Banana and strawberry flavoured Nesquik drinks are standard rated, but chocolate flavoured Nesquik is zero rated.
Category Archives: Law
Managing a Customs Warehouse. Updated HMRC guidance
The new guidance explains how to manage a Customs Warehouse, handle goods, and process, repair and move goods.
Customs Warehouse
A Customs Warehouse is a warehouse that is under Customs control. Goods stored in a customs warehouse are not in free circulation. No duties or taxes have to be paid until that time when you ship the goods to their next destination.
There are two types of Customs Warehouse where goods may be stored.
- Public warehouse
This is a warehouse operated by a business whose purpose is to store other people’s goods. They are the warehousekeeper and you’re the depositor.
- Private warehouse
This is a warehouse operated by you to store your own goods. You are the warehousekeeper and the depositor.
You do not need to be authorised by HMRC to be a depositor in a public or private customs warehouse but, if you operate a private customs warehouse, you’ll need to be authorised as the warehousekeeper.
The warehousekeeper is responsible for coordinating general warehouse operations and activities including shipping and receiving deliveries, conducting stock checks, documenting warehouse transactions and records, and storage of inventory.
To be approved as a warehousekeeper, a person will need to:
- be established in the UK
- have an EORI number
- be financially solvent
- have a good compliance record in dealing with customs
- prove you have a business need for the warehouse
- be able or prepared to make declarations, or employ an agent who is
- be able to keep inventory records and run the warehouse to health and safety standards
- provide a guarantee if needed for Customs Duty and VAT unless you’re an Authorised Economic Operator or can meet Authorised Economic Operator conditions
Guidance Amendments
Updates include information for warehousekeepers who use a duty management system and guidance on when someone else uses your warehouse.
VAT treatment of voluntary carbon credits – soon to be taxable
HMRC has published Revenue and Customs Brief 7 (2024) which explains:
- the VAT treatment of voluntary carbon credits from 1 September 2024
- the voluntary carbon credits that will be in the scope of the Terminal Markets Order
This is not yet fully comprehensive guidance, but does at least provide certainty in some areas.
A carbon credit is a tradable instrument issued by an independently verified carbon-crediting programme. It represents a reduction or removal of one metric tonne of carbon dioxide, or an equivalent amount of greenhouse gases from the atmosphere. Voluntary carbon credits are any carbon credits that are not compliance market credits.
Voluntary carbon credits are currently treated as outside the scope of UK VAT. This is because when they were first introduced, HMRC’s view was that they could not be incorporated into an onward supply and there was no evidence of a secondary market.
HMRC recognise that there have been significant changes in the voluntary carbon credit market, including the emergence of secondary market trading and businesses incorporating voluntary carbon credits into their onward supplies. Because of this, from 1 September 2024, the sale of these carbon credits must be treated as taxable for VAT where the place of supply is in the UK.
VAT: Are cosmetic skin treatments exempt medical care? The Skin Science case
Latest from the courts
In the First Tier Tribunal (FTT) case of Gillian Graham T/A Skin Science the issue was whether certain cosmetic skin treatments were exempt via The VAT Act 1994, Schedule 9, Group 7, item 1 which covers services for the primary purpose of protecting, restoring or maintaining health: “medical care”
Were the services provided by Skin Science (SS) medical care?
Background
SS ran a clinic at 10 Harley Street, London and Ms Graham was a Registered General Nurse (RGN).
As an RGN the Appellant must submit revalidation every three years to the Nursing & Midwifery Council. The revalidation process requires her to demonstrate evidence of the scope of her professional practice including; evidence of hours worked, case studies, discussions with other medical professionals to obtain feedback and attending training courses. The Appellant’s realm of practice is disorders of the skin.
Patients generally attend the Appellant’s clinic by choice and are not referred to the Appellant by a doctor or psychologist. Some clients might see the Appellant following referrals from beauticians who may be unable to carry out treatments for certain conditions.
The treatments that the Appellant provides to her patients are not generally part of a treatment plan which involves other health professionals. SS could not confirm whether psychiatrists, psychological professionals or doctors would prescribe fillers or toxin for the conditions that she diagnoses.
A range of treatments were provided, including:
- Restylane
- Pix Cannula
- Teosyal light filling
- Muscle relaxing injections
- Dermal roller
- Glycolic Acid Peel
- TCA Peel
- Botox
- Belotero Volume
- Dermal fillers
- Face lift by injection
- Hollywood Eye Magic Serum
- Belotero injections
SS provided a description of each treatment to the Tribunal.
The appellant also prescribed medicines such as; Lidocaine, Botulinum, Scleremo, Zinerate and Tretinoin.
Contentions
SS argued that the supplies of skin care treatments are exempt from VAT as they are supplies of medical care. She diagnoses recognised medical conditions, provides treatment to address those conditions and is fully qualified to do so. As all of her treatments are aimed at treating or curing those recognised medical conditions, they inevitably have a therapeutic purpose. Although they may improve the appearance of the patients and in some cases be regarded as inherently cosmetic, this is consequential as the primary purpose is to address an underlying medical condition whether physical or psychological or both. Moreover, purpose should be determined by a medical professional and not by HMRC.
HMRC contended that these supplies were standard rated (causing SS to become VAT registered) as they did not have the primary purpose of protecting, restoring or maintaining health as they were overwhelmingly cosmetic and so do not satisfy the requirements of the exemption.
Decision
It was noted that the concept of the “provision of medical care” does not include medical interventions carried out for a purpose other than that of diagnosing, treating and in so far as possible, curing diseases or health disorders and it is the purpose of the medical intervention rather than merely the qualifications of the person providing it that is key.
Health problems may be psychological, they are not limited to physical problems. Where treatment is for purely cosmetic reasons it cannot be within the exemption. Where, however, the purpose of the treatment is to treat or provide care for persons who as a result of illness, injury or a congenital physical impairment are in need of plastic surgery or other cosmetic treatment then this may fall within the concept of medical care.
The Appellant is not a psychological professional under Item 1(c) of Group 7 (health professionals) or a psychiatrist under Item 1(a) (medical practitioners), so the focus must be on what is within the scope of an RGN’s profession. The judge found that the Appellant had not proven her case that diagnosing and treating conditions which are psychological is within the scope of her profession as an RGN.
The decision was that the treatments were not for the primary purpose of protecting, restoring or maintaining health and so not “medical care” and consequently the appeal was dismissed.
A parallel outcome to a similar case in the Skin Clinics Ltd case. Other cases on medical exemption here, here and here.
Commentary
There has been an ongoing debate as to what constitutes medical care. Over 20 years ago I was advising a large London clinic on this very point and much turned on whether patients’ mental health was improved by undergoing what many would regard as cosmetic procedures. We were somewhat handicapped in our arguments by the fact that many of the patients were lap dancers undergoing breast augmentation on the direction of the owner of the club…
It is crucial to apply the above tests to any medical services to determine whether they come within the exemption.
It is worth remembering that not all services provided by a medically registered practitioner are exempt. The question of whether the medical care exemption is engaged in any given case will turn on the particular facts.
A VAT: Did you know?
The sale of a dead horse is VAT free, but a live horse is standard-rated.
(This is not a recommended tax planning scheme).
Tax points and VAT groups – The Prudential Assurance Company Ltd CoA case
Latest from the courts
In the The Prudential Assurance Company Limited (Pru) Court of Appeal (CoA) case the issues were the “difficult” questions in respect of the relationship between the VAT grouping rules and the time of supply (tax point) legislation. Is VAT is applicable on a continuous supply of services where these services were supplied while the companies were VAT grouped, but invoices were issued after the supplier left the VAT group?
Background
Pru was at the relevant time carrying on with-profits life and insurance business. Silverfleet Capital Limited (Silverfleet) provided Pru with investment management services. Under an agreement dated 30 August 2002, the consideration which Silverfleet received for its services comprised a management fee calculated by reference to the amount of investments made during the period in which services were provided and performance fees, payable in the event that the performance of certain funds exceeded a set benchmark rate of return.
When Silverfleet was rendering its investment management services, Pru was the representative member of a VAT group of which Silverfleet was also a member. However, in 2007 a management buy-out was effected, as a result of which Silverfleet ceased to be a member of Pru’s VAT group. It also ceased to provide management services to Pru.
During 2014 and 2015, the hurdle rate set under the 2002 agreement was passed. Silverfleet accordingly invoiced Prudential at various dates between 2015 and 2016 for fees totalling £9,330,805.92 (“the Performance Fees”) plus VAT at 20%.
The Issues
The CoA considered whether the Performance Fees are subject to VAT.
The First-tier Tribunal (FTT) decided the point in favour of Pru. However, HMRC succeeded in an appeal to the Upper Tribunal (UT). In a decision that decision, the UT concluded that VAT was chargeable on the Performance Fees.
In its decision, the FTT queried whether regulation 90 of the VAT Regulations went so far as to direct that Silverfleet’s services had not been provided within a VAT group and had been “supplied in the course or furtherance of a business that in the VAT group world was not being carried on”. Further, the FTT was “unable to see what feature distinguishes [Prudential’s] case from that of the taxpayer in [B J Rice & Associates v Customs and Excise Commissioners]”.
In contrast, the UT considered that, pursuant to regulation 90 of the VAT Regulations, Silverfleet’s services were to be treated as having been supplied when invoiced and, hence, at a time when Silverfleet and Prudential were no longer members of the same VAT group. That being so, section 43 of VATA 1994 was not, in the UT’s view, in point. The UT also considered that the FTT had erred in regarding itself as bound by B J Rice & Associates v Customs and Excise Commissioners [1996] STC 581 (“B J Rice”) to allow the appeal. Unlike Mr Rice, the UT said in its decision, Silverfleet “was not entirely outside the scope of VAT when the Services were rendered, but rather it was subject to a specific set of assumptions and disregards”.
Pru contended that Silverfleet should not be considered to have made the supply in the course or furtherance of any business carried on by it. The business will instead be assumed to have been carried on by Pru. This was important because if VAT was applicable to the services Pru would not be in a position to recover it (in full at least) due to partial exemption which represented a large VAT cost.
Unsurprisingly, HMRC considered that output tax was due because at the tax point, Silverfleet as no longer part of the VAT group.
Legislation
The VAT Act 1994, section 43 lays down the rules in respect of VAT groups, and The VAT Regulations 1995, regulation 90 makes provision with respect to the time at which continuous supplies of services are to be treated as supplied for VAT purposes.
Section 43 explains that any supply by one member of a VAT group to another is to be “disregarded” and that “any business carried on by a member of the group shall be treated as carried on by the representative member”. Does this mean that no VAT is chargeable on an intra-group supply regardless of whether the supplier has left the group by the time consideration for the supply is the subject of a VAT invoice and paid? Or is section 43 inapplicable in respect of continuous supplies insofar as the consideration is invoiced and received only after the supplier is no longer a member of the VAT group because regulation 90 provides for the services to be treated as supplied at the time of the invoice or payment?
Decision
The appeal was dismissed and HMTC’s assessment was upheld. It was not possible to disregard the supply as intra-group and the tax point rules for the continuous supply of services meant that it was a taxable supply. The decision was not unanimous, with the decision by the judges being a 2:1 majority.
Commentary
This was a close decision and highlights the necessity of considering the interaction between VAT groups and tax points and the implications of timings. The case makes interesting reading in full (well, for VAT people anyway!) for the technical discussions and the disagreement between the judges.
New report finds HMRC performance the worst ever
A report by the Public Accounts Committee (PAC) has found that HMRC’s services continue to deteriorate and are now at an “all time low”.
In summary, Anne Olney MP who sits on the committee said of the new report:
- PAC expressed disappointment over the five-year decline of service levels
- Taxpayers are “exasperated”
- In 2022/2023 the number of callers waiting ten minutes or more for HMRC to answer has increased from 46.3% in 21/22 to 62.7%
- HMRC stated that it “did not have the resources to meet rising demand for its phone and post services at expected standards”
- HMRC agrees that it will not now require digital interaction until a service is of a suitable standard
- Criminal prosecutions fell from 691 in 2019/20 to 240 in 2022/23 which “sends the wrong message” (my comment: although this could partly be due to backlogs in the criminal justice system)
- The report results were “quite predictable” and were a “letdown for taxpayers”
- It is “distressing” to find people who “want to get it right, and who have no intention whatsoever of defrauding the Exchequer, but just find it really, really difficult to access the right support”.
- In failing to access the right support, taxpayers are liable. It is not on HMRC – even if the services are difficult to access, it is still the responsibility of the taxpayer to pay the right amount of tax
- There is “probably” a need for more investment and recruitment
- A smarter allocation of the resources HMRC has could see a better return for taxpayers
- Finally: “It really is important that HMRC get this right.”
In terms of VAT, we can confirm from personal experience that HMRC’s performance is at an unacceptably inferior level; from telephone responses, to written replies and a generally poor “attitude”. This is supported anecdotally by clients and colleagues’ experiences.
VAT registration HMRC update
HMRC has updated VAT Notice 700/1 – Who should register for VAT. The publication explains when a business must register for VAT, and how to do it.
The changes are to para 2.7 – Specified Supplies which sets out what needs to be included during the application process when describing business activities.
Businesses affected
Those that supply; finance, insurance services, or investment gold to customers in countries outside the UK, or make supplies of insurance or finance services which are directly linked to the export of goods outside the UK.
Specified Supplies
These are supplies which would be exempt from VAT if they were made in the UK, but are treated as taxable if made outside the UK.
Benefit to business
A business making Specified Supplies may register for VAT on a voluntary basis and claim UK input tax incurred in making those supplies. We strongly recommend that all businesses in the above categories consider registering in the UK.
The amendment
If a business is registering because it makes Specified Supplies, it must ensure that it clearly states ‘SPECIFIED SUPPLIES’ in the free-text box when asked to describe the business activities during the application process. Failure to do this will likely cause delays and create additional HMRC queries.
The interaction between Transfer Pricing and VAT
Are Transfer Pricing (TP) adjustments subject to VAT? – Usually no, but…
What is TP?
A transfer price is the price charged in a transaction between two parties. The transfer pricing legislation concerns itself with the prices charged in transactions between connected parties as, in such circumstances, the price charged may not necessarily be that which would have been charged if the parties had not been connected.
The UK’s transfer pricing legislation details how transactions between connected parties are handled and in common with many other countries is based on the internationally recognised ‘arm’s length principle’.
The UK allows only for a transfer pricing adjustment to increase taxable profits or reduce a tax loss. It is not possible to decrease profits or increase a tax loss.
The UK’s transfer pricing legislation also applies to transactions between any connected UK entities.
The arm’s length principle applies to transactions between connected parties. For tax purposes such transactions are treated by reference to the profit that would have arisen if the transactions had been carried out under comparable conditions by independent parties.
So, is a TP adjustment additional consideration for a supply?
VAT
Value of the supply – what is the consideration?
TP is a direct tax concept which does not necessarily align with VAT considerations. Unhelpfully, there are no provisions in UK legislation which provides for the VAT treatment of TP adjustments. Additionally, there is no case law on this subject.
As a TP adjustment is solely for direct tax purposes, it does not usually affect the value of the supply for VAT purposes. Consequently, such adjustments are usually outside the scope of VAT.
However, price adjustments of previous supply of goods/services must be recognised for VAT market value rules only when:
- the supply is taxable
- the relevant input tax is not fully recoverable and
- HMRC issues an ‘Open Market Value Notice’ to the parties requiring them to apply market values for VAT.
VAT Act 1994, Schedule 6, Part 2, para 1 gives HMRC the vires to issue such a Notice.
Latest
We understand that a case: Arcomet Romania is due to be heard by the CJEU on whether TP adjustments represent consideration and we await the outcome which may provide clarity. (Although after Brexit, the previous position: that the UK VAT Act is to be interpreted with EU case law and general principles of EU law has ended. UK courts whilst still relying on the UK VAT Act and its EU VAT Directive principles, will be able to deviate from ECJ case law).
VAT and BIK – Double cab pick-ups
VAT and BIK – Double cab pick-ups
The changes to benefit-in-kind tax purposes from 1 July 2024 means that double cab pick-up trucks will no longer be classified as vans but as cars. This brings them into line with the VAT treatment of these vehicles, so here we look at the VAT rules:
HMRC and the Society of Motor Manufacturers and Traders (SMMT) have agreed how the one tonne payload test will be applied in practice to double cab pick-ups.
Cars are treated quite differently for VAT purposes from commercial vehicles:
- most ordinary business cars are subject to a block on input tax recovery which is a proxy for taxing the private use of the car
- the private use of commercial vehicles is taxed either by means of an input tax apportionment or a periodic output charge on actual private use
- a business that converts a commercial vehicle into a car becomes liable to an output tax charge on a “self-supply” of the vehicle to itself para 14 Notice 700/57.
SMMT members will take steps to make dealers aware of the ex-works payloads of their double cab models.
Vehicles are not treated as cars for VAT purposes if they have a payload of one tonne or more. Payload is the difference between a vehicle’s maximum gross weight and its kerbside weight. In practice the change mainly affects those vehicles generally described as double cab pick-ups.
Given the different treatment of cars and commercial vehicles it is important for manufacturers, distributors, dealers, and business customers to know the payload of any double cab vehicle which is bought.
It is especially important to be aware that by adding accessories to the ex-works model they may, by lowering the payload of the vehicle, convert it into a car. This would make the vehicle liable to the self-supply charge. Such conversions are most likely to occur with double cabs that have an ex-works payload of 1000 to 1050 kg.
Accessories fitted by dealers or customers
HMRC will, with one exception, ignore as de minimis the addition of accessories. The exception is the addition of a hard top consisting of metal, fibreglass or similar material, with or without windows. In practice this means that a manufacturer, dealer or customer can fit any accessory to the vehicle, other than a hard top, and still rely upon its payload as being the ex-works payload. HMRC will accord all hardtops a generic weight of 45kgs.
In order to provide simplicity and certainty, HMRC and the SMMT have agreed to simplify the treatment of these vehicles. Full details of the agreement can be found at para 23 Notice 700/57 – Administrative agreements entered into with trade bodies.
Please see the recent The Three Shires Trailers case on input tax recovery and the self-supply of cars/commercial vehicles.
UPDATE!
Double-cab pickups go back to being vans, not cars for BIK (only). A week after the new guidance that classified double-cab pickups as cars rather than vans, the HMG has now reversed this decision on 19 February 2024.