Category Archives: Disputes

VAT: Are sales from Student Union shops exempt?

By   5 November 2018
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Latest from the courts

In the Upper Tribunal (UT) case of Loughborough Students’ Union (LSU) the issue was whether sales of certain goods from Student Union shops were exempt as being closely related to education. This case is a practical issue considering the exemption I set out recently here

The two issues before the UT were:

  • were the shops eligible bodies, and
  • were the sales closely related to education supplies?

 Background

The appeal by LSU was against a decision of the First-Tier Tribunal (FTT) dismissing its appeal against HMRC’s decision to deny its claim for repayment of output tax in respect of sales of; stationery, art materials and other items from the shops which LSU operates on campus.

Legislation

The legislation (where relevant to this case) is:

VAT Act 1994, Group 6, Item No 1, item 4

1 The provision by an eligible body of (a) education; …

4 The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply…

Decision

Not surprisingly, the appeal was dismissed. because even if LSU was an eligible body (which the judge was doubtful about) the exemption only applied to an eligible body which itself provided education, which clearly LSU did not. Consequently, the supplies for which exemption was sought were not closely related to any principal supply. Further, the judge was not persuaded that even if the supplies were closely connected to education, that they were essential (as required) to education. Food, newspapers and household goods for eg, are “ends in themselves” and not ancillary to education; the education provided by the University would be just as good if the students did not buy these items from the LSU shops.

Commentary

The appeal seems to have been a long-shot and predictably, it failed. Care must always be taken with the VAT treatment of goods and services closely connected to education. This is an area I am often asked for an opinion on by schools, academies, colleges and universities and there is not one single one-size fits all answer.

Our offering to education bodies here

VAT: Valuation – interest free credit

By   15 October 2018
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Latest from the courts. The Dixon Carphone plc (Dixon) First Tier Tribunal (FTT) case.

It considered the value of a retail sale where interest free credit was offered. Was it the amount paid by the consumer, or the amount actually received by Dixon after the deductions made by the credit supplier?

Background

The transactions which were the subject of this case are as follows:

  • a consumer purchases goods in a Dixon store and pays a deposit to Dixon
  • the balance of the cost of the purchase is funded by a loan, provided by a third-party loan company
  • the customer gives authority to the loan company to pay the money borrowed to Dixon
  • the customer loan is on favourable terms to the consumer as it is an interest free: “Buy Now, Pay Later” arrangement
  • the amount paid by the loan company to Dixon is a lower amount than that authorised by the consumer, following deduction of an amount described as a “Subsidy”.
  • the customer pays no interest on the amount borrowed if the full amount of credit is repaid by the customer within the “Pay Later” offer period.

Contentions

The appellant argued that the general rule, derived from the VAT Directive Article 73, is that the taxable amount is everything received by the supplier as consideration. In more complex cases, with more than one paying party, the consideration should be everything moving from each paying party and received by the supplier. Consequently, in these transactions there is a reduction in what was received by Dixon consequently, the taxable amount on which VAT should be calculated should be the amount received by Dixon from the loan company.

HMRC contended that output tax was due on the full selling price and that the other transactions did not impact the value of the supply.

Decision

As in a similar case which was decided at the CJEU: Primback Ltd C-34/99 ([2001] STC 803, The FTT decided that the loan company was providing the finance to the consumer who used the money to pay Dixon the full retail price of the goods. The loan company’s “Subsidy” did reduce the amount paid by the loan company directly to Dixon on behalf of the consumer, but this transaction did not affect the amount owed by the consumer for the goods.

The appeal was therefore dismissed.

Practical application

HMRC provide an example of the VAT treatment of interest free credit along the lines as follows:

Goods are sold for £600 on six months interest free credit terms.  As far as the customer is concerned, (s)he merely pays six instalments of £100 to the loan company.

Under separate arrangements between a loan company and the retailer, the loan company makes a deduction from the amount forwarded to the retailer, which accordingly, received only £560, not the full amount of £600. HMRC regard this deduction as third-party consideration, paid by the retailer for the loan made to the customer, and that output tax on £600 is due. Because there is no consideration, in the form of interest, paid by the customer on an interest-free loan, there is no supply for VAT purposes.

Commentary

The value of retail sales has often been an issue in the VAT world, whether it be interest free credit, credit card charges, BOGOF, or “bumping” in the motor industry. Care should be taken when deciding the value of consideration to be used for output tax declarations and advice should be sought if there is any doubt. It appears that the issue of interest free credit has now been killed off, but with ingenious marketing ideas always being created, VAT must be considered at an early stage.

VAT: Education – what, precisely, is exempt?

By   12 October 2018
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In my experience, there is a general assumption that all “education’ is exempt. It is true to say that a lot of education and tuition is indeed exempt, but that is not automatically the case. It is important to establish the reason for the application of non-taxable treatment. The VAT treatment depends on; what is actually being provided, who is providing it and the precise arrangements. I consider the more common issues below:

The legislation covering education is VAT Act 1994, Schedule 9, Group 6.

What does the term education mean?

It means a course, class or lesson of instruction or study in a subject. This includes:

  • lectures
  • educational seminars
  • conferences and symposia
  • recreational and sporting courses
  • distance teaching and associated materials

Schools etc

The first type of education exemption is relatively clear: It is the provision of education by an eligible body. An eligible body is, broadly; a school, college, or university (supplies by Local Authority schools, city technology colleges, sixth form colleges, academies and free schools – where education is provided for no charge, are non-business activities rather than exempt, and have their own set of rules). More on academies here

It is also worth noting that any ‘closely related” goods or services provided with exempt education are themselves exempt. This may cover items such as; certain stationery, accommodation, transport and catering.

There is usually very little disagreement about the VAT treatment of these entities.

Charities/ non-profit making organisations

If a charity/NFP entity is an eligible body supplies of education and vocational training (see below) by it are exempt. Such an organisation is likely to be an eligible body, where it’s a charity, professional body or company which:

  • cannot and does not distribute any profit it makes, and
  • any profit that does arise from its supplies of education is used solely for the continuation or improvement of such supplies.

There can be disputes over the term “does not distribute any profit” so care should be taken in this respect and advice sought if there is any doubt.

Tuition

Exemption applies to the supply of “private tuition, in a subject ordinarily taught in a school or university, by an individual teacher acting independently of an employer” – VAT Act 1994 Schedule 9, Group 6, item 2.

Taking each of these tests in turn:

  • What is “private tuition?

In order to qualify, the provider of tuition must act independently and not be an employee. Practically, this means that the person providing the tuition must either be a sole proprietor, a partner in a partnership, or a member of a Limited Liability partnership (LLP). Consequently, exemption does not apply if the teaching is carried out by a company or an employee. This is a matter of fact, however, it is possible to structure matters such that the exemption applies if it does not currently (and the restructure is possible commercially).

  • What does “ordinarily taught” in schools/universities mean?

This is often a moot issue and the significant amount of case lawn highlights this. Most of the mainstream subjects are covered of course, but what about subjects like; golf, horse riding and dance? Would they be ordinarily taught in schools? (The answer according to case law is; yes). However, there are many other subjects which are debatable and HMRC usually take an uncompromising line on this area, especially around sporting activities. If there is any doubt, we recommend seeking advice.

  • What does tuition mean?

Clearly, if a person teaches or coaches a subject to an individual or group, then this qualifies as tuition. However, a distinction must be made between this and a recreational type of activity which may be called a “class”, but no actual tuition is provided. Exemption does not apply, for example, for the simple provision of gymnasium or swimming pool facilities, or a yoga class where no coaching takes place (however, it is possible that these may be exempt under different parts of the legislation, but that is not the subject of this article).

Vocational training

Vocational training means training or re-training and work experience for paid employment or voluntary employment in areas beneficial to the community.

If vocational training is provided for a charge the VAT consequences are either:

  • for an eligible body (see above) vocational training is exempt
  • for a non-eligible body vocational training is still exempt to the extent that it is funded under an approved government funding scheme. Otherwise the supply is taxable.

English as a Foreign Language (EFL)

If a commercial entity makes supplies of tuition of EFL they will qualify for exemption. In these cases, tuition includes all elements that are integral to the course, held out for sale as such, and are the means by which it is intended to promote fluency in the use of the English language.

General

In respect of all of the above, if exemption does not apply the supply of education falls to be taxable as a default.

For completeness, exemption may also apply to; research, examination services, youth clubs, day nurseries, crèches and playgroups but these activities are outside the scope of this article.

Summary

There are many traps for the unwary here. Planning is always advisable and I recommend that any entity which provides education is conscious of the VAT implications and seeks advice where/when necessary.

VAT – Land and property issues

By   4 October 2018
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Help!

Supplies relating to property may be, or have been; 20%, 17.5%, 15.%, 10% 5%, zero-rated, exempt, or outside the scope of VAT – all impacting, in different ways, upon the VAT position of a supplier and customer. In addition, the law permits certain exempt supplies to be changed to 20% without the agreement of the customer. As soon as a taxpayer is provided with a choice, there is a chance of making the wrong one! Even very slight differences in circumstances may result in a different and potentially unexpected VAT outcome, and it is an unfortunate fact of business life that VAT cannot be ignored.

Why is VAT important?

The fact that the rules are complex, ever-changing, and the amounts involved in property transactions are usually high means that there is an increased risk of making errors. These often result in large penalties and interest payments plus unwanted attentions from the VAT man. Uncertainty regarding VAT may affect budgets and an unforeseen VAT bill (and additional SDLT) may risk the profitability of a venture.

Problem areas

Certain transactions tend to create more VAT issues than others. These include;

  • whether a property sale can qualify as a VAT free Transfer Of a Going Concern (TOGC)
  • conversions of properties from commercial to residential use
  • whether to opt to a commercial property
  • the recovery of VAT charged on a property purchase
  • supplies between landlord and tenants
  • the Capital Goods Scheme (CGS)
  • the anti-avoidance rules
  • apportionment of VAT rates
  • partial exemption
  • charity use
  • relevant residential use
  • the place of supply (POS) of services (which will be increasingly important after Brexit)
  • and even seemingly straightforward VAT registration

Additionally, the VAT treatment of building services throws up its own set of VAT complications.

VAT Planning

The usual adage is “right tax, right time”. This, more often than not, means considering the VAT treatment of a transaction well in advance of that transaction taking place. Unfortunately, with VAT there is usually very little planning that can be done after the event. For peace of mind a consultation with a VAT adviser can steer you through the complexities and, if there are issues, to minimise the impact of VAT on a project. Assistance of a VAT adviser is usually crucial if there are any disputes with VAT inspectors. Experience insists that this is an area which HMRC have raised significant revenue from penalties and interest where taxpayers get it wrong.

Don’t leave it to chance

For more information, please see our Land & Property services

VAT – No more compensation for delayed refunds?

By   7 September 2018
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HMRC has announced its intention to do away with the 5% repayment supplement payable when it repays VAT late; it is not good news and I am quite cross.

Background

What is the repayment supplement?

Repayment supplement is a form of compensation paid in certain circumstances when HMRC does not authorise payment of a legitimate VAT claim within 30 days of receipt of the VAT Return.

If a business submits a repayment return and HMRC does not make the repayment within 30 days, it is required to add interest at 5% to the amount of the claim. A repayment claim arises when input tax is greater than output tax for a period. This may be due to many factors, such as; sales being VAT free, a large VAT bearing purchase or an adjustment to previous declarations. The 30 day period is paused for “the raising and answering of any reasonable inquiry relating to the requisite return or claim” by HMRC.

Additionally, HMRC may make an extra ex-gratia payment to make good any serious disadvantage suffered if a repayment is delayed to an exceptional extent, and the repayment supplement is less than the interest which might otherwise have been earned.

The proposal

In a consultation on draft legislation for Finance Bill 2018-19 the government has announced that it intends to replace the 5% supplement with payment of simple interest. This currently stands at 0.5% pa and therefore a substantially lower payment would be due to a taxpayer.

Technical

The relevant legislation covering the repayment supplement is contained in The VAT Act 1994 Section 79 

Commentary

The entire point of the supplement is to focus HMRC’s mind on making the payment at the appropriate time, just as the default surcharge does for submitting a VAT return and paying VAT for a business. This is fair. To withdraw the repayment supplement does away with any incentive for HMRC to make repayments on time and this must represent an imbalance. To effectively withhold money from a business to which it is properly entitled is plain wrong. It can often significantly impact on cashflow and cause serious problems for a business.

It is quite often a fight to obtain a repayment supplement and in my personal experience HMRC do as much as possible to resist making these payments. It is no surprise that they are trying to wriggle out of their responsibility.

Let us hope that representations to HMRC against this plan are successful.

Right, I’m going to cool off…

VAT – When is chocolate not chocolate (and when is it)?

By   4 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Kinnerton Confectionery Ltd the issue was whether a product could be zero rated as a cooking ingredient, or treated as standard rated confectionary (a “traditional” bar of chocolate.)

Background

The product in question was an allergen free “Luxury Dark Chocolate” bar. It was argued by the appellant that it was sold as a cooking ingredient and consequently was zero rated via The Value Added Tax Act 1994, section 30(2) Schedule 8. HMRC decided that it was confectionary, notwithstanding that it could be used as a cooking ingredient.

Decision

The judge stated that what was crucial was how the chocolate bar was held out for sale. In deciding that the chocolate bar was confectionary the following facts were persuasive:

  • the Bar was held out for sale in supermarkets alongside other confectionery items and not alongside baking products
  • it was sometimes sold together with an Easter egg as a single item of confectionery
  • although the front of the wrapper included the words “delicious for cakes and desserts”, it contained no explicit statement that the Bar was “cooking chocolate” or “for cooking”
  • the back of the wrapper made no reference to cooking. It also stated that the portion size was one-quarter of a bar. Portion sizes are indicative of confectionery, not cooking chocolate
  • Kinnerton’s website positioned the Bar next to confectionery items, and did not say that it was cooking chocolate, or that it could be used for cooking
  • neither the wrapper nor Kinnerton’s website contained any recipes, or any indication of where recipes could be found
  • the Kinnerton brand is known for its confectionery, not for its baking products. All other items sold by Kinnerton are confectionery, and the brand is reflected in the company’s name
  • the single advertisement provided as evidence positioned the Bar next to confectionery Items, and did not say that the Bar was “cooking chocolate”; instead it made the more limited statement that it was “ideal for cooking”
  • consumers generally saw the Bar as eating chocolate which could also be used for cooking 

Commentary

Clearly, the FTT decided that consumers would view the chocolate bar as… a chocolate bar, so the outcome was hardly surprising. This case demonstrates the importance of packaging and advertising on the VAT liability of goods. Care should be taken with any new product and it is usually worthwhile reviewing existing products. This is specifically applicable to food products as the legislation is muddled and confusing as a result of previous case law. This extends to products such as pet food/animal feedstuffs which while containing identical contents have different VAT treatment solely dependent on how they are held out for sale. And we won’t even mention Jaffa Cakes (oops, too late).

VAT – Catering at a university campus; exempt?

By   3 September 2018
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Latest from the courts

In the First Tier Tribunal (FTT) case of Olive Garden Catering Company Ltd (OGC) the mian issue was whether catering which was provided to the University of Aberdeen (UOA) students was an exempt supply. The specific issue was whether the catering was a supply “closely connected to education” which in turn depended on which entity was actually making the supply to students. For exemption to apply, OGC would need to be a principal in purchasing the food and other goods and an agent of UOA (pictured above) in delivering the catering (the exemption could not apply to a supply by OGC to the students).

Background

The central issue was whether the supply of food and staff by the appellant to UOA was a single supply of catering services at the standard-rate for VAT purposes (HMRC’s case) or that the main supply was for food at the zero-rate, with the supply of staff being a separate supply and eligible for staff wages concession which was the appellant’s stance. I comment that the procurement as principal and the delivery of catering as agent is common practice in the education sector and this case focussed on whether the relevant documentation actually reflected the economic reality.

Decision

The HMRC internal VAT manual VTAXPER64300 sets out the general principles for determining the VAT treatment of supplies made under a catering contract, which in turn depend in some situations on the capacity in which the caterer supplies its service, whether as principal or agent in the agreement. Of relevance in this case were the following statements:

(1) In general, it has been established practice that agency contracts are most often used in the education sector.

(2) Under agency contracts for the provision of catering it is accepted that:

  • The client makes a taxable supply of catering to the consumer, or the catering is subsumed within an overall exempt supply, eg; of education
  • VAT is not charged to the client on wages of the catering staff employed at the unit
  • VAT is charged on any management fee plus taxable stock and other services
  • Schools may only exempt supplies which are closely related to the overall provision of education

(3) This contributes to fair competition with in-house providers, and the contract catering industry acknowledges the value of that.

In respect of the contract for the supply of catering services, UOA was the principal and OGC was the agent by reference to the control exercised over; menu specifications, pricing, and the premises in which catering was carried out. The relevant contracts set out that the terms were set by UOA and were indicative of its status as the principal in the catering contract. The judge stated that the catering contracts between UOA and OGC appeared to be an agency contract with OGC acting as the agent. Consequently, the food produced OGC and served by its staff at UOA’s halls of residence was potentially a supply of food in the course of catering that can be subsumed within the overall exempt supply of education by UOA.

Commentary

A win for the appellant, but only after comprehensive consideration of all points and the substantial detailed documentation by the judge. There has been a run of Tribunal cases on the agent/principal point (not just in education and which I have covered in previous articles) and this case serves to demonstrate that each case will be determined on its merits. There can be no blanket VAT treatment and certain factors will point one way and others to a different VAT treatment. In my experience, HMRC are always eager to challenge agent/principal treatment and it is an area which has an enormous tax impact on a business. I always recommend that any contracts/documentation which cover potential agent/principal issues are reviewed to avoid unwanted attention from HMRC. Slight adjustments to agreements often assist in reaching the desired tax treatment. Don’t leave it to chance!

Is tax boring?…On reflection

By   23 August 2018
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I am often asked as a VAT person whether I find tax boring. I do often find it frustrating, some of the mechanics arcane and dealing with HMRC something of a challenge (putting it politely). However, I have been advising on the tax for getting on for 30 years, so it must have its attractions…

I think the best way to put it is by quoting K Maurer:

Tax is not boring. Tax is politics. Tax is geography. Tax is social issues. Tax is financial literacy. Tax is financial empowerment. Tax is problem solving. Tax is helping others create a stronger sense of independence. Tax is anything but boring!

I would also add that tax is challenging as a practitioner, it is also; evaluating information, arriving at creative solutions, hand-holding, standing up for rights, explaining, challenging views and assumptions and…keeping on top of a rapidly changing legislative/legislation and commercial landscapes.

It can also be very silly.

VAT: Adecco Court of Appeal case. Agent or principal?

By   6 August 2018
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Latest from the courts

In the recent Court of Appeal (CA) case of Adecco here the issue was whether the services provided by Adecco – an employment bureau which supplied its clients with temporary staff (temps) were by way of it acting as principal or agent.

Background

Details of the issues as considered in the FTT and UT were covered here 

Overview

As is often the case in these types of arrangements, there are some matters that point towards the appellant acting as agent, and others indicating that the proper VAT treatment is that of principal. The important difference, of course, being whether output tax is due on the “commission” received by Adecco or on the full payment made to it (which includes the salaries of the relevant workers).

Decision

The CA decided that the supply of temporary staff by Adecco was as principal and consequently, VAT was due on the full amount received, not just the commission retained.

Reasoning

The CA focussed on the contractual position. Among the reasons provided for this decision were as follows (I have somewhat summarised). I think it worthwhile looking in some detail at these:

  • There was no question of the temps having provided their services under contracts with the clients: no such contracts existed. The contractual position must be that the temps’ services were provided to clients in pursuance of the contracts between Adecco and its clients and Adecco and the temps.
  • Although the contract between Adecco and a temp referred to the temp undertaking an assignment “for a client” and providing services “to the client”, it also spoke of the client requiring the temp’s services “through Adecco” and of the temp being supplied “through Adecco”.
  • While temps were to be subject to the control of clients, that was something that the temps agreed with Adecco, not the clients. The fact that the contract between Adecco and a temp barred any third party from having rights under the Contracts (Rights of Third Parties) Act 1999 confirms that the relevant provisions were to be enforceable only by Adecco, which, on the strength of them, was able to agree with its clients that the temps should be under their control. Adecco can fairly be described as conferring such control on its clients. (Broadly; the employment regulations required Adecco to treat itself as a principal with the result that that it could not therefore treat itself as an agent).
  • Adecco paid temps on its own behalf, not as agent for the clients.
  • Adecco by did not drop out of the picture once it had introduced a temp to a client. It was responsible for paying the temp (and for handling national insurance contributions and the like) and had to do so regardless of whether it received payment from the client Adecco also enjoyed rights of termination and suspension. It is noteworthy (as the UT said) that the contract between Adecco and a temp proceeded on the basis that a temp’s unauthorised absence could “result in a breach of obligations which we owe to the client”.
  • Adecco did not perform just administrative functions in relation to the temps. The temps, after all, were entitled to be paid by Adecco, not the clients.
  • Adecco charged a client a single sum for each hour a temp worked. It did not split its fees into remuneration for the temp and commission for itself.
  • The fact that Adecco had no control over a temp in advance of his taking up his assignment with the client did not matter.
  • Adecco undoubtedly supplied the services of employed temps to its clients.
  • In all the circumstances, both contractually and as a matter of economic and commercial reality, the temps’ services were supplied to clients via Adecco. In other words, Adecco did not merely supply its clients with introductory and ancillary services, and VAT was payable on the totality of what it was paid by clients.

Action

Clearly this was not the outcome the appellant desired, and it may impact similar arrangements in place for other businesses.  Although found on the precise nature of the relevant contracts, the outcome of this case is not limited to employment bureaux and similar but must be considered in most cases where commission is received by an “agent”. These may include, inter alia; taxi services, driving schools, transport, travel agents, training/education, online services, repairs, warrantee work and many other types of business. It is crucial that contracts are regularly reviewed the ensure that the appropriate VAT treatment is applied and that they are clear on the agent/principal relationship. If there is any doubt, please contact us as it is often one of the most ambiguous areas of VAT.

VAT – Zipvit Court of Appeal decision

By   18 July 2018
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Latest from the courts

The Zipvit Court of Appeal (CA) case here

Background

A full background of this long running case may be found here

In summary: It was previously decided that certain supplies made by Royal Mail (RM) to its customers were taxable. This was on the basis of the TNT CJEU case. RM had treated them as exempt. HMRC was out of time to collect output tax, but claims made by recipients of RM’s services made retrospective claims. These claims were predicated on the basis that the amount paid to RM included VAT at the appropriate rate (it was embedded in the charge) and that UK VAT legislation stipulates that the “taxable amount” for any supply, is the amount paid by the customer including any VAT included in the price. HMRC maintained that the absence of a VAT invoice showing that VAT was charged to Zipvit by RM, and giving details of the rate of tax and the amount charged, was fatal to Zipvit’s claim to recover input tax.

The decisions in the First Tier Tribunal (FTT) and the Upper Tribunal (UT) went against Zipvit so the appeal went to the CA.

Decision

The CA upheld the decisions in the previous courts. The appellant failed to demonstrate that the relevant VAT had been “due or paid” on the supplies received from RM. It further appeared that evidence which was not present at earlier hearings showed that the amounts paid were exclusive of VAT which meant that VAT was not embedded in the consideration paid.

Importance

In the words of the judge Lord Justice Henderson the appeal raised some important questions of principle in the law of VAT. They arise when supplies of goods or services, which were wrongly assumed by the parties to the relevant transactions and by HMR to be exempt from VAT at the time of supply, are later discovered to have been subject to the standard rate of tax when they were made, following a decision to that effect by the Court of Justice of the European Union. Where the recipient of those goods or services was itself a registered trader which made taxable supplies on which it accounted for output tax, the basic question is whether, once the true position has become known, the recipient is in principle entitled to recover as an input tax credit the tax element of the consideration which it paid for the original supplies. If so, does it make any difference if the supplier has failed to pay the tax which should have been paid on the original supplies, and if the recipient is in consequence unable to produce a tax invoice from the supplier showing the amount of the input tax which it seeks to recover?

So a fundamental tenet of VAT was considered, as well as the matter of this being the lead case behind which many others were stood. I understand that the quantum of claims submitted is circa £1 billion in total so there was a lot riding on this decision.

Commentary

In my view, this is an important case for the above technical reasons and the whole decision bears reading in order to understand some of the intricacies of a business claiming input tax.