Category Archives: Latest VAT news

VAT – Charities and donations. Latest from the courts

By Marcus Ward 22 June 2016

What is a donation?

In the widely anticipated case of Friends of the Earth Trust Ltd (TC05165) the issue was; what constitutes a donation for VAT purposes? This is a perpetually thorny issue for charities.

True donations are outside the scope of VAT which usually produces a beneficial outcome for charities as no output tax is due on these payments. However, if any consideration is provided by a charity then it is likely that a taxable supply is being made. This subject often creates disputes and is another difficult area with which charities and NFP bodies have to contend.

This case is slightly unusual as the appellant was arguing that payments received from the public are taxable supplies.

Background

The charity incurred input tax on the expenses of training of street fundraisers (chuggers) who were used to sign up members of the public to a commitment to make regular direct debit payments to the charity. I am sure we have all encountered this type of fundraising.

The recovery of this input tax was dependent on whether the money collected in this way represented taxable supplies made by the charity, or were simply donations. If it was non-business income (donations) it was not possible to recover the relevant input tax.

Contentions on the consideration point

Supporters of the charity who paid £3 or more per month received a magazine and various other benefits. Those paying less than £3 received no benefits.

The charity contended that taxable supplies were being made, albeit that the supply was wholly or overwhelmingly zero rated (the supply of printed matter). Further, there was a direct and immediate link between the expenditure on the training of the fundraisers and the benefits obtained (by a certain class of supporter). This would mean that there would be no output tax on the payments, but recovery of the relevant input tax.

HMRC formed the view that the direct debit payments were donations and as a result a non-business activity such that the attributable input tax was irrecoverable.

The Decision

The Tribunal, citing, inter alia, the FTT’s decision in The Serpentine Trust Ltd v The Commrs for Revenue and Customs, decided that “..it is quite clear when viewed objectively that the £3 minimum monthly payment was not “for” the magazine and benefits, or in other words a quid pro quo for them. The magazine and benefits were quid cum quo, the transaction being that the payment was a gift to the appellant to be used in its charitable work and that the appellant would send the supporter free copies…”.

The Chairman stated that the evidence, when viewed in the round, is simply not consistent with the transaction objectively being one where the person was paying a subscription for the magazine and other benefits. And that it was a donation to support the appellant’s charitable activities. The fact that the taxpayer only provided the benefits if the minimum payment of £3 was made did not turn the payment into value given in return for the magazine and other benefits. It still retained its character as a donation. It was just as consistent with the transaction being one whereby the taxpayer undertook to send a free copy of the magazine where donations were made above a certain level.

The Tribunal therefore concluded that the payments were donations to the taxpayer and so the relevant input tax on the fundraising costs was not claimable.

This case demonstrates the uncertainty over the distinction between taxable supplies and donations and that every case is decided on precise facts. Please contact us if this has rung any alarm bells, or perhaps provided an opportunity to review a charity or NFP body’s income. Our charity services here

VAT – Latest from the courts: A round up of partial exemption

By Marcus Ward 20 June 2016

The partial exemption calculation

The calculation is required to quantify the amount of input tax a partly exempt business is able to claim. A partly exempt business is one which makes a mixture of taxable and non-taxable (eg; exempt) supplies. Input tax attributable to exempt activities is not recoverable.

With certain businesses HMRC accept that the usual “partial exemption standard method” based on taxable turnover versus exempt turnover is either impractical, distortive, or inappropriate. In such cases the business submits an application for a partial exemption special method (PESM). This may be based on many various factors such as; floorspace, staff numbers, transaction counts, management accounting etc (or any combination). If HMRC accept that the proposal is fair and reasonable, a formal agreement will be entered into by both parties.

The question in this case was when a PESM is agreed with HMRC is there a requirement to round up figures to a whole percentage point?

According to the CJEU decision in Kreissparkasse Wiedenbrück the answer is no. It was decided that, via EC legislation, in cases where there is a PESM agreement in place there was no obligation to round up.

The view was that as a significant amount of PESMs are “sophisticated” (compared to the partial exemption standard method) they achieve a more accurate allocation of input tax between taxable and exempt activities and rounding would counter this accuracy.

Full case here

Please contact us if your business is partly exempt and you either have a PESM in place, are in the process of agreeing one, or feel that your input tax recovery is suffering by the use of the standard method.

VAT Quickie – HMRC change bank details for payments

By Marcus Ward 13 June 2016

HMRC’s new bank details

Most taxpayers who pay electronically will not be affected by the change. However, if a business pays its VAT using HMRC’s IBAN and BIC need to use the new IBAN and BIC with immediate effect. This change will mainly affect overseas businesses. It is observed that HMRC’s efforts to publicise this change have not been very successful.

Details for Overseas payments:

Account Number (IBAN) GB36BARC20051773152391

BIC BARCGB22

Account Name: HMRC VAT

HMRC banking address:

Barclays Bank PLC
1 Churchill Place
London
United Kingdom
E14 5HP

VAT Tax Point Planning – Applications for Payment

By Marcus Ward 13 June 2016

Further to my previous article on tax points, I look at a specific planning point.

General

Applications for payment can be used to defer the date when output tax is accountable to HMRC and avoids the supplier having to account (and pay) VAT if the relevant supply becomes a bad debt.

Approval

No formal approval to use applications for payment is required from HMRC. This is because this VAT planning simply uses the “Time of Supply” (tax point) legislation.

Technical

No output tax is due until a tax point is crystallised. Broadly speaking, for the supply of services, a tax point is created at the earlier of; invoice date, receipt of payment, or completion of the work. Consequently, in order to be of benefit, the services in question have to be a “continuous supply of services”. This is defined as “services are supplied for any period for a consideration the whole or part of which is determined or payable periodically or from time to time”. Therefore, if an application for payment is issued rather than an invoice, output tax is only due when payment is received. This means if the debt becomes bad, no VAT is payable on it so long as the service is continuous. An application for payment is only of benefit if there is ongoing work (continuous supply of services) since, as above, there is a tax point created when the job is complete, regardless of the invoicing or payment position. Another relevant issue is; that under the existing VAT legislation, there is no requirement to issue a proper VAT invoice to an unregistered client/customer (unless specifically requested to do so by the client).

Implementation

Sending applications for payment (rather than invoices) may be done on a job by job basis or for all services from a selected date – although, the benefit will only be obtained for those jobs which are continuous. The VAT accounting system is required to recognise and report receipts of fees rather than applications for payment or invoices raised (although if invoices are issued on the day payment is received the tax point will be the same date). Additionally, the system needs to be able to identify completion tax points since these cannot be deferred by the use of application for payment.

Documentation

A request for payment must clearly state; “This is not a VAT invoice” and it may also be helpful if it appears distinct from “usual” invoices. It should state that it is an application/request for payment. It is also helpful if it does not show the supplier’s VAT number.

Cons

If the recipient of the services is VAT registered, it may complicate their accounting and will delay the date on which input tax may be recovered. This should not affect individuals or non-VAT registered clients. As considered above, it will also affect the accounting for the supplier and may add complexity.

Summary

This is relatively simple, yet effective VAT planning. It cannot be challenged technically by HMRC, although the actual operation will be examined at an inspection.

Please contact me if this matter is of interest.

VAT Latest from the courts – what is a business?

By Marcus Ward 8 June 2016

In the CJEU case of * * takes a deep breath * * Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft the court considered whether these Not For Profit companies were making taxable supplies (economic activity). This then dictated whether input tax incurred by them was recoverable.

As a starting point, it may be helpful to look at what the words “economic activity”, “business”, “taxable supplies” and “taxable person” mean: The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning. Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have only recently ended a dispute over this definition for a (as it turns out) very happy client. In the UK the tests were set out as long ago as 1981 and may be summarised as follows:

Is the activity a serious undertaking earnestly pursued?
Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made (bearing in mind that exempt supplies can also be business)?
Is the activity conducted in a regular manner and on sound and recognised business principles?
Is the activity predominately concerned with the making of taxable supplies for a consideration?
Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?

If there is no business, an entity cannot be making taxable supplies.

In EC Legislation, Article 9(1) of Directive 2006/112 provides: that “a ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.”

The case

The case involved the Not For Profit companies constructing and operating a water disposal system. When complete, it was intended to charge a “modest” fee to users of the system. The companies engaged in economic activities that were not intended to make a profit and only engaged in a commercial activity on an ancillary basis.

The majority of the funding for the work was provided by State (Hungarian) and EC aid. The Hungarian authority formed the view that, because a nominal fee was charged this did not amount to an economic activity and so there was no right to deduct input tax incurred on the costs of getting the system operational. The CJEU went straight to judgement and decided that the construction and operation of the system could rightly be regarded as an economic activity and found for the taxpayer. It also provided a very helpful and clear summary in respect of “business” by commenting that “… the fact that the price paid for an economic transaction is higher or lower than the cost price, and, therefore, higher or lower than the open market value, is irrelevant for the purpose of establishing whether it was a transaction effected for consideration …”.

NB: The one area that the CJEU did refer back to the National Court however, was whether the transaction at issue in the case was a wholly artificial arrangement which did not reflect economic reality and was set up with the sole aim of obtaining a tax advantage.

It is interesting to compare this finding with the UK case law above, especially the points concerning “a certain measure of substance in terms of the quarterly or annual value of taxable supplies made” and “sound and recognised business principles”. I strongly suspect that what constitutes a business will continue to occupy advisers and HMRC and throw up disputes until the end of time (and/or the end of VAT….).

Full case here

VAT – New company car fuel rates

By Marcus Ward 31 May 2016

Advisory fuel rates from 1 June 2016

HMRC have published the new rates which apply from 1 June 2016. These rates apply to employees using a company car and HMRC will also accept them for VAT purposes.

Engine size	Petrol – amount per mile	LPG – amount per mile
1400cc or less	10 pence	7 pence
1401cc to 2000cc	13 pence	9 pence
Over 2000cc	20 pence	13 pence

Engine size	Diesel – amount per mile
1600cc or less	9 pence
1601cc to 2000cc	10 pence
Over 2000cc	12 pence

Hybrid cars are treated as either petrol or diesel cars for this purpose.

HMRC website here

New approach to VAT inspections by HMRC

By Marcus Ward 16 May 2016

A VAT quickie.

We understand that HMRC are about to introduce new plans to change the way some VAT inspections are carried out.

The intention is that when a business is selected to an inspection, rather than arranging and visiting the business in the traditional way, initial contact will be made with the responsible person. At this point a short telephone questionnaire will take place. If this option is taken then it is possible that HMRC will reconsider the need for a full inspection. This appears to be along the lines of some pre-credibility processes. It is a pilot exercise and will be entirely voluntary for the taxpayer.

If this approach enables HMRC to focus on evasion and high risk business while reducing the burden for the majority of businesses who always try to be accurate with VAT declarations it is to be welcomed. We shall see how the pilot goes and whether this is rolled out to more businesses. HMRC expects that this will be a benefit for both them and taxpayers and it is to be hoped that this is the case.

We have no knowledge currently how “brief” the questionnaire will be and how much information and preparation will be required. However, it is likely that they will focus on industry specific questions rather than on processes and controls.

If contacted by HMRC our usual advice is to contact us to ensure everything is as it should be. This may avoid penalties and ensure any enquires are concluded smoothly.

VAT – Liability of works carried out under Permitted Development Rights

By Marcus Ward 10 May 2016

HMRC has clarified its views on the zero and reduced rating of conversion construction work carried out under Permitted Development Rights (PDRs).

Who is affected?

Builders and developers who convert non-residential buildings into dwellings for which individual statutory planning consent is not required because the development is covered by PDRs. Additionally, it applies to any person carrying out a similar conversion who will be making a claim for a refund of VAT under the DIY Housebuilders’ Scheme.

What are PDRs?

PDRs are a national grant of planning permission for particular types of development. They are intended to streamline the planning process by removing the need for a full planning application, therefore reducing the amount of information required.

What has changed?

To zero-rate the sale of all newly converted dwellings (from non-residential buildings) or to make a valid claim under the DIY Housebuilders’ Scheme, the converted building must meet the requirements of a building “designed as a dwelling”. One of these conditions is that the developer, builder or DIY Housebuilders’ Scheme claimant must be able to demonstrate that statutory planning consent has been granted for a dwelling and that its construction has been carried out in accordance with that consent. In addition, part of the conditions for some supplies of construction services to be eligible for the reduced rate of VAT of 5% for the conversion of a non-residential building into a dwelling requires individual statutory planning consent.

HMRC have announced that following the introduction of PDRs, individual statutory planning consent will no longer be required for some developments making the meeting of this condition difficult.

HMRC Brief 9 (2016) sets out that when certain conditions are met, zero rating and/or reduced rating where applicable is additionally available when converting non-residential buildings to dwellings when work is carried out under a PDR. This is in contrast to work undertaken via planning consent.

Relevant parties will still be required to provide evidence that the work has been undertaken legally and that it qualifies as a permitted development.

The full guidance is here

VAT – Spot The Ball – Latest from the courts

By Marcus Ward 9 May 2016

Is Spot The Ball a game? And if it is, is it a game of chance? (And therefore exempt from VAT).

In the case of IFX Investment Company Ltd & ORS the main issue was whether the First-tier Tribunal (FtT) were wrong to hold that the appellants’ “Spot The Ball” competitions was exempt under the gaming exemption in Value Added Tax Act 1994, Schedule 9 Group 4. To fall within the gaming exemption, Spot The Ball must be a “game of chance” within the meaning of the Gaming Act 1968. The dispute was over the word “game” and the words “of chance”.

The Court of Appeal (CoA) considered whether the FtT decision in favour of the appellant that the supply was exempt or whether HMRC’s successful appeal to the Upper-tier Tribunal (UtT) should stand.

The court heard form the promoters that while there was an element of skill in determining roughly where the panel that decided where the ball should be would actually place it, the precise placement of the cross was essentially a matter of chance. HMRC insisted that the competitors were not “playing a game” as they advanced the argument that a “game” required interaction between the players. and therefore Spot The Ball could not be considered playing a game of chance such that the supply is standard rated.

The UtT deemed that Spot The Ball is “played” in “solitary isolation” and does not involve any interaction between competitors. The only contract is between the operator and the individual competitor. Additionally the act of placing a cross on the coupon was not “playing”

The CoA disagreed with the UtT’s decision and concluded that the FtT made a finding that Spot The Ball was a game of chance and there was no reason to disturb this decision. The FtT was correct to hold that there is no inter-player interaction rule. Previous case law clearly contemplates that there can be a game without the contestants being in communication with each other. Consequently, it restored the FtT’s decision and the supplies are exempt.

This case has brought home to me two (non-VAT) things; 1) That Spot The Ball is still around, and that 2) I always thought that one had to actually put a cross where the ball actually was, rather than where a judging panel thought the ball was likely to be. One lives and learns. I’m also constantly surprised that “the pools” still exist in these days of lotteries and lotto and other promotions.

Case here

VAT – Latest from the courts; use and enjoyment provisions

By Marcus Ward 25 April 2016

Telefonica Europe Plc and Telefonica UK Limited

The VAT Use and Enjoyment provisions set out an additional layer of rules which establish the place of supply of certain services. They apply to; telecommunications and broadcasting services; electronically supplied services (for business customers); hired goods; and hired means of transport. Broadly, effective use and enjoyment takes place where a recipient actually consumes the services, regardless of any contractual arrangements, payment, or beneficial interest. The intention of this provision is to correct instances of distortion which remain as a result of considering only where the provider and the customer belong. HMRC give the example of supplies such as telecommunications services which are actually consumed outside the EC, to be subject to UK VAT. Of course, the converse is that it would be distortive for there to be no EC VAT on such services where they are consumed in the UK.

In the Upper Tribunal case of Telefonica Europe Plc and Telefonica UK Limited the dispute involved the way in which the appellant calculated the value of its mobile telephone services which were used and enjoyed outside the EC (and thus UK VAT free). Over a number of years Telefonica had an agreement with HMRC whereby the amount of outside the EC supplies was calculated by reference to revenue, ie; comparing call, text and data income relating to non-EC supplies to total income.

HMRC subsequently formed the view that this method of calculation was distortive because higher charges were made to non-EC users than EC consumers. HMRC proposed a “usage methodology” which used call times, texts sent and volume of data used. As may be expected, this resulted in a lower percentage of supplies that were outside the scope of UK VAT thus increasing HMRC’s VAT take.

The appellant contended that the usage methodology was contrary to EC and UK VAT legislation. Not surprisingly, the UTT rejected this argument, deciding that Telefonica had not established that HMRC’s proposal was unlawful.

So then the outcome would be expected to be that the usage methodology should be used, but no. It was decided that the most accurate method would be one based on the time a customer has access to the network outside the EC; which differs from both the usage and revenue methods.

This type of dispute is quite common and also appears regularly in partial exemption situations. There are nearly always alternative ways to view apportionment calculations and it pays to obtain professional advice; not only to ensure that a fair result is achieved, but as assistance with negotiations (which may avoid having to go to Tribunal).