Tag Archives: vat-structure

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.

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.

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…

VAT: Top 10 Tips for small businesses and start-ups

By Marcus Ward 17 December 2019

At some point it is likely that a small business or start-up will need to consider VAT. Here are a few pointers:

Should you be registered for VAT?

If your income is above £85,000 pa of taxable supplies, you have no choice. But you can voluntarily register if below this threshold. There are significant penalties for failure to register at the correct time.

Advantages of VAT registration: VAT recovery on expenses plus, perhaps; gravitas for a business
Disadvantages: administration costs plus a potential additional cost to customers if they are unable to recover VAT charged to them (eg; they are private individuals) which could affect your competitiveness

More here

Even non-registered businesses can save VAT

Look to use non-VAT registered suppliers, or non-EU suppliers (however, this may count towards your registration turnover)
If you are purchasing or leasing commercial property, consider looking for non-opted property or raise the issue of your inability to recover VAT in negotiations on the rent
Take advantage of all zero and reduced rates of VAT reliefs available
Challenge suppliers if you consider that a higher rate of VAT has been charged than necessary

Consider using the appropriate simplification scheme

Flat Rate Scheme (1% discount in first year of registration)
Cash Accounting (helps avoid VAT issues on bad debts)
Annual Accounting (can generate real, cash flow and/or administrative savings)
Margin schemes for second-hand goods

Further details here and here

Make sure you recover all pre-registration and/or pre-incorporation VAT

VAT incurred on goods on hand (purchased four years ago or less) and services up to six months before VAT registration is normally recoverable.

Are your VAT liabilities correct?

Many businesses have complex VAT liabilities (eg; financial services, charities, food outlets, insurance brokers, cross border suppliers of goods or services, health, welfare and education service providers, and any business involved in land and property). A review of the VAT treatment may avoid assessments and penalties and may also identify VAT overcharges made which could give rise to reclaims. Additionally, these types of business are often restricted on what input tax they can reclaim. Check business/non-business apportionment and partial exemption restrictions.

VAT: The extent of exempt childcare. The RSR Sports case

By Marcus Ward 3 December 2019

Latest from the courts

In the RSR Sports Limited First Tier Tribunal (FTT) case the issue was whether the provision of holiday camps for children was exempt healthcare via VAT Act 1994, Schedule 9, Group 7, item 9 – “services… closely linked to the protection of children and young persons” and supplies of “welfare services”

Background

The Appellant traded under the name of Get Active Sports. It provided various services including the provision of school holiday camps which were the subject of the appeal.

The holiday camps were Ofsted registered and “pupils will be safe and receiving the best possible childcare”. The appellant worked with children aged 4-16 and had specially designed programmes from multi-sports and games to themed arts and crafts. The staff that provided the holiday camp services were not required to have any teaching or coaching qualifications (but needed to be DBS checked). They were just required to ensure that the children were kept busy with a variety of activities and were kept safe.

The appellant considered that these supplies constituted supplies of “ services…closely linked to the protection of children and young persons” – within the meaning of Article 132(1)(h) of Council Directive 2006/112/EEC and supplies of “welfare services” under UK legislation as above. HMRC submitted that the predominant element of that single composite supply was the provision of activities because, weighing up objectively, from the position of the parents whose children attended the holiday camps, the importance to those parents of the childcare aspects of the holiday camps in comparison to the importance to them of the various activities which were made available at the holiday camps, the latter outweighed the former. The supplies did not fall within the exemption and should have therefore properly been treated as standard-rated as the primary aim of the appellant in running the camps was to offer sports and activities to the attendees and that the childcare was simply a by-product of the activity-based courses.

Decision

It was decided that the holiday camp services involved the provision of activities in the course of caring for children during the school holidays. In other words, the holiday camp services included both an activities element and a childcare element.

Although the judge commented that; it was fair to say that this case was finely-balanced, the services provided by RSR amounted to a single composite supply of which the predominant element was childcare (as opposed to the provision of activities) and therefore they fell within the scope of the above provisions and qualified for the exemption

The FTT agreed with HMRC that one element of the holiday camp services was the provision of activities, but it did not agree with the proposition that just because the provision of activities was an element of the services, that inevitably means that the provision of those activities, as opposed to the provision of childcare, was the predominant element of its supply.

Commentary

It looks like another close call, but the Tribunal appears to have got it right. An interesting aspect was RSR considering it strange that by offering activities to the children, as opposed to sitting them down in front of a television, the appellant was to deprive itself of the ability to bring the its services within the scope of the exemption. The mere fact that the appellant was encouraging parents to choose active childcare arrangements over more passive ones should not cause the relevant services to fall outside the exemption. So a “bit” of sport was OK, but not too much…

VAT: Input tax claim – business or personal? The Taylor Pearson (Construction) Ltd case

By Marcus Ward 3 December 2019

Latest from the courts

In the Taylor Pearson (Construction) Ltd (TPCL) First Tier Tribunal (FFT) case the issue was whether input tax incurred on professional fees in respect of tax planning and the issue of new (E Class) shares to directors was for business purposes or for the benefit of the directors in their personal capacity.

Background

The overall issue in this appeal was whether the company was entitled to deduct input VAT in relation to services provided by tax advisers as to how the company might reduce its tax and NIC liabilities in rewarding its directors and reduce the income tax liabilities of the directors. There are two specific issues:

Whether the services supplied were used for the purpose of the company’s business within the meaning of VATA 1994, section 24.
Whether the services supplied do not have a direct and immediate link with taxable output supplies because they have a direct and immediate link with exempt supplies, being the issue of share capital in the company.

HMRC argued that this appeal is similar to Customs and Excise Commissioners v Rosner [1994] STC 228 and Finanzamt Köln-Nord v Becker (Case C-104/12) in which input VAT incurred in defending the sole trader or individual employees personally, in criminal proceedings entirely unconnected to the business, was held not to be deductible.

Another issue, which was dealt with fairly perfunctory, was whether the issue of new shares was a supply for VAT purposes to which an element of the input tax could be attributed. As per the Kretztechnik ECJ case and subsequent HMRC guidance – the issue of shares was not a supply and the company was entitled to recover the associated input tax to the extent that its business activities generated taxable supplies (business of making supplies of construction goods and services in TPCL’s case).

Decision

In respect of whether the expenditure was for the benefit of the business, the judge stated that “...The advice in question was provided to the company and although the directors were significant beneficiaries of the arrangements that was entirely in their capacity as directors and employees of the company and not in any personal capacity.”

Further:

“…HMRC argued that the incentivisation of employees did not have a direct and immediate link with the purposes of the business I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward. This concerns me.”

It is no wonder that the judge commented on this. This appeal was completely on all fours with the FTT case of Doran Bros (London) which HMRC did not appeal.

Consequently, it was decided that:

the services were used for the purposes of the company’s business, and
they did not have a direct and immediate connection with the issue of share capital.

The appeal was therefore allowed.

Commentary

It was a surprising decision by HMRC to take this to FTT. Case law in respect of Kretztechnik is well established and the purpose to which the funds created by a new share issue were put appears irrelevant. I also find it difficult to see how HMRC could ignore Doran Bros which was very clear and on all fours with this case, while referencing cases in which companies defended its directors against accusations of wrongdoings. In this case, the business purpose was to reward and incentivise TPCL’s directors.

This can be a difficult area of the tax and HMRC’s approach in this case demonstrates that it is prepared take these cases as far as possible. It is nearly always the case that VAT incurred on expenditure which is designed to increase staff morale and performance is a business expense.

VAT: Place of supply of matchmaking. The Gray & Farrar case

By Marcus Ward 26 November 2019

Latest from the courts

The Gray & Farrar International LLP (G&F) First Tier Tribunal (FTT) case.

The romantic side of VAT (well…if romance comes at a cost of £15,000 a time).

The issue here was the place of supply (POS) of the services provided by G&F to clients all over the world.

Background

The Appellant ran an exclusive matchmaking business. It provides its services to clients in many jurisdictions. It argued that its supplies to non-taxable (individuals) persons who reside outside the EU where outside the scope of UK VAT because the POS was where the supply was received. HMRC formed the view that these services did not fall within the required definition of “consultancy” such that the POS was where the business belonged. As G&F belonged in the UK, the relevant services were subject to VAT. So, the issue was: whether matchmaking could be regarded as a consultancy service.

Legislation

The EU legislation is found at The Principal VAT Directive, Article 59(c) (“para(c)”) and in the UK law at The VAT Act 1994, Schedule 4A para 16(2)(d).

In the words of para (c):

“the services of consultants, engineers, consultancy firms, lawyers, accountants and other similar services, as well as data processing and the provision of information”

So, did G&F’s services fall within para (c)?

Decision

The judge stated that “… the services provided by the appellant must be compared with services “principally and habitually” provided by a consultant…and that such similarity is achieved when both types of service serve the same purpose.” And that consultancy is “advice based on a high degree of expertise” or “specialist and expert advice by someone with extensive experience/qualifications on the subject”. Was matchmaking that?

Well, the FTT decided that services would fall within para(c) if they are services of the sort which are primarily and habitually supplied by one or more of the specifically listed suppliers and that “consultants” are not limited to persons who are members of the liberal professions but to persons who are in ordinary usage “consultants” and typically act in an independent manner – that is to say are not dependent on, or integrated with, their client.

HMRC argued that what G&F were providing was the possibility of entering into a long-term happy relationship: and that was what the Appellant was selling. The FTT accepted that that dream was what the typical client would want, but saw a difference between what is provided and the reason the service is wanted. It gave the example of a school providing education, not the hope of a good job.

Further, HMRC contended that G&F’s activities went far beyond the provision of advice and information because they involved all the other elements that go into the service of matchmaking. Those activities included ascertaining and executing the needs of the client, reading the non-verbal clues, reading body language, and the inexplicable magic of applying knowledge based on intuition and experience to identify people who may be compatible. The FTT said that that was all very well but drew a distinction between the skills required by the seller and what was sold.

Split decision

A first Tribunal member concluded that the material elements of the supply consisted only of the provision of information and expert advice, and the supply fell within para (c).

Another Tribunal member considered that the actions of the liaison team in G&F promoted and helped the making of a successful relationship, but he was not persuaded that the support provided by the liaison team assisted the provision of information about a potential partner or served the supply of G&F’s MD’s advice that a particular person might be suitable. It was support in the developing of a relationship – support in addition to the use of the information and expert advice received – and was not shown to be sufficiently inconsequential to say that it was just part of those elements. The liaison team provided a form of ready-made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. It enabled him or her to obtain the kind of support one might obtain from a friend – a listening ear or sounding board – and informal advice.

As two members of the Tribunal disagreed on the outcome, it fell to the judge to give a casting vote; which he did in favour of dismissing the appeal.

So, in this case at least, matchmaking is not consultancy. (Although I like the definition of the service being “inexplicable magic”).

Commentary

If it easy to make assumptions about the precise nature of a type of service. In order for certain services to be UK VAT free they need to meet the relevant criteria fully. “Consultancy” is a bit of a catch all, but this case illustrates the dangers of a lack of analysis. This was a close case and I could see the decision going the other way on another day quite easily.