Tag Archives: VAT-law

VAT: Input tax recovery – whether a taxable supply. The Door Specialist case

By   9 June 2021
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Latest from the courts

In the First Tier Tribunal case of The Door Specialist Limited (TDSL) the issue was whether an HMRC assessment for overclaimed input tax was correct.

Background

The appellant recovered input tax on the import of goods (doors). The company did not sell the doors, but simply gave the goods (no consideration provided) to a separate company called Just Doors (JD).  It was JD who made the sales of the doors to third party customers.  TDSL and JD were under common ownership but no VAT group in place at the relevant time. TDSL was VAT registered as it made separate, unrelated taxable supplies of property rental

Arguments

HMRC contended that as there was no onward taxable supply of the doors by TDSL, no input tax was recoverable per The VAT Act 1994 section 24 (1). TDSL relied on HMRC’s published guidance (Notices 700 and 700/7) in relation to gifts and proposed that it would be proper to assess for output tax on the “supply” to JD rather than denying the input tax claim.  

Issues

The issues may therefore be summarised as whether;

  • the relevant goods were used for the purpose of any economic activity by TDSL
  • the doors could be treated as business gifts as contended by the applicant such that the input tax was recoverable.

Further cases on economic activity/business here, here and here

Decision

It was decided that as there was no direct and immediate link between the purchase of the goods and any onward taxable supply in the course of business or economic activity by TDSL (as required by the outcome of the cases of BAA Ltd JDI International Leasing Ltd) the disallowance of the input tax was appropriate. The advancement of the business gifts contention did not assist the taxpayer as this was not an economic activity in itself. The appeal was therefore dismissed.

 Commentary

A clear example of not considering the VAT implications when carrying out transactions. This tax cost could have easily been avoided if TDSL had sold the doors to JD. As both parties were fully taxable, there would have been no VAT hit. Business gifts and promotional activities are also often a complex area of VAT and as one former colleague once remarked “If you have a marketing department you have a VAT issue”.

VAT Schemes Guide – Alternative ways of accounting for tax

By   17 May 2021
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There are a number of VAT Schemes which are designed to simplify accounting for the tax.  They may save a business money, reduce complexity, avoid the need for certain documentation and reduce the time needed to deal with VAT.  Some schemes may be used in combination with others, although I recommend that checks should be made first.

It is important to compare the use of each scheme to standard VAT accounting to establish whether a business will benefit.  Some schemes are compulsory and there are particular pitfalls for certain businesses using certain schemes.

I thought that it would be useful to consider the schemes all in one place and look at their features and pros and cons.

These schemes reviewed here are:

  • Cash Accounting Scheme
  • Annual Accounting Scheme
  • Flat Rate Scheme
  • Margin schemes for second-hand goods
  • Global Accounting
  • VAT schemes for retailers

Cash Accounting Scheme

Normally, VAT returns are based on the tax point (usually the VAT invoice date) for sales and purchases. This may mean a business having to pay HMRC the VAT due on sales that its customers have not yet paid for.

The VAT cash accounting scheme instead bases reporting on payment dates, both for purchases and sales. A business will need to ensure its records include payment dates.

A business is only eligible for the Cash Accounting Scheme if its estimated taxable turnover is no more than £1.35m, and can then remain in the scheme as long as it remains below £1.6m.

Advantages

  • Usually beneficial for cash flow especially if its customers are slow paying
  • Output tax is not payable at all if a business has a bad debt

Disadvantages

  • Is generally not beneficial for a repayment business (one which reclaims more VAT than it pays, eg; an exporter or supplier of zero rated goods or services)
  • Not usually beneficial if a business purchases significant amounts of goods or services on credit

Annual Accounting Scheme

The Annual Accounting Scheme allows a business to pay VAT on account, in either nine monthly or three quarterly payments. These instalments are based on VAT paid in the previous year. It is then required to complete a single, annual VAT return which is used to calculate any balance owed by the business or due from HMRC.

A business is eligible for the scheme if its estimated taxable turnover is no more than £1.35m and is permitted to remain in the scheme as long as it remains below £1.6m.

Advantages

  • Reduces paperwork as only the need to complete one return instead of four (Although it does not remove the requirement to keep all the normal VAT records and accounts)
  • Improves management of cash flow

Disadvantages

  • Not suitable for repayment businesses as they would only receive one repayment at the end of the year
  • If turnover decreases, the interim payments may be higher than under standard accounting

Flat Rate Scheme

The Flat Rate Scheme is designed to assist smaller businesses reduce the amount of time and complexity required for VAT accounting. The Flat Rate Scheme removes the need to calculate the VAT on every transaction. Instead, a business pays a flat rate percentage of its VAT inclusive turnover. The percentage paid is less than the standard VAT rate because it recognises the fact that no input tax can be claimed on purchases. The flat rate percentage used is dependent on a business’ trade sector.

A business is eligible for this scheme if its estimated taxable turnover in the next year will not exceed £150,000. Once using the scheme, a business is permitted to continue using it until its income exceeds £230,000.

If eligible, a business may combine the Flat Rate Scheme with the Annual Accounting Schemes, additionally, there is an option to effectively use a cash basis so there is no need to use the Cash Accounting Scheme. New rules regarding ” limited cost traders” mean that the scheme has become less attractive.

Advantages

  • Depending on trade sector and circumstances may result in a real VAT saving
  • Simplified record keeping; no requirement to separate out gross, VAT and net in accounts
  • Fewer rules; no issues with input tax a business can and cannot recover on purchases
  • Certainty of knowing how much of income is payable to HMRC

Disadvantages

  • No reclaim of input tax incurred on purchases
  • Limited cost traders impact
  • If a business buys a significant amount from VAT registered businesses, it is likely to result in more VAT due
  • Likely to be unattractive for businesses making zero-rated or exempt sales because output tax would also apply to this hitherto VAT free income
  • Low turnover limit

Margin Scheme for Second Hand Goods

A business normally accounts for output tax on the full value of its taxable supplies and reclaims input tax on its purchases. However, if a business deals in second-hand goods, works of art, antiques or collectibles it may use a Margin Scheme. This scheme enables a business to account for VAT only on the difference between the purchase and selling price of an item; the margin. It is not possible to reclaim input tax on the purchase of an item and there will be no output tax if no profit is achieved. There is a special margin schemes for auctioneers. A variation of the Margin Scheme is considered below.

Advantages

  • Usually beneficial if buying from (non-VAT registered) members of the public
  • Purchaser will not see a VAT charge
  • Although no input tax claimable on purchases of scheme items, VAT may be claimed in the usual way on overheads and other fees etc

Disadvantages

  • Record keeping requirements are demanding and closely checked, eg; stock records and invoices which are required for both purchases and sales
  • Cannot be used for items purchased on a VAT invoice
  • Can be complex and create a cost if goods exported
  • Although no VAT due on sales if a loss is made, there is no set-off of the loss

Global Accounting

The problem with the Second Hand Goods Scheme is that full details of each individual item purchased and sold has to be recorded. Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme. It differs from the standard Margin Scheme in that rather than accounting for the margin achieved on the sale of each individual item, output tax is calculated on the margin achieved between the total purchases and total sales in a particular accounting period.

Advantages

  • Simplified version of the Margin Scheme
  • Record keeping requirements reduced
  • Losses made on sales reduce VAT payable
  • Beneficial for businesses which buy and sell bulk volume, low value eligible goods

Disadvantages

  • Cannot be used for; aircraft, boats, caravans, horses or motor vehicles
  • Similar to Margin Scheme disadvantages apart from loss set off

VAT Schemes for Retailers

It is usually difficult for retailers to issue an invoice for each sale made, so various retail schemes have been designed to simplify VAT. The appropriate scheme for a business depends on whether its retail turnover (excluding VAT) is; below £1m, between £1m and £130m and higher.

Smaller businesses may be able to use a retail scheme with Cash Accounting and Annual Accounting but it cannot combine a Retail Scheme with the Flat Rate Scheme.  However, retailers may choose to use the Flat Rate Scheme instead of a Retail Scheme.

Using standard VAT accounting, a VAT registered business must record the VAT on each sale. However, via a Retail Scheme, it calculates the value of its total VAT taxable sales for a period, eg; a day, and the proportions of that total that are taxable at different rates of VAT; standard, reduced and zero.

According to the scheme a business uses it then applies the appropriate VAT fraction to that sales figure to calculate the output tax due. A business may only use the Retail Scheme for retail sales and must use the standard accounting procedures for other supplies.  It must still issue a VAT invoice to any VAT registered customer who requests one.  It is a requirement of any scheme choice that HMRC must consider it fair and reasonable.

Examples of Retail Schemes

  • Apportionment
  • Direct calculation
  • The point of sale scheme

There are special arrangements for caterers, retail pharmacists and florists.

Advantages

  • No requirement to issue an invoice for each sale
  • Most schemes are relatively simple to administer once set up. Technology assists in a helpful way with EPOS systems
  • Simplifies record keeping

Disadvantages

  • It is usual for each line sold to need to be coded correctly for VAT liability
  • Smaller businesses without state of the art technology may be at a disadvantage
  • Time and resources required to set up and maintain systems
  • In some cases the calculation depends on staff “pressing the right button”
  • Often complex calculations and record keeping
  • Very precise and complicated rules
  • Lack of understanding by a number of  inspectors
  • Complexity increases the risk of misdeclaration

Overall

As may be seen, there are a lot of choices for a business to consider, especially a start-up.  Choosing a scheme which is inappropriate may result in VAT overpayment and a lot of unneeded record keeping and administration.  There are real savings to be made by using a beneficial scheme, both in terms of VAT payable and staff time.

We are happy to review a business’ circumstances and calculate what schemes would produce the best outcome.

Please contact us if you require further information.

VAT: What is open market value? The Jupiter case

By   11 May 2021
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Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

  • the full cost of making the supplies;
  • the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
  • the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

A VAT did you know?

By   29 April 2021
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Wigs for teddy bears are subject to duty, but in a recent Upper Tribunal case it was ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free. 

VAT: Brexit latest

By   23 June 2020
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The European Commission (EC) has published an updated Notice to Stakeholders which covers the UK leaving the EU.

The original document which was published in 2018 has been amended to reflect the latest developments which mainly include the official Brexit on 1 February 2020 and the current transition period, which, as matters stand, will end on 31 December 2020. Until that date, EU law in its entirety applies to the UK

The Notice includes:

  • The legal position from 1 January 2021
  • VAT rules for cross-border services
  • The VAT General Rule
  • MOSS
  • Refunds of VAT
  • Separation provisions of the Withdrawal Agreement
  • The supply of other services
  • Refund requests relating to VAT paid before the end of the transition period

The Notice states that; “…during the transition period, the EU and the UK will negotiate an agreement on a new partnership, providing notably for a free trade area. However, it is not certain whether such an agreement will be concluded and will enter into force at the end of the transition period”. I think that this is likely to be a charitable conclusion!

The EC advises businesses:

  • when they are established in the EU, to familiarise themselves with the rules applicable to services supplied to and received from third countries (which the UK will become from 1 January 2021)
  • when they are established in the UK, to examine whether new liability rules will apply to them with regard to their services supplied in the EU
  • to take the necessary steps in respect of services covered by MOSS
  • consider the changes in the VAT refund request procedures

The Notice does not cover the supply of goods nor digital services themself.

General

After the end of the transition period, the EU rules on VAT for services no longer apply to, and in, the UK. This has, particular consequences for the treatment of taxable transactions in services and VAT.

Businesses need to understand the probable changes and make preparations for a No-Deal Brexit.

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: Zero rated food – a summary

By   8 February 2019
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Food – What’s hot and what’s not?

Further to my article on the recent Eat case I have had a number of queries on what “hot” food can be zero rated. So, as a brief overview of the current position a quick look at types of food:

Pasties, sausage rolls, pies or other pastries

  • If they are hot and straight from the oven: Although the pasty is hot, it is not being kept warm, so therefore there is no VAT
  • Left to cool to room temperature: The pasty is not being kept warm, so no VAT is chargeable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp: The pasty is being kept warm so VAT is due

Sandwiches

  • Cold food is zero-rated for tax purposes so no VAT.
  • Heated for a customer – standard rated per the Eat case.

Bread

  • Freshly baked, cooling or cold – the bread is not kept warm, even though it may be straight from the oven, so would be VAT free.

Rotisserie chicken

  • If hot from the spit; VAT on takeaway food intended to be served hot is VATable.
  • Kept hot in a cabinet, on a hot plate or under a heat lamp – As the food is kept hot and served hot, VAT is applicable.
  • Left to cool to room temperature – If the chicken is cooked then left to cool, such as in bags in a supermarket, it will be VAT free.

Takeaways

  • such as fish and chips: VAT remains on all takeaway food served hot.

Catering

  • All supplies of catering is subject to VAT regardless of what food and drink is being provided. This includes all restaurants and cafés.

This is a general guide and, as case law shows, there will always be products on the “borderline”.







VAT: HMRC slammed over MTD

By   22 November 2018
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The House of Lords Economic Affairs Committee has published its report “Making Tax Digital for VAT: Treating Small Businesses Fairly”. It does not make good reading for HMRC and it concludes that SME will suffer as a result of the rushed introduction of Making Tax Digital (MTD). The main conclusion is that the government should delay the introduction of MTD.

MTD for VAT will cost far more than was predicted in HMRC’s impact assessments. The Committee also criticised HMRC, saying it “inadequately considered the needs and concerns of smaller businesses”.

The report said HMRC neglected its duty to support small businesses through the implementation of the controversial measures, suggesting it “will make life even more difficult” for them.

In addition, the Committee said it “remained unconvinced” of the government’s logic used to justify the “speed and rigidity with which the programme is being introduced”.

Recommendations

A summary

  • Defer the introduction of mandatory MTD by at least one year
  • Plan a staged transition for businesses to join MTD and future stages which allows for businesses, not just HMRC, to be fully ready
  • Wait until at least April 2022 to implement the next stages of MTD
  • Publish its plan for the long-term development of MTD to encourage businesses to choose digitalisation for productivity, efficiency and modernisation reasons rather than just tax compliance.

The start date of MTD for most businesses is just three days after Brexit, so this also is very unhelpful for SMEs.

Full report







Inter-company charges: What is VATable?

By   1 November 2018
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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: Latest from the courts – Are loan administration services exempt?

By   1 May 2018
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In the First Tier Tribunal (FTT) case of Target Group Limited (Target) the appeal was against a decision by HMRC that loan administration services supplied by Target to a UK bank, Shawbrook Bank Limited (Shawbrook) were standard rated.

Background

Target contracted with Shawbrook to provide services related to loans provided by Shawbrook to its customers in the course of its lending business. Target’s description of its services was “loan account administration services” which amounted to Shawbrook outsourcing the management of the loans to Target.  The services that Target provided covered the entire lifecycle of the loans, apart from the making of the initial loan. Target established loan accounts using its own systems, communicates with borrowers as an undisclosed agent of Shawbrook, and dealt with payments by borrowers and all administrative issues that arose.  Target had limited discretion. The terms of the loans, including interest rates, were set by Shawbrook. Although Target is involved in dealing with arrears, any enforcement action would be a decision for Shawbrook. Specifically, the contract described Target as being “a provider of loan origination and account operation services” which “performs activities including the functions of: payment processing and servicing and portfolio management services”

Issue

It was accepted that Shawbrook made the loans (not Target) and that the services  provided by Target were to Shawbrook and comprised a single (composite) supply for VAT purposes, rather than multiple supplies. Details of the definition between the two types of supply have been hot news in the VAT world for some time. My commentary on relevant recent case law here here here here here and here

The issue was the precise nature of the supplies and whether they qualified for exemption. The areas of dispute included whether Target’s supplies were excluded from exemption as debt collection, and whether the loan accounts fall to be treated as current accounts.

Target’s case was that the principal supply it made to Shawbrook related to payments and transfers in the same way as in the Electronic Data Services Ltd (EDS) case, which related to similar customer-facing loan administration services. (EDS provided loan arrangement and execution services to banks in relation to the granting of personal loans. The services included the provision of a staffed call centre, the printing and despatch of loan agreement documentation, the transfer of funds via the BACS system on the release of loans and the administrative work related to handling loan accounts and repayments).  In the alternative, the principal or core supply relates to the operation of accounts (specifically, current accounts), or amounts to transactions concerning debts.

Technical

Article 135(1)(d) of the Council Directive 2006/112/EC (the Principal VAT Directive, or “PVD”) requires Member States to exempt the following transactions: “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;”

This is transposed into UK legislation via VAT Act 1994, Schedule 9, Group 5, items 1 and 8:

“Item 1. The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money. …

Item 8. The operation of any current, deposit, or savings account.”

Decision

It was decided that Target’s supplies did not qualify for exemption and they therefore fell to be standard rated. What was fatal to the appellant’s case was the fact that there was an absence of any involvement in the initial loan. Consequently, although it was possible to view the services as “transactions concerning payments” they fell within the debt collection definition and accordingly were not exempt. The judge also ruled that the supplies may be loan accounts, these did not qualify as an exempt operation of a current account.

Commentary

Of course, this decision was important for the recipient of the supply (Shawbrook) as well as Target. Because its supplies were exempt, the VAT on the outsourcing expenditure would be irrecoverable thus creating an extra 20% cost.

This case once again demonstrates that even the smallest variation of facts can produce an unexpected VAT outcome.  Care must be taken to analyse precisely what is being provided. Financial Services is a minefield for VAT and it is certainly one area that assumptions of the VAT treatment should be avoided and timely advice sought.

Picture: A loan arranger (apologies)