Tag Archives: zero-rate

VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case

By Marcus Ward 10 March 2020

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: EC AG’s Opinion – Are aphrodisiacs food?

By Marcus Ward 2 March 2020

Latest from the courts

It’s rare to come across anything vaguely sexy about VAT, but hey ho, aphrodisiacs were the subject of the AG’s opinion in the case of “X” – the name of the Dutch business. The document was published by the European Commission (EC) and is here but unavailable in the English language, presumably as a result of Brexit, unless anyone knows of any other reason.

Opinion

The AG, M. Maciej Szpunar decided that no, aphrodisiacs cannot be treated as food via Directive 2006/112/CE – Article 98 and are therefore not subject to a reduced rate (which would have been zero rated in the UK). The relevant element was:

“Foodstuffs” intended for human consumption “refers to products containing nutrients, and which are in principle consumed for the purpose of supplying said nutrients to the human body”. Products which are normally used to supplement or replace foodstuffs “Means products which are not foodstuffs, but which contain nutrients and are consumed in place of foodstuffs to supply these nutrients to the body, as well as products ingested in order to stimulate the nutritional functions of food or products used to replace them.

Therefore, in the AG’s opinion, the powders and capsules sold by X are different to foodstuffs and supplements and were not subject to the reduced rate. The fact that they may contain elements of nutrition did not override that they were intended to stimulate sexual desire and it was not the intention of the legislation that such products should be subject to the reduced rate as they were not “essential goods”.

That, of course, does not mean that foods which are said to contain aphrodisiac properties such as; asparagus, oysters, watermelons, celery and pomegranates are not reduced rated.

I doubt that Aphrodite – the Greek goddess of love and beauty, knew that ultimately there would be a court case on the rate of indirect tax applicable to such, err; “stimulants”.

AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each member state, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT overpayments – HMRC to consider changes

By Marcus Ward 24 February 2020

VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

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: 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: Issue of zero-rating certificate – The Westow Cricket Club case

By Marcus Ward 18 December 2019

Issue an incorrect certificate to obtain zero rated building work at your peril! Don’t get caught out – A warning.

In the First Tier Tribunal (FTT) case of Westow Cricket Club (WCC) the appeal was against a penalty levied by HMRC for issuing a certificate to a contractor erroneously under The VAT Act 1994, Section 62 (1).

Background

WCC was an entity run by volunteers but was not a charity, although it was a Community Amateur Sports Club (“CASC”). It decided to build a new pavilion and wished to take advantage of certain zero rating which was available for the construction of a building that the

“…organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating is being sought …..solely for

a relevant charitable purpose, namely by a charity in either or both of the following ways:

….(b) As a village hall or similarly in providing social or recreational facilities for a local community.”

– Public Notice 708 para 14.7.1.

To ensure that the issue of such a certificate was appropriate, the appellant wrote to HMRC giving details about the building project and seeking guidance on the zero rating of supplies to WCC in the course of the construction of the pavilion. The response was important in this case as WCC sought to rely on it as a reasonable excuse. Part or the reply stated:

“HM Revenue & Customs policy prevents this Department from providing a definitive response where we believe that the point is covered by our Public Notices or other published guidance, which, in this case, I believe it is. In view of the above, please refer to section 16 of Public Notice 708 Buildings and construction. This explains when you can issue a certificate. Section 17 includes the certificates. Furthermore, I would refer you to sub-paragraph 14.7.4 which covers what is classed as a village hall or similar building. Providing the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes…”

Decision

Regrettably, the FTT found that, despite HMRC’s letter expressing a ‘non definitive’ view; which was wrong, this was insufficient to provide reasonable excuse and could not be relied upon. The FTT made references to the fact that the club was not a charity and could not therefore issue the certificate. Consequently, the 100% penalty was applicable and not disproportionate (the penalty imposed is nothing more than the VAT that would have been paid by any other CASC seeking to build a pavilion incurring a vatable supply of a similar sum).

Commentary

HMRC was criticised for potentially leaving taxpayers in ‘no man’s land’ by expressing a view whilst at the same time saying that this was not a definitive response. This is a common tactic used by HMRC and one which many commentators, including myself, have criticised.

Tribunal’s unease

The judge commented that he trusted that HMRC will take note of his concerns and if this is a matter of policy to revisit it in light of the comments made in this decision. Let us hope HMRC listens. It is also an important case for charities (and others) to note when considering if they are able to obtain the construction of buildings VAT free. This is not a straightforward area, and the penalty for getting it wrong is clearly demonstrated here.

Always get proper advice – and don’t rely on vague rulings from HMRC!

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: 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.

VAT: Property and construction – amended HMRC guidance

By Marcus Ward 15 November 2019

HMRC has issued a new Buildings and Construction VAT Notice 708.

The changes

The changes are:

paragraph 1.5 has been included to indicate ‘force of law’
paragraph 2.1.1 has been removed (and subsequent paragraphs re-numbered), because it is no longer applicable
paragraph 3.2.4 provides new information for facades
paragraph 3.3.7 has been amended to remove the Extra-Statutory Concession for connecting utilities to existing buildings
paragraphs 6, 8.3.4 and 8.4 have been reworded to improve clarification
paragraph 14.7.1 has been amended following changes in the Finance Act 2010

Help

Please contact us if you have any queries on the complex areas of; land, buildings or construction.

VAT: ‘Intention’ – The Euro Beer case

By Marcus Ward 7 October 2019

Latest from the courts, the Euro Beer Distribution Ltd First Tier Tribunal (FTT) case.

The intention of a taxpayer is extremely important for a number of reasons. It is relevant where:

a VAT registration is requested
input tax is claimed
and in this case; whether deregistration is compulsory

Broadly, immediate action is dependent upon whether a business intends to make taxable supplies in the future. This intention dictates whether registration is possible, whether input tax may be claimed, and whether a business may remain VAT registered. Even if a business has the intention to make taxable supplies, it is sometimes difficult to evidence this to HMRC’s satisfaction.

Background

Euro Beer was in the business of importing and selling alcoholic drinks. It had been in business since 2004 and was also approved and registered as an owner of duty suspended goods under the Warehousekeepers and Owners of Warehoused Goods Regulations 1999.

Technical

HMRC compulsorily deregistered Euro Beer via VAT Act 1994, Schedule 1, para 13 (2) on the grounds that it believed that the appellant had ceased making taxable supplies. Nil returns had been submitted since 2016 and, after enquires, formed the view that there was no intention to make supplies in the future.

Euro Beer contended, unsurprisingly, that there was an intention to make taxable supplies in the future such that continued VAT registration was appropriate. Additionally, the reason for the nil returns was simply, at that time, business had dried up. The appellant provided limited evidence to support its intention. This comprised; emails between the directors and third-party contacts.

Decision

The appeal was dismissed and Euro Beer’s VAT deregistration (and revocation of approval from the Warehousekeepers and Owners of Warehoused Goods Regulations 1999) was confirmed as appropriate.

Commentary

This was hardly a surprising decision and one wonders why it got to court. It does, however, emphasise the importance of the concept of intention. This can be a subjective matter and HMRC place significant weight on documentary evidence. There is no question in law that HMRC must register/maintain registration/repay input tax if it is satisfied that there is a business which does not make taxable supplies but ‘intends to make such supplies in the course or furtherance of that business’ – VAT Act 1994, Schedule 1, para 9 (b). However, ensuring HMRC is satisfied is often problematic.

This is specifically difficult in the area of land and property. VAT registration and the associated input tax claims of a property developer is often the source of disputes. It is important to differentiate between an intention, and what actually happens. Often business plans change, or the original intention is not fulfilled. In such cases, there is a mechanism for repaying input tax claimed (VAT Gen regs 1995 reg 108) but this is only applicable in certain circumstances. The case of Merseyside Cablevision Ltd (MAN/85/327, VTD 2419) demonstrates that if an intention to make taxable supplies is thwarted, input tax claimed is not clawed back (a person who carries on activities which are preparatory to the carrying on of a business is to be treated as in business and is a taxable person).

It should be noted that a business does not have to specify a date by which it expects to make taxable supplies, or to estimate the value of them.

The lesson is; to document every business decision made:

board minutes, emails, business plans, letters etc
retain all correspondence with; third-parties
provide written advice from legal advisers, accounts etc
invoices demonstrating expenditure in respect of a new venture are persuasive
budgets and considered estimates can be of use
retain all advertising media, offers, promotions and other publicity.

Clearly for land and property additional; planning permission, land registry details, plans, surveys, fees, etc will build up a picture that there is an intention to make taxable supplies.

These are just examples and different business may have alternative evidence.

In commercial terms, it will be difficult for HMRC to be unsatisfied if a business is incurring costs in relation to a project – why would they devote time/staff/advisers/financial resources to something when there is no intention of deriving income?

One final point on the Euro Beer case. The judge stated; ‘an intention to make supplies requires more than a mere hope to be in a position to make supplies at some unspecified time in the future’. It is not enough for a business to ‘generally’ state that there is an intention.