services) to members of the public. It was the representative member of a VAT Group which also contained Virgin Media Payment Limited (VMPL).

If customers choose not to pay by direct debit, they were required to pay a £5 “handling charge”. The handling charge was paid to VMPL and passed to VML on a daily basis. The issue was; what was the correct VAT treatment of the charge?

Contentions

The appellant argued that the £5 charge was optional for the customer and the collection of it was carried out by VMPL and was exempt as the transfer or receipt of, or any dealing with, money. Further, that, despite being members of the same VAT group, there was nothing in the legislation which forced the VAT group to treat supplies by separate entities within that group as a single supply to a recipient outside the group.

HMRC contended that there was a single taxable supply and thus no exempt services were provided and, in fact, VMPL was not making a supply at all (and therefore not to VML as the group representative member). In the first alternative, if it were decided that there was a supply, such a supply was an ancillary component of a single taxable supply by VML as representative group member and not by VMPL as per the Card Protection Plan case. In the second alternative, if both decisions above went against HMRC, that the service provided by VMPL fell outside the exemption so that it was taxable in its own right.

Decision

It was found that:

there was a single supply made to customers
the supply was made by VML as the representative member of the VAT group
the £5 handling charge was an integral part of the overall supply
if not integral, the handling charge was an ancillary supply such that it took on the VAT treatment of the substantive supply
therefore, VMPL does not make any supply to the end users of the overall service
if VMPL does make a supply, it is an intra-group supply to VML which s disregarded for VAT purposes
VMPL does not have a free-standing fiscal identity for VAT purposes
if the FTT is wrong on the above points and VMPL does make a supply of payment handling services to customers, these supplies are taxable and not exempt (per Bookit and NEC) as the supply is simply technical and administrative and does not amount to debt collection
the arrangements do not constitute an abusive practice. The essential aim of the transactions are not to secure a tax advantage so HMRC’s argument on abuse fails

Therefore, the appeal was dismissed and a reference to the CJEU was considered inappropriate and output tax was due on the full amount received by the group from customers.

Summary

This was a complex case which suffered significant delays. It does help clarify a number of interconnected issues and demonstrates the amount of care required when planning company structures and the VAT analysis of them.

VAT: Suspension of penalties and special reductions

By Marcus Ward 3 February 2020

HMRC has significant powers to issue penalties for a wide range of reasons (which include imprisonment, but this is not the subject of this article). A summary of the penalty regime here and an overview from HMRC here.

In some circumstances, HMRC can decide to suspend a penalty, or suspension can be requested by a taxpayer.

I thought it worthwhile to look closer at suspension and the guidance HMRC has issued to its officers.

Suspension can only apply to errors which are “careless inaccuracies” in tax declarations, so a penalty for a deliberate error cannot be suspended.

Penalty suspension only applies if HMRC is able to set at least one suspension condition, with the intention that it will help a business avoid penalties for similar inaccuracies in the future.

When can a penalty be suspended?

HMRC use the standard SMART test

Specific – it must be directly related to the cause of the inaccuracy
Measurable – a business will need to demonstrate that it has met the condition
Achievable – a business will need to show that it is able to meet the condition
Realistic – HMRC must realistically expect that a business will meet the condition
Time based – a business must meet the condition by the end of the suspension period

These conditions are in addition to the condition that all returns are filed on time during the suspension period.

When HMRC will not suspend a penalty

HMRC will not suspend penalties if it is not possible to set any SMART conditions
If HMRC believes that it is unlikely a business will comply with any of the suspension conditions
If a business is penalised for an error which arose because it attempted to use a tax avoidance scheme

An example is if HMRC do not believe that an improved record keeping system will/can be put in place.

If HMRC decide not to suspend a penalty, it represents an appealable decision.

Agreement to suspension

Before HMRC will suspend a penalty, a business will need to agree conditions with it. A business will need to:

understand the conditions
meet the conditions
agree that the conditions are proportionate to the size of the inaccuracy
agree that the conditions take a business’ circumstances into account
be clear to both the business and HMRC when the conditions have been met

After a taxpayer has agreed the conditions HMRC will send a Notice of Suspension (NOS).

Length of the suspension period

The length will depend on how long HMRC considers that it will take a business to meet the specific suspension conditions. The maximum suspension period allowed by law is two years but normally it would be less than this.

Action during the suspension period

During the suspension period, a business must meet the conditions it agreed to. It must also ensure that it does not submit any other inaccurate returns, as this is likely another inaccuracy penalty will apply. If another inaccuracy penalty is incurred during the suspension period, the previously suspended penalty must be paid in full.

End of suspension period

At the end of the suspension period HMRC will ask whether the conditions have been fully met. Officers will check records and ask for other evidence, to ensure compliance. If HMRC agree that the conditions have been met, the original penalty will be cancelled. If it is decided that they have not, the penalty must be paid in full. A business cannot appeal against such a decision; however, it may be the subject of judicial review.

Appeal

An appeal may be lodged against:

any Penalty Notice (and/or ask for it to be suspended)
HMRC’s refusal to suspend a penalty
the conditions HMRC have set relating to a suspension

Special reduction

In addition to suspension, HMRC is able to reduce a penalty in “special circumstances”.

Penalty legislation provides for common circumstances and these are therefore taken into account in establishing the liability to and/or level of a penalty.

Special circumstances are either:

uncommon or exceptional, or
where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of that penalty law

To be special circumstances, the circumstances in question must apply to the particular individual and not be general circumstances that apply to many taxpayers by virtue of the penalty legislation.

It is very common that HMRC will not offer special reduction. This does not prevent a taxpayer asking it to consider one. Inspectors are supposed to consider special reduction before deciding on the amount of a penalty, but experience insists that this is uncommon and many are unaware of this particular area of internal guidance.

Summary

If a Penalty Notice is received, we highly recommend that it is reviewed and challenged as appropriate. In a significant number of cases it is possible to mitigate or remove a penalty. If that is not possible, suspension or special reduction may be possible. Never just accept a penalty!

VAT: Subjects normally taught in schools – The Premier Family Martial Arts case

By Marcus Ward 20 January 2020

Latest from the courts

In the First Tier Tribunal (FTT) case of Premier Family Martial Arts LLP the issue was whether kickboxing was a subject that is ordinarily taught in schools (or universities). If it was, then the education exemption at VAT Act 1994, Schedule 9, group 6, item 2 would apply as it was supplied by a partnership. If not, the tuition would be subject to VAT.

Background

The FTT found that kickboxing is a “striking” martial art. In terms of its physical attributes, kickboxing involves a mixture of boxing, karate and taekwondo and therefore includes all elements of the striking”martial arts. All martial arts involve common physical attributes such as co-ordination and balance. It also stated that; perhaps more significantly, all martial arts emphasise, in addition to the physical aspects of the various forms of martial arts, aspects of personal development such as self-discipline, respect for others, confidence, manners, teamwork and focus which meant it should be considered more than recreational. There was also evidence to the mental and social benefits of the practice of martial arts.

However, this was insufficient to qualify it as a subject “ordinarily” taught in schools. The subject does not feature on the national curriculum, there is no formal qualification or external accreditation requirement to become a kickboxing teacher and there was no formal external validation of the qualifications achieved by children who attend the Appellant’s classes.

Decision

Consequently, the tuition failed the exemption test, the appeal was dismissed and the charges for tuition were therefore subject to VAT.

Commentary

This case demonstrates that there are fine lines between different types of tuition and to which the education exemption applies. It is never safe to simply assume that a subject is ordinary taught in schools. Although many subjects are (to my mind; surprisingly) considered as exempt, it is always better to check.

As the old joke goes: two men punching each other – what’s that a bout?

VAT – Limitation on deduction of input tax on hired cars

By Marcus Ward 20 January 2020

Currently, UK businesses may claim 50% of input tax incurred on the lease of vehicles. This limitation is a simplification for persons using the vehicle for both business and non-business purposes.

The 50% restriction also applies to optional services – unless they’re supplied and identified separately from the leasing supply and excess mileage charge – if it forms part of a supply of leasing but not if it was incurred on an excess mileage charge that forms part of a separate supply of maintenance. If repair and maintenance etc are supplied separately, 100% of the input tax is usually reclaimable. The 50% restriction is a derogation from from Articles 26(1)(a), 168 and 169 of Directive 2006/112/EC. These measures remove the need for the hirer of a business car to keep records of private mileage travelled ior to account for VAT on the actual private mileage travelled in that car.

The Council Implementing Decision 2019/2230 authorised the United Kingdom, until 31 December 2022, to continue restricting to 50% the right to deduct the VAT incurred with hired or leased vehicles, which is not exclusively used for business purposes.

Brexit

This Decision shall, in any event, cease to apply to and in the UK from the day following that on which the Treaties cease to apply to the United Kingdom pursuant to Article 50(3) TEU (Brexit) or, if a withdrawal agreement concluded with the UK has entered into force; from the day following that on which the transition period ends, or on 31 December 2022, whichever is the earlier.

Changes to the VAT registration limits for overseas businesses

By Marcus Ward 16 January 2020

The (current) EU Member States have reached political agreement on correcting the current discriminatory and unfair rules on non-resident businesses. Unfortunately, these new measures will not come into effect until 1 January 2025 (well after the UK will have left the EU).

Background

Under the current rules a Non-Established Taxable Person (NETP) is required to register and account for VAT in a Member State as soon as any supply is made there. There is a zero threshold, so, for example, if a French company makes a UK supply of £100 it will be required to register here. Compare this to a UK company which will be able to make supplies up to £85,000 per annum without needing to register or pay UK VAT. Blatantly discriminatory and arbitrary based on where a company belongs. It also distorts competition and is inherently unfair. This is the position across the EU, so UK businesses will be suffering in other countries. This has long been a bugbear of mine!

New rules

From 2025 EU Member States have agreed to extend the threshold to all business making supplies. NETPs will have similar VAT registration thresholds as domestic businesses in each country. The registration limits will not be able to exceed €85,000 per year and overseas businesses may only benefit from this if their total sales across the EU are below an amount of €100,000. This is to avoid large enterprises benefiting from the small company threshold.

Outcome

The change will bring a level playing field between domestic and overseas business and will remove significant compliance costs which fall disproportionally on SMEs. This could also encourage small businesses to explore overseas markets without falling foul of; overseas regimes, potential penalties for innocent errors and the disincentive of domestic businesses having a commercial competitive tax advantage over those based overseas.

It is a pity that these changes will not be applied for another five years. It does beg the question why it will take so long. Of course, we have yet to see how Brexit plays out. It is not outside the bounds of reason to imagine the EU Member States excluding the UK from the new rules, nor the UK not implementing them at all here.

Budget announced

By Marcus Ward 16 January 2020

The Chancellor of the Exchequer- Sajid Javid has confirmed that the next Budget will be held on Wednesday 11 March 2020.

He said that the budget:

will set out ambitious plans to unleash Britain’s potential, level up across the UK and usher in a decade of renewal
will start a new chapter for the economy, seizing the opportunities that come from getting Brexit done

As many will know, I am not a supporter of Brexit so it will be “interesting” to see what these opportunities are.

The launch of the Budget process means that individuals, interest groups and representative bodies can now submit a Budget representation to HM Treasury to comment on government policy and/or suggest new policy for inclusion in the Budget.

For completeness, the Scottish Budget date has also been announced: 6 February 2020.

VAT Notice 700/7: Business promotions – updated

By Marcus Ward 10 January 2020

Further to my articles here, here, and here HMRC have, on 30 December 2019, updated the relevant Notice which covers, inter alia; business gifts, samples and promotional schemes.

The changes are summarised here:

Technical content has been updated to take account of developments in both law and policy on vouchers
A new section has been added as a result of the changes to the treatment of vouchers issued after 1 January 2019
The definition of the meaning of a gift has been amended
An explanation of the treatment of the disposal of obsolete stock has been added

This can be a complex area of VAT, especially valuation, and care should be taken when promotion schemes are being considered.

VAT: Digital newspapers zero-rated. The News Corp case

By Marcus Ward 10 January 2020

Latest from the courts

Hot on the heels of the update to e-publications here comes new from the Upper Tribunal (UT) in the News Corp UK and Ireland Ltd case.

Background

The issue was whether electronic editions of The Times (plus other e-newspapers from the same company: The Sunday Times, The Sun and The Sun on Sunday) were “newspapers” within the meaning of The VAT Act 1994, Schedule 8, Group 3, Item 2 and could therefore be treated as zero rated.

The relevant part of Schedule 8, Group 3 (where relevant), lists the following items:

“1 Books, booklets, brochures, pamphlets and leaflets.

2 Newspapers, journals and periodicals…”,

At the First Tier Tribunal (FTT) the appeal was dismissed, and the decision went in favour of HMRC. Details here. The facts were consistent throughout both hearings.

Decision

The UT agreed with the FTT in that there was no material difference between the two types of supply despite the sale of e-newspapers being supplies of services and the sale of physical newspapers being supplies of goods.

That being the case, it was possible to interpret Schedule 8, Group 3. Item 2 as extending to e-publications, which, of course, did not exist when the legislation was drafted in 1972. Consequently, the appeal was allowed, and the e-newspapers were zero rated. Such treatment did not extend the scope of UK zero rating which would not be permitted by the EU.

The UT also indicated that the zero rating would be subject to some restrictions in respect of what may be treated as e-publications.

It was observed that it is important that the legislation should be interpreted in a way that maintained its relevance and that the “always speaking” * principle is preserved.

Commentary

The EC European Council (EC) has previously agreed to allow Member States to apply reduced VAT rates to electronic publications. This UT case appears to confirm that this will extend to UK zero rating. Other Members States have already applied reduced rates or are in the process of doing so. The UK have not previously announced its approach, so this decision is likely to force their hand (notwithstanding the fallout from Brexit…).

Action

Supplies or e-publications should review their sales and decide whether their supplies are on fours with this case. If so, it may be possible to make a retrospective claim for overpaid output tax, subject to certain conditions.

Recipients of such supplies should consider approaching their suppliers and obtain a repayment of overpaid VAT if it represents a cost to them.

“Always speaking” is an influential principle that is recited in materials on legislative drafting as the justification for using the present tense, adopted in many common law jurisdictions as a principle of interpretation, and accepted as a foundation for the linguistic analysis of the use of tense in statutes. It is particularly relevant where technology has outpaced the law.

VAT: New guidance on Cryptoassets

By Marcus Ward 9 January 2020

HMRC Guidance

Further to my articles on cryptocurrencies here, here and here HMRC have update their guidance on cryptoassets which was published on 20 December 2019.

Background

VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.

The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.

Definition

Cryptocurrency (an example being Bitcoin) is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.

Cryptoassets

For VAT purposes, bitcoin and similar cryptoassets are to be treated as follows:

exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that:

- the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and
- there is no customer for the mining service

when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
charges (in whatever form) made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the conditions outlined in VAT Finance manual (VATFIN7200), will be exempt from VAT under The VAT Act 1994, Schedule 9, Group 5, item

The VAT treatments outlined above are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions.

Bitcoin exchanges

In 2014, HMRC decided that under The VAT Act 1994, Schedule 9, Group 5, item 1, the financial services supplied by bitcoin exchanges – exchanging bitcoin for legal tender and vice versa – are exempt from VAT.

This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). The appellant planned to set up a business which would exchange traditional currency for Bitcoin and vice versa. It was not intended to charge a fee for this service but rather to derive a profit from the spread (the difference between his purchase and sell price).

Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.

The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services carried out for consideration.

The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under VAT Directive Article 135(1) (e).

A supply of any services required to exchange exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under The VAT Act Schedule 9, Group 5 item 1.

Commentary

As always, the legislation and case law often struggles to keep pace with technology and new business activities. Although the focus of the guidance is more towards direct taxes, it is a helpful summary of HMRC’s interpretation of UK and EU law and decided case law.

VAT: e-publications – New reduced rates

By Marcus Ward 8 January 2020

Background

Further to my article on the ongoing issue of e-books, in October 2018, the European Council (EC) agreed to allow Member States to apply reduced VAT rates to electronic publications (eg; e-books and e-newspapers) thereby allowing alignment of VAT rates for electronic and physical publications. The reasoning was for the EC to modernise VAT for the digital economy, and to keep pace with technological progress.

Under Directive 2006/112/EC, electronically supplied services are taxed at the standard VAT rate, whereas physical publications of the dead tree variety; books, newspapers and periodicals, benefit from non-standard rates in many Member States – these goods being zero rated in the UK and around 5% or below in other countries.

Amendments to the Directive allowed Member States to apply reduced VAT rates to electronic publications as well. Super-reduced and zero rates will only be allowed for Member States that currently apply them to physical publications.

The new rules will apply temporarily, pending the introduction of a new, ‘definitive’ VAT system. The EC has issued proposals for the new system, which would allow member states more flexibility than at present in setting VAT rates.

New rates

Some Member States have now introduced reduced rates:

Austria 10%, from 1 January 2020

Belgium 6%, from 1 April 2019

Croatia 5%, from 1 January 2019

Czech Republic new 10% rate from 1 May 2020

Finland: 10% from 1 July 2019

Germany 7%, from 1 January 2020

Ireland 9%, from 1 January 2019

Luxembourg 3%, from 1 May 2019

Malta 5%, from 1 January 2019

The Netherlands 9%, from 1 January 2020

Poland 5%, from 1 November 2019

Portugal 6%, from 1 January 2019

Slovenia 5% from 1 January 2020

Sweden: 6%, from 1 July 2019

It is anticipated that the remaining Member States are likely to introduce reduced rates in the future. The UK, being subject to Brexit, is in a more complicated position. If the UK brought e-publications in line with the VAT treatment of physical publications, it would apply the zero rate. However, the current EU legislation prevents any introduction of new zero rating. As matters stand, the UK may only apply the zero rate after an exit from the EU.

Watch this space…