Tag Archives: output-tax

VAT: New reverse charge for the construction industry

By Marcus Ward 4 February 2019

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: Changes to the treatment of forfeited deposits

By Marcus Ward 1 February 2019

HMRC have announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits will change from 1 March 2019.

The changes affect businesses that receive payments for services and part payments for goods and the customer does not:

use the service
collect the goods

Typically, this could be a hotel which reserves a room for a deposit which is retained if the customer is a no-show.

Current treatment

Prior to 1 March 2019, charges for unfulfilled supplies and the retention of customer deposits are treated as outside the scope of VAT (and consequently VAT free). This is on the basis that either no supply had been made or, in the alternative, the retention of the deposit represents compensation for a loss, or the costs necessarily incurred.

Practically, this means that output tax is payable on the initial deposit, but this is adjusted if subsequently there is a no-show or goods are not collected.

New treatment

From 1 March 2019, HMRC’s new policy will be that output tax is due on all retained payments for unused services and uncollected goods. Where businesses become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.

This means that when a non-repayable deposit is taken, VAT will always be due on the payment, regardless of subsequent events. However, if a deposit is returned, there will be no VAT due on it.

The rationale for the new treatment, according to HMRC is that; “because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services”

Who is affected?

Clearly, any business that takes non-refundable deposits will be hit by the new rules. These will be mainly; hotel and accommodation providers, hirers of goods, transport suppliers, the entertainment sector and bespoke goods. (And apparently, in Bulgaria; the production and marketing of bread and pastries according to the Firin OOD case).

Technical

HMRC base their decision on this matter on CJEU decisions in Air France-KLM and Firin OOD) and claim that is treatment is unavoidable.

Please find more details of deposits and advance payments in general here

Please contact me should you have any queries.

VAT Invoices – A Full Guide

By Marcus Ward 3 January 2019

The subject of invoices is often misunderstood and can create serious issues if mistakes are made. VAT is a transaction tax, so primary evidence of the transaction is of utmost importance. Also, a claim for input tax is usually not valid unless it is supported by an original valid invoice HMRC can, and often do, reject input claims because of an inaccurate invoice. There are a lot of misconceptions about invoices, so, although a rather dry subject, it is very important and I thought it would be useful to have all the information in one place, so here is my guide:

Obligation to provide a VAT invoice

With certain limited exceptions a VAT registered person must provide the customer with an invoice showing specified particulars including VAT in the following circumstances.

(a) He makes a supply of goods or services in the UK (other than an exempt supply) to a taxable person.

(b) He makes a supply of goods or services to a person in another EC country for the purposes of any business activity carried on by that person. But no invoice is required where the supply is an exempt supply which is made to a person in another EC country which does not require an invoice to be issued for the supply. (Because practice varies widely across the EC, HMRC guidance is that businesses should be guided by their customers as to whether invoices are required for exempt supplies.)

(c) He receives a payment on account from a person in another EC country in respect of a supply he has made or intends to make.

Exceptions

The above provisions do not apply to the following supplies.

• Zero-rated supplies (other than supplies for acquisition by a person registered in another EC country, see (b) above).

• Supplies where the VAT charged is excluded from credit under VATA 1994, s 25(7) (eg business entertaining and certain motor cars) although a VAT invoice may be issued in such cases.

• Supplies on which VAT is charged but which are not made for a consideration. This includes gifts and private use of goods.

• Sales of second-hand goods under one of the special schemes. Invoices for such sales must not show any VAT.

• Supplies that fall within the Tour Operators’ Margin Scheme(TOMS). VAT invoices must not be issued for such supplies.

• Supplies where the customer operates a self-billing arrangement.

• Supplies by retailers unless the customer requests a VAT invoice.

• Supplies by one member to another in the same VAT group.

• Transactions between one division and another of a company registered in the names of its divisions.

• Supplies where the taxable person is entitled to issue, and does issue, invoices relating to services performed in fiscal and other warehousing regimes.

Documents treated as VAT invoices

Although not strictly VAT invoices, certain documents listed below are treated as VAT invoices either under the legislation or by HMRC.

(1) Self-billing invoices

Self-billing is an arrangement between a supplier and a customer in which the customer prepares the supplier’s invoice and forwards it to him, normally with the payment.

(2) Sales by auctioneer, bailiff, etc.

Where goods (including land) forming part of the assets of a business carried on by a taxable person are, under any power exercisable by another person, sold by that person in or towards satisfaction of a debt owed by the taxable person, the goods are deemed to be supplied by the taxable person in the course or furtherance of his business.

The particulars of the VAT chargeable on the supply must be provided on a sale by auction by the auctioneer and where the sale is otherwise than by auction by the person selling the goods. The document issued to the buyer is treated as a VAT invoice.

(3) Authenticated receipts in the construction industry.

(4) Business gifts

Where a business makes a gift of goods on which VAT is due, and the recipient uses the goods for business purposes, that person can recover the VAT as input tax (subject to the normal rules). The donor cannot issue a VAT invoice (because there is no consideration) but instead may provide the recipient with a ‘tax certificate’ which can be used as evidence to support a deduction of input tax. The tax certificate may be on normal invoicing documentation overwritten with the statement:

“Tax certificate – No payment is necessary for these goods. Output tax has been accounted for on the supply.”

Full details of the goods must be shown on the documentation and the amount of VAT shown must be the amount of output tax accounted for to HMRC.

Invoicing requirements and particulars

A VAT invoice must contain certain basic information.

A VAT invoice must show the following particulars.

(a) A sequential number based on one or more series which uniquely identifies the document.

The ‘invoice number’ can be numerical, or it can be a combination of numbers and letters, as long as it forms part of a unique and sequential series. Where there is a break in the series, eg; where an invoice is cancelled or spoiled and never issued to a customer, this is still acceptable as long as the relevant invoice is retained.

(b) The time of the supply, ie tax point.

(d) The name, address and registration number of the supplier.

(e) The name and address of the person to whom the goods or services are supplied.

(f) A description sufficient to identify the goods or services supplied.

(g) For each description, the quantity of the goods or extent of the services, the rate of VAT and amount payable, excluding VAT, expressed in any currency.

(h) The unit price.

This applies to ‘countable’ goods and services. For services, the countable element might be, for example, an hourly rate or a price paid for standard services. If the supply cannot be broken down into countable elements, the total VAT-exclusive price is the unit price.

(i) The gross amount payable, excluding VAT, expressed in any currency.

(j) The rate of any cash discount offered.

(k) The total amount of VAT chargeable expressed in sterling.

(l) Where the margin scheme for SECOND-HAND GOODS or theTOMS is applied, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994or any indication that the margin scheme has been applied.

The way in which margin scheme treatment is referenced on an invoice is a matter for the business and but we recommend:

• “This is a second-hand margin scheme supply.”

• “This supply falls under the Value Added Tax (Tour Operators) Order 1987.”

The requirement only applies to TOMS invoices in business to business transactions.

(m) Where a VAT invoice relates in whole or in part to a supply where the person supplied is liable to pay the VAT, either a reference to the appropriate provision of EC Council Directive 2006/112/EC or the corresponding provision of VATA 1994 or any indication that the supply is one where the customer is liable to pay the VAT.

This covers UK supplies where the customer accounts for the VAT (eg under the gold scheme or any reverse charge requirement under the missing trader intra-community rules). The way in which margin scheme treatment is referenced on an invoice is a matter for the business and we recommend: “This supply is subject to the reverse charge”.

Exempt or zero-rated supplies

Invoices do not have to be raised for exempt or zero-rated transactions when supplied in the UK. But if such supplies are included on invoices with taxable supplies, the exempt and zero-rated supplies must be totalled separately and the invoice must show clearly that there is no VAT payable on them.

Leasing of motor cars

Where an invoice relates wholly or partly to the letting on hire of a motor car other than for self-drive, the invoice must state whether the car is a qualifying vehicle

Alternative evidence to support a claim for input tax

In certain situations HMRC can use its discretion and allow an input tax with documentary evidence other than an invoice. Their guidance here

Electronic invoices

Full information on electronic invoicing here

Retailers

Retailers may issue a “less detailed tax invoice” if a customer requests one. the supply must be for £250 or less (including VAT) and must show:

your name, address and VAT registration number
the time of supply (tax point)
a description which identifies the goods or services supplied
and for each VAT rate applicable, the total amount payable, including VAT and the VAT rate charged.

Summary

As may be seen, it is a matter of law whether an invoice is valid and when they must be issued. Therefore it is important for a business to understand the position and for its system to be able to produce a valid tax invoice and to recognise what is required to claim input tax. As always with VAT, there are penalties for getting documentation wrong. Please contact us should you have any queries.

VAT – A Christmas Tale

By Marcus Ward 17 December 2018

Well, it is Christmas…. and at Christmas tradition dictates that you repeat the same nonsense every year….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities. May I explain what I do and then you can write to me with your advice? If you think a face to face meeting would be better, I can be found in most decent sized department stores from mid-September to 24 December.

First of all, I am based in Greenland, but I do bring a stock of goods, mainly toys, to the UK and I distribute them. Am I making supplies in the UK?

If I do this for philanthropic reasons, am I a charity, and if so, does that mean I do not pay VAT?

The toys are of course mainly for children and I wonder if zero rating might apply? I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it? My friend Rudolph has told me that there is a peculiar rule about gifts. He says that if I give them away regularly and they cost more than £150 I might have to account for VAT. Is that right?

My next question concerns barter transactions. Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return. If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks. Have I made a supply and what is the value please? My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me. Lots of children ask me for a ride on my airborne transport. I suppose I could manage to fit twelve passengers in. Does that mean my services are zero-rated? If I do this free of charge will I need to charge air passenger duty? Does it matter if I stay within the UK, or the EU? My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges? After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home. Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT. Please comment.

May I also ask about VAT registration? I know the limit is £85,000 per annum but do blips count? If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover. May I be excused from registration? If I do need to register should I use AnNOEL Accounting? At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing. I feel that my red clothing not only protects me from the extreme cold, but it is akin to a uniform and should be allowable. These are not clothes that I would choose to wear except for my fairly unusual job. If lady barristers can claim for black skirts, I think I should be able to claim for red dress. And what about my annual haircut? That costs a fortune. I only let my hair grow that long because it is expected of me.

Insurance worries me too. You know that I carry some very expensive goods on my transport. Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example. My parent company in Greenland takes out insurance there and they make a charge to me. If I am required to register for VAT in England will I need to apply the Reverse Charge? This seems to be a daft idea if I understand it correctly. Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

VAT: More on agent or principal – The All Answers Limited case

By Marcus Ward 9 December 2018

Latest from the courts

In the All Answers Limited (AAL) First Tier Tribunal (FTT) case the issue was whether AAL acted as an agent as it contended, or was a principal as HMRC argued. It also considered the position of contracts in certain situations. There have been a huge number of cases on this point, many of which I have commented on. Some of them here here and here

Background

AAL runs an online business which provides essays, coursework and dissertations to students. The FTT found many euphemisms used for this service, but the service which the student paid for effectively passed off other peoples’ work as the students own in order to obtain a certain grade which was decided by the student. Or in other words; cheating. AAL arranged for one of its circa 400 writers, which were usually other students, teachers or lecturers etc (who should have known better) to provide the required work.

Technical

AAL contended that it was acting as the students’ agent in respect of making arrangements to provide the written work. Consequently, it would only account for output tax on the “commission” retained, rather than on the full value of the amount paid by the student – a significant difference. The contracts produced as evidence fully supported the agency analysis. The Terms and Conditions between AAL and the writer provided that the appellant acts as the writer’s agent to sell his/her services and to enter into “relationships” with clients on the writer’s behalf and to collect payment on the writer’s behalf.

HMRC’s view was that there were no agency services supplied and that the economic reality should be examined rather than relying solely on the relevant contracts. The respondent argued that the notion of agency, so carefully woven into the AAL’s Terms and Conditions, lacked both factual and economic reality because the only service provider was the appellant who choose to use a sub-contractor to provide it with the work which AAL ultimately supplied to the client as principal.

The Decision

Unsurprisingly, the judge concluded that the appellant was acting as principal, not agent and so AAL’s appeal was dismissed. In the ruling, certain comments were made which illustrate how the decision was arrived at and are useful to consider when looking at agency/principal positions.

In respect of the T&Cs, the judge observed “…an agreement which is not a sham may nonetheless be artificial and intended to deflect attention from the true positions taken by both the client and the writer, to whom the appellant profitably lends a willing hand, with no concern for ethics or morality”.

And in respect of the business model: “It could not be stressed more strongly during the appeal before us, and in the documents emanating from the appellant, that its business model is based upon the identity of the client and the identity of the person who is to write the requested piece of academic work, not being made known to one another…” In such circumstances it is difficult to conclude that any agency services are being carried out.

Commentary

As in nearly all agent/principal cases, the VAT position is determined according to the facts of each individual case. Slight variations may produce different VAT outcomes, so it is crucial to look at the detail of each business activity. Contracts are a useful starting point, but as this case shows, if a contract is deliberately drafted to produce a VAT outcome that is not supported by the actual facts of a transaction then it must be disregarded in favour of an analysis of the economic reality. It seems that in this case, AAL desired agency treatment in order to significantly reduce its output tax (which was sticking tax as the recipient was unable to recover it as input tax). Its advisers drafted the relevant contract with this in mind. The FTT saw through that and, came to this sensible decision.

VAT: Time of supply (tax point). Baumgarten Sports case

By Marcus Ward 4 December 2018

Latest from the courts

In the Baumgarten Sports EJEU case, the matter was the time of supply of a German football agent’s services.

Background

As is common in the football world, clubs make payments to agents in order to obtain the services of footballers. When the agent places a player with a football club, it receives commission from that club, provided that the player subsequently signs an employment contract and holds a licence issued by the Deutsche Fußball Liga GmbH (German Football League). The commission is paid to the company in instalments every six months for as long as the player remains under a contract with that club.

The arguments

The German tax authorities took the view that a tax point was created when Baumgarten Sports services were complete – when the contract was signed, and that output tax was due in full at that time The appellant contended that the rules for “successive payments” applied and that VAT was due on each six monthly payment.

Legislation

The issue is covered by Articles 63 and 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’).

Decision

The supply of services gave rise to successive payments, the chargeable event for VAT occurs and VAT becomes chargeable on expiry of the periods to which those payments relate (re; Asparuhovo Lake Investment Company, C‑463/14).

The chargeable event (tax point) and chargeability of a tax on the supply of the agent’s services must be regarded as occurring, not when the player is placed, but on expiry of the periods to which the payments made by the club relate.

Commentary

It is useful to look at the UK tax point rules for services, which I have summarised here:

VAT must normally be accounted for in the VAT period in which the tax point occurs and at the rate of VAT in force at that time. Small businesses may, however, account for VAT on the basis of cash paid and received.

Although the principal purpose of the time of supply rules is to fix the time for accounting for, and claiming VAT, the rules have other uses including

calculating turnover for VAT registration purposes
establishing the period to which supplies (including exempt supplies) are to be allocated for partial exemption purposes, and
establishing when and if input tax may be deducted

The tax point for a transaction is the date the transaction takes place for VAT purposes. This is important because it crystallises the date when output tax should be declared and when input tax may be reclaimed. Unsurprisingly, get it wrong and there could be penalties and interest, or VAT is declared too early or input tax claimed late – both situations are to be avoided, especially in large value and/or complex situations.

The basic tax point for a supply of services is the date the services are performed.

Actual tax point

Where a VAT invoice is raised or payment is made before the basic tax point, there is an earlier actual tax point created at the time the invoice is issued or payment received, whichever occurs first.

14 Day Rule

There is also an actual tax point where a VAT invoice is issued within 14 days after the basic tax point. This overrides the basic tax point.

Continuous supply of services

If services are supplied on a continuous basis and payments are received regularly or from time to time, there is a tax point every time:

A VAT invoice is issued
a payment is received, whichever happens first

Deposits

Care should be taken when accounting for deposits. The VAT rules vary depending on the nature of the deposit. In some circumstances deposits may catch out the unwary, these could be, inter alia; auctions, stakeholder/escrow/solicitor accounts in property transactions, and refundable/non-refundable deposits. There are also other special provisions for particular supplies of goods and services, for eg; TOMS.

Summary

The tax point may be summarised (in most circumstances) as the earliest of:

The date an invoice is issued
The date payment is received
The date title to goods is passed, or services are completed.

Planning

Tax point planning can be very important to a business. the aims in summary are:

Deferring a supplier’s tax point where possible
Timing of a tax point to benefit both parties to a transaction wherever possible
Applying the cash accounting scheme (or withdrawal from it)
Using specific documentation to avoid creating tax points for certain supplies
Correctly identifying the nature of a supply to benefit from certain tax point rules
Generating positive cashflow between “related” entities where permitted
Broadly; generate output tax as early as possible in a VAT period, and incur input tax as late as possible
Planning for VAT rate changes
Ensure that a business does not incur penalties for errors by applying the tax point rules correctly.

As always, please contact us if you have any queries.

EC clamp down on yacht and aircraft VAT abuse

By Marcus Ward 8 November 2018

The European Commission (EC) has stepped up its agenda to tackle tax avoidance in the yacht and aircraft sectors by implementing infringement proceedings on tax breaks being applied in the pleasure craft industries of the Isle of Man. These provisions can generate major distortions of competition, as highlighted by last year’s ‘Paradise Papers’ leaks.

The EC has sent a formal notice to the UK in respect of the Isle of Man’s abusive VAT practices relating to sales and leasing of aircraft.

Background

Input tax is only deductible when it relates to business use of an asset. The EC says that supplies of aircraft, including leasing services, intended expressly for private use, should not be effectively VAT free. The EC believes that the UK has not taken sufficient action against abusive VAT practices in the Isle of Man on supplies and leasing of aircraft. This perceived abuse is facilitated by UK national rules which do not comply with EU law.

Broadly, arrangements are made such that a (seemingly) artificial leasing businesses is put in place and through which individuals rent their own jets from themselves. The most high-profile example of this structure is one used by Lewis Hamilton for his private jet.

Features of such arrangements are said to be:

Users of the scheme recover 100% of import VAT when it appears that an adjustment should be made for the proportion of the amount of private use intended for the aircraft
VAT should be declared and paid to any European Member States whose airports are used for leisure flights.
The leasing businesses set up for jets usually appear to be a letterbox companies with no real economic purpose. Consequently, it is unlikely that such entities should be entitled to reclaim VAT from the Isle of Man.

It is understood that the Isle of Man government has called in the HMRC which will review of 231 tax refunds issued to private jet owners since 2011 valued at circa $1billion of VAT.

Representatives of the EC are due to visit the Isle of Man this month. Similar action is being taken against Italy in respect of the lease of yachts and excise duty rates for motor boats.

What happens next?

The UK now has two months to respond to the arguments put forward by the EC regarding VAT on aircraft. If the UK authorities do not act within those two months, the EC will send a reasoned opinion. If the UK does not act within the next two months on the reasoned opinion the EC may bring the case before the Court of Justice of the EU.

Pierre Moscovici, the Commissioner for Economic and Financial Affairs, Taxation and Customs Union, said: “It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft. Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the Commission is taking action to clamp down on rules that try to circumvent EU law in these areas.”

For More Information

On the general infringements procedure, MEMO/12/12.

On the EU infringements procedure.

Commentary

We do not design, sell or advocate such schemes. Our view is that these and similar structures are, quite rightly, open to attack from the relevant authorities. They do not reflect well on those that put these structures in place nor those that benefit from them. Using a leasing scheme as such is not necessarily abusive. However, if one takes the other elements in the targeted schemes into consideration, such as the absence in motive of setting up those companies and the fact that those companies do not seem to have any substance, it is likely to lead to the action we see from the EC and its view that these schemes are abusive.

How Brexit will impact on these and similar situations remains to be seen.

VAT: Are sales from Student Union shops exempt?

By Marcus Ward 5 November 2018

Latest from the courts

In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here

The two issues before the UT were:

were the shops eligible bodies, and
were the sales closely related to education supplies?

Background

The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.

Legislation

The legislation (where relevant to this case) is:

VAT Act 1994, Group 6, Item No 1, item 4

1 The provision by an eligible body of (a) education; …

4 The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply…

Decision

Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.

Commentary

The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.

Our offering to education bodies here

Inter-company charges: What is VATable?

By Marcus Ward 1 November 2018

This seemingly straightforward area can throw up lots of VAT issues and touches on a number of complex areas. If we look at what is commonly called a “management charge” it is clear that such a charge can cover a lot of different circumstances.

Do I charge VAT on a management charge?

An easy yes or no question one would think, however, this being VAT, the answer is; it depends. Typically, management charges represent a charge by a holding company to its subsidiaries of; a share of overhead costs, the provision of actual management/advisory services or office facilities or similar (the list can obviously be quite extensive).

Consideration for a supply

The starting point is; is something (goods or services) supplied in return for the payment? If the answer is no, then no VAT will be due. However, this may impact on the ability to recover input tax in the hands of the entity making the charge. It is often the case that a management charge is used as a mechanism for transferring “value” from one company to another. If it is done in an arbitrary manner with no written agreement in place, and nothing identifiable is provided, and VAT is charged, HMRC may challenge the VAT treatment and any input recovery of the company making the payment.

Composite of separate supply?

This is a complex area of the tax and is perpetually the subject of a considerable amount of case law. This has been so since the early days of VAT and there appears no signs of disputes slowing down. I have written about such cases here here here here and here

“Usually” if a combination of goods or services are supplied it is considered as a single supply and is subject to the standard rate. However, case law insists that sometimes different supplies need to be divided and a different rate of VAT applied to each separate supply. This may be the case for instance, when an exempt supply of non-opted property (eg; a designated office with an exclusive right to occupy) is provided alongside standard rated advice.

Approach

What is important is not how a management charge is calculated, but what the supply actually is (if it is one). The calculation, whether based on a simple pro-rata amount between separate subsidiaries, or via a complex mechanism set out in a written agreement has no impact on the VAT treatment. As always in VAT, the basic question is: what is actually provided?

Can the VAT treatment of a supply change when recharged?

Simply put; yes/ For example, if the holding company pays insurance (VAT free) and charges it on as part of a composite supply, then VAT will be added to an original non-VAT bearing cost. It may also occur when staff are employed (no VAT on salaries paid) but the staff are supplied to a subsidiary company and VAT is added (but see below).

Staff

The provision of staff is usually a standard rated supply. However, there are two points to consider. One is joint contracts of employment which I look at below, the other is the actual definition of the provision of staff. Care must be taken when analysing what is being provided. The question here is; are staff being provided, or; is the supply the services that those staff carry out? This is relevant, say, if the services the staff carry out are exempt. There are a number of tests here, but the main issue is; which entity directs and manages the staff?

Directors

There can be different rules for directors compared to staff.

If a holding company provides a subsidiary company with a director to serve as such, the normal rules relating to supplies of staff apply and VAT applies.

However, there are different rules for common directors. An individual may act as a director of a number of companies. There may be an arrangement where a holding company pays the director’s fees and then recover appropriate proportions from subsidiaries. In such circumstances, the individual’s services are supplied by the individual to the companies of which (s)he a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore, there is no supply between the companies and so no VAT is due on the share of money recovered from each subsidiary.

Planning

Planning may be required if;

the subsidiary cannot reclaim all VAT charged to it as input tax
there are cashflow/timing disadvantages
there are management or administrative complexities

Specific planning

VAT grouping

If commercially acceptable, the holding company and subsidiary companies may form a VAT group. By doing so any charges made between VAT group members are disregarded and no VAT is chargeable on them.

There are pros and cons in forming a VAT group and a brief overview is provided here

A specific development in case law does mean care must be taken when considering input tax recovery in holdco, details here

Joint contracts of employment

If members of staff are employed via joint contracts or employment no VAT is applicable to any charges made between the two (or more) employers. In addition, where each of a number of associated companies employs its own staff, but one company (the paymaster) pays salaries behalf of the others who then pay their share of the costs to the paymaster the recovery of monies paid out by the paymaster is VAT free as it is treated as a disbursement.

Disbursements

Looking at disbursements is a whole article in itself, and in fact there is a helpful one here

But, briefly, if a charge qualifies as a disbursement, then the costs is passed on “in the same state” so if it is VAT free, the onward charge is also VAT free, as opposed to perhaps changing the VAT liability as set out above. It is important to understand the differences between a disbursement and a recharge as a VAT saving may be obtained.

Overseas

The above considers management charges within the UK. There are different rules for making or receiving management charges to/from the EU and outside the EU. These charges are usually, but not always, VAT free and it is worth checking the VAT treatment before these are made/received.

There may be more planning for charities and NFP entities via cost sharing arrangements, but this is outside the scope of this article.

As may be seen, the answer to a simple question may be complex and the answer dependent upon the precise facts of the case. It is unusual to have two scenarios that precisely mirror each other, so each structure needs to be reviewed individually. Please contact us if you have any queries or would like more information on any of the above.

VAT: Valuation – interest free credit

By Marcus Ward 15 October 2018

Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

a consumer purchases goods in a Dixon store and pays a deposit to Dixon
the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
the customer gives authority to the loan company to pay the money borrowed to Dixon
the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms. As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.