Category Archives: Planning

VAT – Work on farm buildings

By   November 14, 2017

I am quite often asked if there are any VAT reliefs for farming businesses carrying out work to farm buildings.

Indeed, there are some areas of the VAT rules which may be of assistance to owners of farms and farm buildings. Clearly, the best position is to avoid VAT being charged in the first place. If this is not possible, then we need to consider if the VAT may be recovered.

Repairs and Renovations of Farmhouses

The following guidelines apply to businesses VAT registered as sole proprietors or partnerships. Where the occupant of the farmhouse is a director of a limited company (or a person connected with the director of the company) it is unlikely that any VAT incurred on the farmhouse may be recovered. The following notes are provided by HMRC after consultations with the NFU:

  • Where VAT is incurred on repairs, maintenance and renovations, 70% of that VAT may be recovered as input tax provided the farm is a normal working farm and the VAT-registered person is actively engaged full-time in running it. Where farming is not a full-time business for the VAT-registered person, input tax claimable is likely to be between 10%–30% on the grounds that the dominant purpose is a personal one.
  • Where the building work is more associated with an alteration (eg; building an extension) the amount that may be recovered will depend on the purpose for the construction. If the dominant purpose is a business one then 70% may be claimed. If the dominant purpose is a personal one HMRC would expect the claim to be 40% or less, and in some cases, depending on the facts, none of the VAT incurred would be recoverable.

Other farm buildings

As a general rule, when VAT is incurred on non-residential buildings, then, as long as they are used for business purposes, it would be expected that 100% of the VAT is recoverable. Care should be taken if any buildings are let and it may be that planning is necessary in order to achieve full recovery.

It should be noted that if any work to a building which is not residential results in the building becoming residential, eg; a barn conversion, then the applicable VAT rate should be 5%. If the resulting dwelling is sold then generally the 5% VAT is recoverable. If the dwelling is to be lived in by the person converting it; the VAT incurred may be recovered, but the mechanism is outside the usual VAT return and a separate claim can be made. In these circumstances it is not necessary for the “converter” to be VAT registered.

As may be seen, in many cases it will be necessary to negotiate a percentage of recovery with HMRC.  We can assist with this, as well as advising on VAT structures and planning to ensure as much input tax as possible is either not chargeable to you, or is recoverable.

VAT Simplification (We can but hope)

By   November 13, 2017

This month The Office Of Tax Simplification has published a document called “Value added tax: routes to simplification”. This includes 23 recommendations on how VAT may be simplified in the UK.   This is the first Office of Tax Simplification review to focus specifically on VAT and it takes a high level look at areas where simplification of either law or administration would be worthwhile.

The report specifically covers the following areas:

  • VAT registration threshold
  • VAT administration
  • Multiple rates
  • Partial exemption
  • Capital Goods Scheme
  • The option to tax
  • Special accounting schemes

The dominant issue that came out of the report is the level of turnover above which a business is required to pay VAT, known as the VAT threshold. At £85,000, the UK has the highest VAT threshold in the EU. The report considered a range of options for reform, in particular setting out the impact of either raising or lowering the threshold to avoid the current “cliff edge” position (many business restrict growth in order to avoid VAT registration, creating a “bunching” effect.  For example, lowering the threshold may create less drag on economic growth but would bring a larger number of businesses into the VAT system. Alternatively, a higher threshold could also result in less distortion but it would clearly raise less tax.

Legislation

It was noted that since the introduction of VAT in the UK, the relevant legislation has grown so that it is now spread across 42 Acts of Parliament and 132 statutory instruments while still retaining some of the complexities of the pre-1973 UK purchase tax system.

Brexit

The report notes that: unlike income taxes, the VAT system is largely prescribed by European Union rules, so Brexit may present an opportunity to consider areas which could be clarified, simplified, or just made easier. It is not clear at present how Brexit will unfold so this review does not embrace aspects of the VAT system which are part of the Brexit negotiations, such as financial services, or focus specifically on cross-border trade.

Recomendations

The summary of the 23 recommendations are reproduced here:

  1. The government should examine the current approach to the level and design of the VAT registration threshold, with a view to setting out a future direction of travel for the threshold, including consideration of the potential benefits of a smoothing mechanism.
  2. HMRC should maintain a programme for further improving the clarity of its guidance and its responsiveness to requests for rulings in areas of uncertainty.
  3. HMRC should consider ways of reducing the uncertainty and administrative costs for business relating to potential penalties when inaccuracies are voluntarily disclosed.
  4. HM Treasury and HMRC should undertake a comprehensive review of the reduced rate, zero-rate and exemption schedules, working with the support of the OTS.
  5. The government should consider increasing the partial exemption de minimis limits in line with inflation, and explore alternative ways of removing the need for businesses incurring insignificant amounts of input tax to carry out partial exemption calculations.
  6. HMRC should consider further ways to simplify partial exemption calculations and to improve the process of making and agreeing special method applications.
  7. The government should consider whether capital goods scheme categories other than for land and property are needed, and review the land and property threshold.
  8. HMRC should review the current requirements for record keeping and the audit trail for options to tax, and the extent to which this might be handled on-line.
  9. HMRC should establish a target to update guidance within a short, defined, period after a legal change or new policy takes effect.
  10. HMRC should explore ways to improve online guidance, making all current information accessible, and to gauge how often queries are answered by online guidance.
  11. HMRC should review options to reduce the uncertainty caused by the suspended penalty rules.
  12. HMRC should draw greater attention to the facility for extending statutory review and appeal time limits to enable local discussions to take place where appropriate.
  13. HMRC should consider ways in which statutory review teams can deepen engagement with business and adviser groups to increase confidence in the process, and for providing greater clarity about the availability and costs of alternative dispute resolution.
  14. HMRC should consider introducing electronic C79 import certificates.
  15. HMRC should consider options to streamline communications with businesses, including the process for making payments to non-established taxable persons.
  16. HMRC should looks at ways of enhancing its support to other parts of government (for example, in guidance) on VAT issues affecting their operations.
  17. HMRC should review its process for engaging with business and VAT practitioner groups to see if representation and effectiveness can be enhanced.
  18. HMRC should explore the possibility of listing zero-rated and reduced rate goods by reference to their customs code, drawing on the experience of other countries.
  19. HMRC should consider ways of ensuring partial exemption special methods are kept up to date, such as giving them a limited lifespan.
  20. The government should consider introducing a de minimis level for capital goods scheme adjustments to minimise administrative burdens.
  21. The government should consider the potential for increasing the TOMS de minimis limit and removing MICE businesses from TOMS.
  22. HMRC should consider updating the DIY House builder scheme to include clearer and more accessible guidance, increased time limits and recovery of VAT on professional services.
  23. HMRC should consider digitising the process for the recovery of VAT by overseas businesses not registered in the UK.

Next Steps

The Chancellor of the Exchequer must now respond to the advice given.

Commentary

A lot of the areas identified have long been crying out for changes and the recommendations appear eminently sensible and long overdue. As an example, the partial exemption de minimis limit has been fixed at £7500 pa for 23 years and consequently the value of purchases it covers has reduced significantly with inflation.  A complete read of the report with prove rewarding as it confirms a lot of beliefs that advisers have long suspected and highlights areas the certainly do require simplification. I am particularly pleased that the complexities of both partial exemption and TOMS have been addressed. Fingers crossed that these recommendations are taken seriously by the government and the Chancellor takes this advice on-board. I am however, not holding my breath. It is anticipated that the early indications of the government’s thinking may be set out in the next Budget.

VAT: Don’t forget to make EC 13th Directive claims

By   November 6, 2017

The deadline for a business to make a 13th Directive claim is fast approaching – don’t miss out!

What is a 13th Directive claim?

A non-EU based business may make a claim for recovery of VAT incurred in the UK. Typically, these are costs such as; employee travel and subsistence, service charges, exhibition costs, imports of goods, training, purchases of goods in the UK, and clinical trials etc.

Who can claim?

The scheme is available for any businesses that are not VAT registered anywhere in the EU, have no place of business or other residence in the EU and do not make any supplies in the UK.

What cannot be claimed?

The usual rules that apply to UK business claiming input tax also apply to 13th Directive claims. Consequently, the likes of; business entertainment, car purchase, non-business use and supplies used for exempt activities are usually barred.

Process

The business must obtain a “certificate of business status” from its local tax or government department to accompany a claim. Claims must via hard copy submission to HMRC as online filing is not yet available. The application form is a VAT65A and is available here  Original invoices which show the VAT charged must be submitted with the claim form and business certificate. Applications without a certificate, or certificates and claim forms received after the deadline are not accepted by HMRC. It is possible for a business to appoint an agent to register to enable them to make refund applications on behalf of that business.

Deadline

Claim periods run annually up to 30 June and must be submitted by 31 December of the same year. Consequently, any UK VAT incurred in the twelve months to 30 June 2017 must be submitted by 31 December 2017.

With the usual Christmas rush and distractions it may be easy to overlook this deadline and some claims may be significant. Unfortunately, this is not a rapid process and even if claims are accurate and the supporting documents are in all in order the claim often takes some time to be repaid.

Note

Please note; there is a similar scheme for businesses incurring VAT in the UK which are based in other EU Member States. However, the process and deadlines are different. Additionally, if you are a UK business incurring VAT (or its equivalent) overseas, there are mechanisms for its recovery. Please contact us if you would like further information.

 

 

VAT: Distinction between goods and services. Mercedes Benz Financial Services case

By   October 17, 2017

In the CJEU case of Mercedes Benz Financial Services (MBFS) the issue was whether certain supplies where of goods or services.

Technical Background

Before looking at the case, it is worthwhile considering the difference between goods and services and why the distinction is important. For most transactions the difference is clear, although sometimes (such as in this case) it is not immediately apparent. A starting point is that services are “something other than supplying goods”. Difficulties can arise in areas such as; provision of; information, software and, as MBFS discovered, Hire Purchase (HP)/leasing.

The distinction is important for two main reasons:

  • VAT liability – Goods and services may have different VAT rates applicable
  • Tax point – goods and services have different tax point rules, see here

The difference between HP and Leasing arrangements:

In an HP agreement the intention is usually for the ownership of the goods to pass when the final payment has been made. The transaction therefore relates to a supply of goods. If title to goods does not pass, this is leasing and represents a supply of services.

Case Background

MBFS offered certain contract purchases which were similar to many personal contract purchase deals for vehicles. These featured regular monthly payments with a final balloon payment. In the MBFS arrangements in question a significant difference to “usual” personal contract purchase agreements was that the balloon payment represented over 40% of the price of the car and payment of this fee was entirely optional.

The EU rules set out that there is a supply of goods where “in the normal course of events” ownership will pass at the latest upon payment of the final instalment. Consequently, the focus here was on whether the optional final payment meant that in the normal course of events the ownership of the car would pass to the customer.

Decision

The CJEU decided that the supplies were those of services rather than goods. This was based on the fact that, although the ownership transfer clause is an indicator of the transaction representing a supply of goods, there was a  genuine economic alternative to the option being exercised. The circa 40% of the car price was a significant amount and it did not immediately follow that all customers would make this final payment. It was observed that in a “traditional” HP arrangement making the final payment was the “only economically rational choice”.  This meant that the supply was one of services.

VAT Impact

As this was ruled to be a supply of services, output tax was not due from MBFS at the start of the contract (as would have been the case if the supply had been one of goods). This results in a significant cashflow saving.

Commentary

Any business which provides vehicles via HP or leasing arrangements should review its supplies and contracts to determine whether it can take advantage of this CJEU ruling. We are able to assist in this process.

New Customs Bill White Paper – VAT implications

By   October 12, 2017

A new Customs Bill White Paper has been issued.

As a result of the Brexit vote new domestic legislation is due to enter Parliament later this autumn which will provide for most negotiated outcomes, as well as a contingency scenario.

This Bill will be referred to in this paper as the “Customs Bill”. The purpose of the White Paper is to set out the government’s approach to the Bill. It sets out how the current customs, VAT, and excise regimes operate for cross border transactions, why the Bill is necessary, and what the Bill will contain.

Unfortunately, although being “sold” as containing concrete details, unsurprisingly there is nothing particular of substance. I shall refrain from adding any political comments, but just to observe that any process will be confusing, complex, and very unhelpful for businesses.

Good luck everyone…

VAT: Extent of zero rating for a construction by a charity

By   October 9, 2017

Latest from the courts

In the First Tier Tribunal (FTT) case of The Trustees of Litton & Thorner Community Hall the issue was whether certain construction works were a completion of an initial build or whether they were an extension or an annex to a pre-existing building. And if an annex, whether it was capable of functioning independently from the existing building and whether there is a main access to the annex.

Background

The appellant began construction of a hall in 2008. It was intended that the hall would be available for a school to use and also for it to be available at for village use and other activities, such as by local youth clubs and a scout group. There was no dispute that the original construction was zero rated via VAT Act 1994, Schedule 8, Group 5, item 2  (The supply in the course of the construction of a building designed for a relevant charitable purpose).

A decision was made to install ground source heat pumps to feed the heating system. However the space occupied to accommodate the system meant that there was insufficient storage space in the hall. So at the time of construction, but before planning permission was obtained, it was decided with the builder that a steel joist should be incorporated within the east wall of the hall in order to facilitate the necessary support and access when the envisaged storage facility was added.  The additional planning permission was granted in November 2011, three years after building work commenced. The facility was eventually able to be used when work was completed in 2014. The delay was caused (not surprisingly) by funding issues. It was the VAT treatment of work relating to the addition of the storage area which was the subject of the appeal, with HMRC considering that it was either standard rated work to the building or was a standard rated extension to it.

Technical background

The provisions relevant to the appeal are VAT Act 1994, Schedule 8, Group 5, Notes 16 and 17. It is worthwhile taking a moment to consider these in their entirety:

Note 16

For the purpose of this Group, the construction of a building does not include

(a ) the conversion, reconstruction or alteration of an existing building; or

(b) any enlargement of, or extension to, an existing building except to the extent the enlargement or extension creates an additional dwelling or dwellings; or

(c) subject to Note (17) below, the construction of an annexe to an existing building.

Note 17

Note 16(c) above shall not apply where the whole or a part of an annexe is intended for use solely for a relevant charitable purpose and;

(a) the annexe is capable of functioning independently from the existing building; and

(b) the only access or where there is more than one means of access, the main access to:

(i) the annexe is not via the existing building; and

(ii) the existing building is not via the annexe.

The Appeal

The Trustees appealed on two separate and distinct bases:

(1) That the additional building was the completion of the original building and neither an extension nor an annex to it. It was their case that the temporal disconnect between the two building processes must be seen in the factual context, with particular reference to the decision to put in a lintel to allow the building to be completed when additional monies and planning permission were available. Additionally, alongside this fact was that the appellant was a non-commercial organisation and so things could not progress as expeditiously as they might have done if those things were being undertaken by a commercial organisation.

(2) The second basis is that, in any event, the additional building is zero rated by reference to paragraphs 16(c) and 17 of Group 5 to Schedule 8. It was the appellant’s case that the additional building is an annex intended for use solely for relevant charitable purposes and it meets the conditions set out in paragraph 17(a) & (b).

Decision

The FTT decided that the work was subject to zero rating. Not only was it part of the original construction (albeit that there was a significant time period between the building original work and the work on the storage area) but also, even if the storage area is considered as being separate, it was ruled that, on the facts, it was an annex rather than an extension, so it also qualified for zero rating on this basis.

Commentary

The date a building is “completed” is often an issue which creates significant disputes with HMRC, not only for charities, but for “regular” housebuilders. I have also encountered the distinction between an annex and an extension representing a very real topic, especially with academy schools. Even small changes in circumstances can create differing VAT outcomes. My advice is to seek assistance form a VAT consultant at the earliest stage possible. It may be that with a slight amendment to plans, zero rating may be obtained in order to avoid an extra 20% on building costs which charities, more often than not, are unable to reclaim.

Links to what we can offer to schools here, and charities here

Additionally, our offering to the construction industry here

VAT: Separate or composite supply? The Ice Rink Company Ltd case

By   October 4, 2017

Latest from the courts – Appellant on thin ice?

In the first Tier Tribunal case of The Ice Rink Company Ltd the issue was whether supplies of admission to ice skating rink and the hire of children’s ice skates – where sold as a package were single or multiple supplies. This is yet another separate/composite/compound supply case.

As a background to the issue please see previous relevant cases here here and here (in fact, this case was referred to in this hearing).

The issue of what is a single supply and what must be split as separate supplies seems to be neverending and HMRC appears to have an appetite to challenge every moot position through the courts.

Background

As anyone who has been ice skating will be aware (I tend to avoid the places not least as a result of not wishing to demonstrate my total lack of balance or skill) you can take your own skates, or hire skates for that session. In this case, the costs were £8 to use the rink or £10 with skate hire. The sole issue in the appeal was whether, when the appellants sold a “package deal” at £10 allowing a child to skate and to hire skates, it made a single supply or two separate supplies. If they made separate supplies, the £2 hire of skates to children is zero-rated. If it is a single supply the whole package is standard rated.

Decision

The judge decided that there were two separate supplies and that the skate hire supply could be treated as zero rated. This decision was based on a number of factors put forward by the appellant and which may be summarised as:

  • Skating with skate hire is a mixed supply, as the supply of skates is distinct and separate from the supply of admission
  • Around half the customers wishing to skate brought their own skates and some customers hired skates without paying to skate (at club sessions when a club had hired the rink and they needed skates for their club members). The hire of skates was therefore capable of being carved out from a single supply
  • A single “package” price is not determinative – in this case is it clear to the customer that they have freedom of choice and the components are available separately
  • Despite what HMRC said, it is clear that the skate hire is additional and optional
  • Neither supply is predominant and neither ancillary (as HMRC have previously accepted)
  • There was physical separation between the admission booth and the skate hire zone

The decision helpful included the following observations: “In our view… it is plain that in this case there are two supplies, a supply of the use of a skating rink and the supply of hire of ice skates. Neither is ancillary to the other as they both can be, and are, purchased on their own. Far from it being artificial to split the package into two, that is precisely what is in effect done in a substantial percentage of the appellant’s transactions with those using its facilities.” And “From the customers’ viewpoint a consumer of the package is getting the two things they want. The two elements are dissociable, not because of any spatial separation between the ticket office and the skate hire booth, but because that is the only appropriate way of looking at the supply of the elements.” And “…a substantial percentage of customers will choose to buy one or other of the element but not both, and that it is possible that the same customer may at one time buy a package and at another buy only one of the elements. Therefore it makes no sense to say that the elements are not dissociable when on a majority of the occasions that users enter the reception to use the rinks they choose only one of the two main elements, entry to the rink.”

 Commentary

A sensible decision based on the facts. There does not seem to be an end to these types of cases as the decision is always based on the unique facts of each situation. It is difficult, if not impossible, to draft legislation which covers every type of scenario. Consequently, case law is very important in this area and the lead cases of CPP and Levob are the most cited. This case further illustrates that HMRC are not always correct in reaching a conclusion on multiple/composite supply cases and there is usually value in challenging their determinations. I would also say, from experience, that a review of a business’ activities can often identify such contentious areas and as always, getting it wrong can either result in an assessment and penalties, or mean that a business is paying too much VAT – not something that sits easily with me!

VAT: Latest from the courts – partial exemption attribution

By   October 4, 2017

In court about courts…

In the First Tier tribunal (FTT) case of The Queen’s Club Limited the issue was whether certain input tax was attributable to the company’s taxable activities or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. A brief guide to partial exemption here 

Background

The Queen’s Club (The Club) is a well-known members’ tennis club in West London. The Club’s tennis facilities are world-class and each year the Lawn Tennis Association hires the Club’s courts to put on the Aegon Championship which is a precursor to the Wimbledon tournament and attracts many of the world’s leading players. It makes exempt supplies of sporting services to its members and also makes taxable supplies of food and drink in its bars and restaurants. It incurred VAT on the costs of refurbishing the bars, restaurant and café facilities on its premises. The Club considers that it is entitled to a full credit for input tax on those expenses as they were wholly attributable to the taxable supply of catering.

The Club’s revenue comes primarily from the membership fees that it charges. For the year 2012-13 the annual membership fee was £1820. By becoming a member of the Club, a person obtains the right to use both its sporting and non-sporting (catering) facilities. It was decided by the FTT that the Club had a discretion, but not an obligation, to provide the café etc to its members, however it was accepted that most members do not use the social facilities.  It was agreed that the membership fee was consideration for an exempt supply of services closely linked with sport for the purposes of Value Added Tax Act 1994, Schedule 9, item 10. The Club also receives five main sources of taxable income:

  • Fees from the LTA to use its courts for the Aegon Championship
  • Sales of food and drink from restaurant and bars
  • Sales of sporting and other goods
  • Provision of the use of the restaurant and bars, usually with catering
  • Rental income for certain other rooms

The decision

There was no dispute that there was a direct and immediate link between the refurbishment of the restaurant and bars and taxable supplies made from them. The question that divided the parties was whether there was also a direct and immediate link between the refurbishment the exempt membership supplies.

The judge decided that “In short, viewed objectively, what members obtain when they join the Club is a right of access to world-class sporting facilities together with such additional facilities as the Club decides, in its discretion, to offer. The focus is on the sporting facilities…” and that, viewed objectively, the renovated bars and restaurant are a means by which members are able enjoy the Club’s sporting offering. The overall conclusion was that there was no direct and immediate link between the renovation goods and services and exempt supplies that the Club made.

The decision was that the Club was entitled to credit for the full amount of input tax that it incurred.

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant; particularly when they are incurred on land and property. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution. These type of costs are often covered by the Capital Goods Scheme, so care must be taken over a ten year period which adds to the complexity.  As always, when considering land and property transactions it pays to obtain professional advice as mistakes are costly. A brief guide to land and property issues here

Recovering VAT on Staff Expenses

By   September 29, 2017

VAT on Staff Expenses – what is claimable?

Although the VAT rules normally prevent a business reclaiming input tax on supplies that are not made directly to it, there are certain circumstances when the rules are relaxed. Although rather a dry and basic area, experience insists that it creates many issues at inspections and is “low hanging fruit” for which HMRC may levy penalties. Some business decide not to recover VAT on such costs to avoid problems, but certain claims are permissible and may be worth significant sums if they have a number of employees.

 Subsistence Expenses

For instance, the VAT element of subsistence expenses paid to your employees may be treated as input tax. In order to qualify for this concession, employees must be reimbursed for their actual expenditure and not merely receive round sum allowances. These costs include hotels and meals.

VAT invoices (which may be made out to the employee) must also be obtained. The rule of thumb is that the employee must be more than five miles away from their place of employment and spend over five hours there (the so-called 5 mile/5 hour rule). A business cannot reclaim input tax if it pays an employees a flat rate for expenses.

Reimbursement for Road Fuel

The VAT legislation permits a business to treat as its own supply road fuel which is purchased by a non-taxable person whom it then pay for the actual cost of the fuel (usually through an expenses claim). This would therefore allow a business to recover input tax when it reimburses its employees for the cost of road fuel used in carrying out their employment duties.

A business is able to reclaim all the input tax on fuel if a vehicle is used only for business. There are three ways of claiming VAT if a business uses a vehicle for both business and private purposes.

  • reclaim all the VAT and pay the fuel scale charge – HMRC details here
  • only reclaim the VAT on fuel you use for business trips – this requires the retention of detailed mileage records
  • choose not to reclaim any VAT eg; if your business mileage is so low that the fuel scale charge would be higher than the VAT you can reclaim

If a business chooses not to reclaim VAT on fuel for one vehicle it cannot reclaim VAT on any fuel for vehicles used in the business.

Mileage Allowances

The legislation also enables you to reclaim the VAT element (or a reasonable approximation) of mileage allowances paid to employees.

Business entertainment

For details of this complex area please see here

Goods

Certain goods which are to be used in a business, eg; office supplies, the business may reclaim the input tax on purchases made by employees or directors. In all cases you’ll need a VAT invoice. Details required on a VAT invoice here

Mobile telephones

An element of mobile phone costs may be recovered. The VAT on the business use of the phone may be recovered, eg; if half of the mobile phone calls are private 50% of the VAT on the purchase price and the service plan can be recovered.

Work from home

If a person works from home an element of the costs may be recovered. As an example: if an office takes up 20% of the floor space in a house. A business may reclaim 20% of the VAT on utility bills.

Apportionment

A business must keep all records to support a claim and show how it arrived at the business proportion of a purchase of goods or services and it must also have valid VAT invoices in all cases.

VAT: Output tax on credits? A Tax point case

By   September 18, 2017

Latest from the courts

In the Scottish Court of Session case of Findmypast Limited the issue was whether the sale of credits represented a taxable supply, the tax point of which was when payment was received.

Background

Findmypast carries on a business of providing access to genealogical and ancestry websites which it owns or for which it holds a licence. If a customer wishes to view or download most of the records on the website, they will be required to make a payment. This may be done by taking out a subscription for a fixed period, which confers unlimited use of the records during that period. Alternatively, the customer may use a system known as Pay As You Go. This involves the payment of a lump sum in return for which the customer receives a number of “credits”. The credits may be used to view records on the website, and each time a record is viewed some of the credits are used up. The credits are only valid for a fixed period, but unused credits may be revived if the customer purchases further credits within two years; otherwise they are irrevocably lost.

Technical

Findmypast accounted for output tax on the price of the credits at the time when they were sold.  As a consequence, VAT was paid, not only on credits which were used, but also on credits that were not redeemed (The tax point therefore similar to the current rules on the sale of single use face value vouchers. Rules here).

The taxpayer claimed repayment of the VAT accounted for on the sale of unredeemed vouchers during a period which ran up to May 2012 when the legislation was changed.

The question was whether output tax should have been accounted for at the time when the vouchers were sold or at the time the vouchers were redeemed. If the tax point was the date of redemption, then the claim would be valid. The court identified the following issues:

  • What is the nature of the supply made by the taxpayer to customers?
    • Was it was the supply of genealogical records selected by the customer and viewed or downloaded by them?
    • Or was the supply a package of rights and services, which conferred a right to search the records and download and print items from the taxpayer’s websites?

If the former is accurate, the supply only takes place if and when a particular record is viewed or downloaded.  If the latter, the supply includes a general right to search which is exercisable as soon as the credits are purchased, with the result that the supply takes place at that point.

A subtle distinction, but one which has an obviously big VAT impact.

Decision

The Court decided that where credits were not redeemed, the taxpayer is entitled to be repaid the output tax previously declared as no tax point was created. In the Court’s view, Findmypast was making the relevant documents available in return for payments received. HMRC’s contention that there was a complex, multiple supply of the facility to find and access genealogical documents such that payment created a tax point was dismissed. The court further found that the relevant payments did not qualify as prepayments (deposits) because it was not known at the time of purchase whether the credits would be redeemed (many were not) or indeed at what time they would be redeemed if they were.  It was also decided that the credits were not Face Value Vouchers per VAT Act 1994, Schedule 10A, paragraph 1(1) as they are rather mere credits that permit the customer to view and download particular documents on the taxpayer’s website, through the operation of the taxpayer’s accounting system.  And that they are not purchased for their own sake but as a means to view or download documents.

Commentary

Readers of my past articles will have identified that multiple/single supplies and tax points create have been hot topics recently, and this is the latest chapter in the story.

This case highlights that any payments received by a business must be analysed closely and the actual nature of them determined according to the legislation and case law. Not all payments received create a tax point and

Some will not represent consideration such that output tax is due. Careful consideration of the tax point rules is necessary.  Not only can the correct application of the rules aid cashflow, but in certain circumstances (such as set out in this case) it is possible to avoid paying VAT on receipts at all.