Protein drinks are standard rated (they are not “food”) although they “deliver nutrition” to consumers and are derived from milk, which is itself zero rated.
Tag Archives: vat-zero-rate
A VAT Did you know?
Rabbits are zero-rated, even if sold as pets. Sales of pets are standard rated.
VAT: Freeports – what are they? Are they beneficial?
Further to the background to Freeports here I consider the latest developments.
What are Freeports?
Freeports are a specific port where normal tax and customs rules do not apply. Imports can enter with simplified customs documentation and without paying tariffs. Businesses operating inside designated areas in and around the port can manufacture goods using the imports, before exporting again without paying the tariff on the original imported goods (however, a tariff may be payable on the finished product when it reaches its final destination).
Freeports are similar to Free zones, or “Enterprise Zones” which are designated areas subject to a broad array of special regulatory requirements, tax breaks and Government support. The difference is that a Freeport is designed to specifically encourage businesses that import, process and then re-export goods, rather than more general business support.
Use
Goods brought into a Freeport are not subject to duties until they leave the port and enter the UK market. Additionally, if the goods are re-exported no duty is payable at all.
If raw materials are brought into a Freeport and processed into final goods before entering the UK market, duties will be paid on the final goods.
Background
If a business chooses to use a Freeport to import or export goods, it will be able to:
- get relief from duties and import taxes
- use simplified declarations processes to reduce administrative burdens
- choose which rate of Customs Duty to use if processing the goods changes their classification
If goods are purchased in the UK, a business will continue to pay duties and import taxes using the normal UK rates.
Where are they?
The eight new Freeports are located at East Midlands Airport, Felixstowe and Harwich, the Humber region, Liverpool City Region, Plymouth, the Solent, the Thames, and Teesside.
Authorisation needed to use a Freeport
A business can apply to use the Freeport customs special procedure (a single authorisation combined with easier declaration requirements) to import goods for:
- processing and then export or for sale in the UK
- storage and then export or for sale in the UK
Declaring goods entering the UK Freeport
A form C21 is used to declare goods entering the UK. This can be done before the goods arrive in the UK or when the goods have arrived in the UK.
Declaring goods exported
A business will normally need to submit an exit summary declaration when goods are exported from the UK. When an exit summary declaration is not needed, a business will need to give an onward export notification to HMRC.
Disposing of goods which have been processed or repaired
When a business has finished processing or repairing goods, it must leave the Freeport and dispose of the goods by either:
- re-exporting them outside the UK
- declaring them to another customs procedure
- transferring them to another Freeport Business Authorisation holder
- destroying them – usually only possible under customs supervision
- using other simplified disposal methods
VAT on supplies in the Freeport
A business will be able to zero rate supplies within a Freeport of:
- goods declared to the Freeport
- services carried out on goods declared to the Freeport
When a zero rated VAT invoice is issued, it must include the reference “Free zone”.
Zero rating of goods applies if:
- they are declared to the Freeport
- they are sold from one authorised Freeport business to another in the Freeport
- both Freeport businesses are registered for VAT (unless they are exempt from registering for VAT and HMRC has approved this exemption)
Benefits
The Government says that Freeports and free zones are intended to stimulate economic activity in their designated areas. Government backed economic studies have found the main advantage of Freeports is that they encourage imports by lowering duty and paperwork costs. Manufacturing businesses that are inside the Freeport can benefit from cheaper imported inputs in comparison to those outside the area. However, some commentators such as the UK Trade Policy Observatory (UKTPO) suggest that whilst some form of free zones could help with shaping export-oriented and place-based regional development programmes, it is important to ensure that trade is not simply diverted from elsewhere and that wider incentives are needed.
Evasion
Considering that the European Parliament has called for Freeports to be scrapped across the EU because of tax evasion and money laundering and that they are where trade can be conducted untaxed, and ownership can be concealed it is likely that there will be a certain degree of evasion. This a result of the lack of scrutiny on imports and means that high-value items, eg; art, can be bought and easily stored in Freeports without the kind of checks and controls they would normally face.
Summary
Any business that regularly imports and/or exports goods should consider if a Freeport will benefit their business model. This is particularly relevant if work is carried out on imported goods.
A VAT Did you know?
Gingerbread men: No tax is due if the figure has two chocolate spots for its eyes, but any chocolate-based additions, such as buttons or a belt, mean VAT is payable.
A CASC is not a charity for VAT – The Eynsham Cricket Club case
Latest from the courts
In the Court of Appeal (CoA) case of Eynsham Cricket Club (ECC) the issue is whether a Community Amateur Sport Club (CASC) is able to take advantage of VAT reliefs in the same way as a charity.
Background
The question was whether supplies of construction services of building a new cricket pavilion for a CASC qualify for zero-rating via The VAT Act 1994, Schedule 8. Group 5, item 2 (a) “The supply in the course of the construction of a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose or a relevant charitable purpose…”Emphasis added.
The outcome depended on whether ECC was a charity. That in turn depends on whether:
- ECC was “established for charitable purposes only” pursuant to Schedule 6 to the Finance Act 2010
- Section 6 of the Charities Act 2011 applied and had the effect of preventing ECC from being treated as “established for charitable purposes”
- ECC satisfied the other conditions, and in particular, the “registration condition”
Decision
It was determined that CASCs cannot be treated as charities for VAT purposes as the above criteria were not met. Therefore, the construction of ECC’s new pavilion did not qualify for zero-rating and was standard rated. It was noted that becoming a CASC meant that certain charitable benefits were forgone in return for relief for certain administrative and management chores.
Commentary
It appears that ECC had the opportunity to register as a charity, but apparently, unlike a near neighbour cricket club, decided not to.
“Charity” is not defined in VAT legislation, so this case is a reminder that it should not be assumed that every entity which may have charitable objectives, or generally exist in order to benefit a section of the community qualifies as a charity for the tax.
VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case
Latest from the courts
The difference between intended use and first actual use of an asset.
In the Dutch case of Stichting Schoonzicht (C‑791/18) the AG was asked to provide an opinion on the interaction between clawback and the Capital Goods Scheme (CGS) via Directive 2006/112/EC, Articles 185 and 187. Details of the CGS here. In the UK clawback is set out in The General Regulations 1995, Reg 108.
Background
Stichting Schoonzicht constructed a number of apartments which it intended to sell on completion. This would have been a taxable supply and afforded full input tax recovery on the costs incurred on the development. Unfortunately, due to market conditions, the business was unable to find buyers at the appropriate sale price. Therefore, a decision was made to let some of the flats on a short-term basis until the market picked up. This was done and created an exempt supply. The intention to make taxable supplies remained, but in the meantime, exempt supplies had actually been made. This could affect the original input tax claim. Details of partial exemption here.
Technical
The Dutch referring court entertained doubts about the compatibility of the ‘first-use full adjustment’ requirement provided for under Netherlands law and the CGS.
So the issue was whether the CGS (Article 187 of the VAT Directive) applied such that any required adjustments to the initial input tax claim could be made via a CGS calculation, or whether, as the Dutch authorities contended, there should be a one-off clawback of the input tax previously claimed.
Decision
In the AG’s opinion, the Dutch tax authorities could clawback 4/7 of the input tax on the construction (as four of the flats were let and three remained unoccupied). The AG decided that the CGS could co-exist with clawback and that EU Member States are allowed to adjust the initial deduction of input tax using clawback where actual use varies from intended use. A distinction was made between clawback and the CGS. The CGS is intended to adjust input tax claims as a result of fluctuations in the taxable use of capital assets over a period of time (ten years for buildings in the UK).
Commentary
In the UK, there are published easements for input tax recovery in similar circumstances: “VAT: Partial Exemption – adjustments when house builders let their dwellings”. However, this is an interesting AG opinion, is worth a read and it will be interesting to see how this develops. However, with prior planning, this situation may be avoided in the UK (where new house sales are zero rated).
VAT: Digital newspapers zero-rated. The News Corp case
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: e-publications – New reduced rates
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: When is the building of a house complete? (And why is it important?)
Completion of a residential dwelling
A technical point which comes up surprisingly often and seems innocuous is: when is a building “complete”? The following case is helpful, and I thank Les Howard for bringing it to my attention.
The date that the construction of a dwelling is deemed to be complete is important for a number of reasons. The issue in the case of Mr and Mrs James was whether certain works could be zero rated via the VAT Act Schedule 8 Group 5 Item 2 (The supply in the course of the construction of a building designed as a dwelling…) or as HMRC contended, they were the reconstruction or alteration of an existing building and the work should be standard rated.
Background
The James used a contractor to plaster the entire interior of their house in the course of its construction. However, the work was demonstrably defective to such an extent that the James commenced legal proceedings. A surveyor advised that all of the old plaster needed to be hacked off and replaced by new plastering installed by a new firm. The stripping out and replacement works took place after the Certificate of Completion had been issued.
The James claimed input tax on the house construction via the DIY Housebuilders’ Scheme.
Technical
HMRC refused the James’ claim to have the remedial work zero-rated because, in their view, the re-plastering works amounted to the reconstruction or alteration of the house which was, when the supplies were made, an “existing building”. They proffered Note 16 of Schedule 5 which provides that “the construction of a building” does not include “(a) … the conversion, reconstruction or alteration of an existing building”.
They stated that zero-rating only applied if the work formed part of the construction of a zero-rated building. They had previously decided that the work of snagging or correction of faults carried out after the building had been completed could only be zero-rated if it was carried out by the original contractors and correction of faults formed part of the building contract. When the snagging is carried out by a different contractor, the work is to an existing building and does not qualify for zero rating.
The James stated that the Customs’ guidelines on snagging do not take into account extraordinary circumstances. Their contention was that the re-plastering works were zero rated because they had no choice but to engage the services of a different contractor other than the one who carried out the original works.
Decision
The judge found for the appellant – the re-plastering works were zero rated.
There was a query as to why The James applied for a Certificate of Completion before the plastering was completed. In nearly all cases such a certificate would crystallise the date the building was complete.
The reasons were given as:
- the need for funds. The James could not remortgage the house without the certificate and they needed to borrow a substantial amount
- they could not reclaim VAT under the DIY Housebuilders’ Scheme until the Certificate of Completion had been issued
- they were aware that the building inspector was beginning to wonder why the building works were taking such a long time
- they needed the house assessed for Council Tax which could only happen when the certificate had been issued
- the Certificate was issued as part of the procedure required by the Building Act 1984 and the Building Regulations of 2000
These reasons were accepted by the judge.
Despite the respondents stating that:
- for the reasons given above
- the fact that the James had been living in the house for some time
- they had obtained the Certificate of Completion
- the new plastering work had been done by the new plasterer such that the house had been constructed before supply of the new plasterer’s services had been made
- the house was an “existing building”
the judge was satisfied that in the circumstances the new plastering work was supplied in the course of the construction of the building as a dwelling house and that there was no reconstruction or alteration of an existing building in the sense contemplated by Note (16) to Group 5 Schedule 8.
He observed that the Certificate of Completion records that the substantive requirements of the Building Regulations have been satisfied. But to the naked eye the old plasterwork was obviously inadequate and dangerous ad he could not possibly consider that the construction project had finished until the new plasterwork was installed. The James’ construction project was to build a new dwelling house. Plasterwork of an acceptable standard was an integral part of the construction works. The new plasterwork was done at the earliest practicable opportunity.
Commentary
Care should be taken when considering when the completion of a house build takes place. There are time limits for DIY Housebuilders’ Scheme clams and clearly, as this case illustrates, usually work done to a house after completion does not qualify for zero rating. So, if the owner of a house is thinking of, say, building a conservatory for example, it is more prudent in VAT terms to construct it at the same time as a new house is built, and certainly before completion.
I would say that the appellant in this case achieved a surprisingly good result.