Tag Archives: court

VAT Latest from the courts – Allocation of payments

By   13 March 2017
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VAT payment problems

In the Upper Tribunal (UT) case of Swanfield Limited (Swanfield)

The matter was whether HMRC had the right to allocate payments made by the applicant to specific periods against the wishes of the taxpayer.

Background

Swanfield was late with returns/payments such that it was subject to the Default Surcharge (DS) mechanism.  Details of the DS regime here

HMRC issued DSs to Swanfield, many at the maximum rate 15%. The total involved was said to be over £290,000. However, if the payments made by Swanfield had been allocated in a certain way (broadly; to recent debts as desired by the taxpayer) it would have substantially reduced the amount payable. However, HMRC allocated the payments to previous, older periods which were not the subject of a DS.

The Issue

The issue was relatively straightforward; did HMRC have the authority to allocate payments as they deemed fit, or could the taxpayer make payments for specific periods as required?

The Decision

The UT found that Swanfield were entitled to allocate payments made to amounts which would become due on supplies made in the (then) current period, even though the due date had not yet arrived.  Additionally, HMRC did not have the authority to unilaterally allocate payments made by the taxpayer to historical liabilities as they saw fit, in cases where the taxpayer has explicitly made those payments in relation to current periods.  In cases where there is no specific instruction in respect of allocation of the payment, HMRC was entitled to allocate payment without any obligation to minimise DS. The UT remitted this case back to the First Tier Tribunal to decide, as a matter of fact, whether Swanfield had actually made the necessary allocation.

Commentary

This is a helpful case which sets out clearly the responsibilities of both parties.  It underlines the necessity of a taxpayer to focus on payments and how to manage a debt position to mitigate any penalties.  Staying silent on payments plays into the hands of HMRC. It is crucial to take a proper view of a business’ VAT payment position, especially if there is difficulties lodging returns of making payment. Planning often reduces the overall amount payable, or provides for additional time to pay (TTP).  A helpful overview of payment problems here

Things can be done if a business is getting into difficulties with VAT; whether they are; reporting, submitting returns, making payments, or if there are disputes with HMRC. There are also structures that may be put in place to assist with VAT cashflow.

We would always counsel a business not to bury its head in the sand if there are difficulties with HMRC.  Please make contact with us and, in almost all cases, we can improve the situation, along with providing some relief from worries. VAT may be payable, but there are ways of managing payments – as this case demonstrates.

VAT Latest from the courts – Evidence for zero rated exports

By   10 March 2017
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In the First Tier Tribunal case of Grange Road Car Sales one of the main issues was the evidence required to satisfy HMRC that goods have actually left the UK (and, as exports, be zero rated). If a business cannot satisfy HMRC then the sales must be standard rated.  There are different levels of evidence required for different types of export, and this case is a handy reminder of the importance of having the correct documentation. I have briefly set out below the different requirements and would strongly advise that any business that exports, regularly or occasionally, to keep this situation under constant review. It is an area which is easy for HMRC to “pick off” transactions and to be “unsatisfied”…

The case

In this case the supplier of cars was based in Northern Ireland and purportedly exported cars to the Republic of Ireland. The purchasers were said to drive the cars over the land boundary.  In brief, the appeal was thrown out because both the evidence given in court and the documentation provided appears to have been woefully lacking; which is putting it politely. The case makes entertaining reading (if reading about VAT cases is your thing!). However, it does raise a serious point about exports.

An overview of export requirements

These requirements for exports are set out in Public Notice 703 (although in this case, as the supply was said to be intra-EU, the rules are set out in Public Notice 725). Not only are the requirements prescribed in detail, but they have the force of law (unlike a lot of HMRC’s published Notices).  Unless these conditions are met, it is not possible to treat an export as zero rated, even if a business knows that the goods have physically left the UK.

Proof of export

The section of the Notice covering evidence is mainly set out in paragraph 6.

Official evidence

Official evidence is produced by Customs systems, for example Goods Departed Messages (GDM) generated by NES.

Commercial transport evidence

This describes the physical movement of the goods, for example:

  • Authenticated sea-waybills
  • Authenticated air-waybills
  • PIM/PIEX International consignment notes
  • Master air-waybills or bills of lading
  • Certificates of shipment containing the full details of the consignment and how it left the EC, or
  • International Consignment Note/Lettre de Voiture International (CMR) fully completed by the consignor, the haulier and the receiving consignee, or Freight Transport Association own account transport documents fully completed and signed by the receiving customer

Photocopy certificates of shipment are not normally acceptable as evidence of export, nor are photocopy bills of lading, sea-waybills or air-waybills (unless authenticated by the shipping or airline).

Supplementary evidence

You are likely to hold, within your accounting system some, or all, of the following:

  • customer’s order
  • sales contract
  • inter-company correspondence
  • copy of export sales invoice
  • advice note
  • consignment note
  • packing list
  • insurance and freight charges documentation
  • evidence of payment, and/or
  • evidence of the receipt of the goods abroad.

You must hold sufficient evidence to prove that a transaction has taken place, though it will probably not be necessary for you to hold all of the items listed.

What must be shown on export evidence?

  • The evidence you obtain as proof of export, whether official or commercial, or supporting must clearly identify:
  • the supplier
  • the consignor (where different from the supplier)
  • the customer
  • the goods
  • an accurate value
  • the export destination, and
  • the mode of transport and route of the export movement

Vague descriptions of goods, quantities or values are not acceptable. An accurate value, for example; £50,000 must be shown and not excluded or replaced by a lower or higher amount.

How long must I retain export documentation?

To substantiate zero-rating a transaction you must make sure that the proof of export is:

  • kept for six years, and
  • made readily available to any visiting VAT Officer to substantiate the zero-rating of your exports

What happens if I do not hold the correct export evidence?

If you do not hold the correct export evidence, within the appropriate time limits, then the goods supplied become subject to VAT at the appropriate UK rate.

Additional, or different, evidence is required in the following cases:

  • The supply is to a recipient in the EU
  • Where the supplier does not arrange shipment of the goods
  • Where an overseas customer arranges his own export
  • Merchandise in baggage (MIB)
  • Groupage or consolidation transactions
  • Postal exports
  • Exports by courier and fast parcel services
  • Exports by rail
  • Exports through packers
  • Exports through auctioneers
  • Exports from Customs, Excise and/or Fiscal warehouses
  • Supplies to the Foreign and Commonwealth Office
  • Exports to the Channel Islands

This list is not exhaustive.

Summary

As may be seen, there is a degree of complexity here, and curiously, just waving a car off to a different country does not create, in itself, a zero rated export.

We are able to review a business’ export procedures to ensure that, as far as possible, HMRC is satisfied that goods have left the UK and that the correct documentation is held to evidence this.

Please contact us if this service is of interest.

VAT – Claiming input tax on fuel. A warning

By   27 February 2017
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In the First Tier Tribunal (FTT) case of Cohens Chemist the issue was whether VAT paid on employees’ mileage expenses was recoverable.

Background

The appellant offers a delivery service of prescription medicines.  This service was undertaken by the appellants’ employees, using their own vehicles. The employees buy the fuel which is to be used in their vehicles, with their own money, and later submit claims to the appellants for the payment of a mileage allowance related to the distance covered.  The allowance includes an element of reimbursement for the fuel used.  The appellant then claim credit for the input tax included in the cost of the fuel which they have reimbursed in this way. This is permissible via VAT (Input Tax) (Reimbursement by Employers of Employees’ Business Use of Road Fuel) Regulations 2005. HMRC sought to disallow these claims on the basis that there were no supporting invoices form the petrol stations and that the detailed records kept were not sufficient to support the recovery of VAT.

Decision

Unfortunately for the taxpayer,  it was decided that the failure by to retain fuel receipts in compliance with mandatory requirement of Regulations meant that the disallowance of the input tax claims was appropriate.  This was particularly costly for Cohens Chemist as the input tax at stake here was £67,000. Additionally, the Tribunal held that there was discretion to allow alternative evidence and that this discretion was reasonably exercised to reject the claim.

Commentary 

A very simple lesson to be learned from this case:

Always obtain and retain fuel receipts!  

Failure to do so can be very costly, and it does not matter how detailed and accurate your fuel records are.  You must check your system for the VAT treatment of fuel allowances.

VAT Latest from the courts – White Goods claims by housebuilders

By   27 February 2017
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Recovery of input tax on goods included in the sale of a new house.

The recent Upper Tribunal (UT) case of Taylor Wimpey plc considered whether builders of new dwellings are able to recover input tax incurred on certain expenditure on goods supplied with the sale of a new house. We are aware that there are many cases stood behind this hearing and it is understood that the appellant’s claim amounts to circa £60 million alone. Unfortunately, the UT ruled against the appellant.

The rules

Before considering the impact of the case, I thought it worthwhile to look at the rules on this matter.

There is in place a Blocking Order (“Builders’ Block”) which prohibits recovery of input tax on goods which are not “building materials”. In most cases it is simple to determine what building materials are; bricks, mortar, timber etc, but the difficulty comes with items such as white goods (ovens, hobs, washing machines, dishwashers, refrigerators etc) carpets, and similar.  So what are the rules?

These are set out in HMRC’s VAT Notice 708 para 13.2

There are five criteria:

  • The articles are incorporated into the buildings (or its site)
  • the articles are “ordinarily” incorporated by builders into that type of building
  • other than kitchen furniture, the articles are not finished or prefabricated furniture, or materials for the construction of fitted furniture
  • with certain exceptions, the articles are not gas or electrical appliances
  • the articles are not carpets or carpeting material

To qualify as building materials, goods have to meet all of these criteria

Examples of specific goods are given at VAT Notice 708 para 13.8 

The case

Generally, Taylor Wimpey’s argument was that under the VAT law in force at the time of the claim it was entitled to recover the VAT paid on these items and the Builders’ Block did not prevent it from recovering input tax on these goods. The VAT was properly recoverable as it was attributable to the zero rated sale of the house when complete. Taylor Wimpey further contended that if the Builder’s Block did apply, it was unlawful under EU law and should therefore be disapplied.  Additionally, there was a challenge on the meaning of “incorporates … in any part of the building or its site” and the meaning of “ordinarily installed by builders as fixtures”.

The Builders’ Block which prevents housebuilders from reclaiming VAT on such goods was challenged on the basis that the UK was not allowed to extend input tax blocks, as it had done in 1984 (white goods) and 1987 (carpets).

The decision

The UT ruled that the block could be extended in relation to supplies which were zero-rated and that the block properly applied to most of appellants’ claim.  The UT held that only goods “ordinarily installed” in a house were excepted from the block, but that exception does not cover white goods and fitted carpets supplied since the appropriate rule changes.

Commentary

This ruling was not really a surprise and, unless Taylor Wimpey pursues this further it provides clarity.  It demonstrates that technology and the requirements of a modern house purchaser have moved on significantly since the 1970s and 1980s.  I doubt many houses built in the 1970s had dishwashers or extractor hoods.  The ruling does bear reading from a technical viewpoint as my summary does not go into the full reasons for the decision.  If you, or your client have a claim stood behind this case it is obviously not good news as claims for white goods are extremely limited.  If you have mistakenly claimed for white or similar goods, it would be prudent to review the position in light of this case.  The decision also affects claims via the DIY Housebuilder’s Scheme.  Details of this scheme here

VAT Latest from the courts – Reverse Charge

By   13 February 2017
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The First Tier Tribunal case of University Of Newcastle Upon Tyne is a useful reminder of the impact of the Reverse Charge.

A brief guide to the Reverse Charge is included below.

Background

As with many UK universities, Newcastle was keen to encourage applications to study from new students from overseas. This is an important form of income for the institution.  It used local (overseas) agents to recruit students. Some 40% of those students were studying as undergraduates, 40% as postgraduates on one year “taught” courses and 20% as postgraduate research students studying for doctorates.  In 2014 the University had agreements with more than 100 agents worldwide. The agents used their own resources to recruit students for universities around the world, including in the UK. The University entered into contractual arrangements with agents and paid commission to them. In 2008 the University paid agent commissions of £1.034m, rising to £2.214m in 2012.

The Tribunal was required to consider whether the services supplied by the agents were a single supply to University or separate supplies to both the University and students. If the entire supply is to the University then the Reverse Charge is applicable and, because the University is partly exempt, this would create a VAT cost to it. If the supplies are to both the students and the University, the Reverse Charge element would be less and the VAT cost reduced. (There were changes to the Place Of Supply legislation during the period under consideration, but I have tried to focus on the overall impact in this article.)

The University contended that agents made two supplies: a supply to the University of recruitment services and a supply to students of support services. The commission paid by the University should therefore be apportioned so as to reflect in part direct consideration paid by the University for supplies of services to it, and in part third party consideration for services supplied to the students. The supplies to students would not made in the UK and therefore were not subject to UK VAT.

Decision

After thorough consideration of all of the relevant material, the judge decided that the agents made a single supply of services to the University and make no supplies to students. This meant that the University must account for VAT on the full value of services received since 2010 under the Reverse Charge (although before 2010 different rules on place of supply applied).  Additionally,  it was decided the University was not entitled to recover as input tax VAT for which it is required to account by means of a Reverse Charge. There was no direct and immediate link between the commission paid to agents and any taxable output of the University or the economic activities of the University as a whole.

Commentary

It is understood that the way the University recruited students using overseas agents is common amongst most Universities in the UK, so this ruling will have a direct impact on them.  It was hardly a surprising decision, but underlines the need for all businesses to consider the impact of the application of the Reverse Charge.  Of course, the Reverse Charge will only create an actual VAT cost if a business is partly exempt, or involved in non-business activities.  The value of the Reverse Charge also counts towards the VAT registration threshold.  This means that if a fully exempt business receives Reverse Charge services from abroad, it may be required to VAT register (depending on value). Generally, this means an increased VAT cost. This situation may also affect a charity or a NFP entity.

The case also highlights the importance of contracts, documentation and website wording (should any more reminders be needed).  VAT should always be borne in mind when entering into similar arrangements. It may also be possible to structure arrangements to avoid or mitigate VAT costs if carried out at an appropriate time.

We can assist with any of the above and are happy to discuss this with you.

Guide – Reverse charge on services received from overseas
Normally, the supplier of a service is the person who must account to the tax authorities for any VAT due on the supply.  However, in certain situations, the position is reversed and it is the customer who must account for any VAT due.  This is known as the ‘Reverse Charge’ procedure.  Generally, the Reverse Charge must be applied to services which are received by a business in the UK VAT free from overseas. 
Accounting for VAT and recovery of input tax.
Where the Reverse Charge procedure applies, the recipient of the services must act as both the supplier and the recipient of the services.  On the same VAT return, the recipient must
  • account for output tax, calculated on the full value of the supply received, in Box 1;
  • (subject to partial exemption and non-business rules) include the VAT stated in box 1 as input tax in Box 4; and;
  • include the full value of the supply in both Boxes 6 and 7.
Value of supply.
The value of the deemed supply is to be taken to be the consideration in money for which the services were in fact supplied or, where the consideration did not consist or not wholly consist of money, such amount in money as is equivalent to that consideration.  The consideration payable to the overseas supplier for the services excludes UK VAT but includes any taxes levied abroad.
Time of supply.
The time of supply of such services is the date the supplies are paid for or, if the consideration is not in money, the last day of the VAT period in which the services are performed.
The outcome
The effect of the provisions is that the Reverse Charge has no net cost to the recipient if he can attribute the input tax to taxable supplies and can therefore reclaim it in full. If he cannot, the effect is to put him in the same position as if had received the supply from a UK supplier rather than from one outside the UK. Thus the charge aims to avoid cross border VAT rate shopping. It is not possible to attribute the input tax created directly to the deemed (taxable) supply. 

VAT Postal claims: Zipvit update

By   6 February 2017
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A full background of this 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.

Update

We understand that Zipvit’s appeal against the decision by the Upper Tribunal that the relevant input tax was not recoverable has been listed on the Court Of Appeal’s register and is due to be heard in January 2018.

There are a lot of cases stood behind Zipvit and the amount of VAT involved is significant.  If you have an appeal stood behind this case, or act on behalf of a business which has, we recommend that a review of the position is carried out in light of the latest developments. We can assist which such a review if required.

VAT – What is a caravan? Latest from the courts

By   27 January 2017
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Motorhomes versus caravans…

In the Upper Tribunal (UT) case of Oak Tree Motorhomes Limited the simple issue was whether motorhomes may be considered to fall within the definition of a “caravan” and thus benefit from certain zero rating provisions.  Oak Tree sold certain vehicles commonly called ‘motor homes’, ‘motor caravans’ and ‘campervans’

The VAT Act 1994, Section 30(2) provides that supplies of goods of a description specified in Schedule 8 are zero-rated. At the relevant time this was VAT Act 1994, Schedule 8, Group 9, item 1 which described the following goods: “Caravans exceeding the limits of size for the time being permitted for the use on roads of a trailer drawn by a motor vehicle having an unladen weight of less than 2,030 kilogrammes.” Oak Tree contended that the sales of their vehicles were covered by this item and thus should have been zero rated rather than standard rated.

So what is a caravan?

The term is not defined in the VAT legislation, but HMRC base its interpretation on the definitions in the Caravan Sites and Control of Development Act 1960 and the Caravans Sites Act 1968 as set out in Public Notice 701/20 para 2.1.  In that Notice HMRC state that:

“A caravan is a structure that:

  • is designed or adapted for human habitation
  • when assembled, is physically capable of being moved from one place to another (whether by being towed or by being transported on a motor vehicle so designed or adapted), and
  • is no more than:
  • 20 metres long (exclusive of any drawbar)
  • 8 metres wide, or
  • 05 metres high (measured internally from the floor at the lowest level to the ceiling at the highest level)”

(Note: No reference is made to engine here).

The Decision

It was accepted by HMRC that the vehicles were large enough to qualify as caravans, so the matter turned on the interpretation of a “caravan” and whether the fact that the relevant vehicles incorporated an engine disbarred them. The UT did not appear to waste much time in agreeing with the First Tier Tribunal that a motorhome was not a caravan.  This was so even though accommodation in a motorhome and a qualifying caravan might be almost identical. The UT considered that the First Tier Tribunal’s interpretation of “caravan” by reference to the Oxford English Dictionary was appropriate. An important definition being one which refers to a caravan as generally “…able to be towed”. It was also decided that an engine represented “…an obvious and significant distinction” between a caravan and a motorhome.  It is also interesting that despite HMRC’s Notice referring to the Caravan Act 1960, the UT considered that this should not be used in determining whether a vehicle should be regarded as a caravan

Commentary

This was almost a foregone conclusion, but the appellant obviously thought it was worth another bite at the cherry as the claim was worth over £1.1 million (and an ongoing saving). There are lots of areas involving caravans that throw up VAT oddities, including, but not limited to; pitches, skirts, contents, holiday homes and compound/multiple supplies here 

It may also mean that HMRC will have to consider redrafting Notice 701/20

If a business is involved in any transactions involving caravans it would be prudent to consider whether all of the available reliefs are being taken advantage of, and whether VATable supplies have been correctly identified.

VAT Self-billing and latest from the courts

By   6 January 2017
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Self-billing: where the customer issues the invoice (and how this can go wrong).

A recent case Court of Appeal case: GB Housley here has highlighted the inherent dangers of using the self-billing system.  Self-billing is a very useful mechanism for a lot of businesses, especially in respect of activities like royalties and scrap purchases where the supplier may not know (or know immediately) the value of the supply.  Before we look at the case, it may be useful to recap the rules for self-billing.

Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment.  There is no requirement to notify HMRC or get approval for using the arrangement.

If you are the customer

You issue the documentation and you are able to reclaim as input tax the VAT shown on the self-billing invoice.

In order to set up self-billing arrangements with your supplier you are required to:

  • enter into an agreement with each supplier
  • review agreements with suppliers at regular intervals
  • keep records of each of the suppliers who let you self-bill them
  • make sure invoices contain the required information and are correctly issued

If a supplier stops being registered for VAT then you can continue to self-bill them, but you can’t issue them with VAT invoices. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.

Self-billing agreements

You can only operate a self-billing arrangement if your supplier agrees to put one in place. If you don’t have an agreement with your supplier your self-billed invoices won’t be valid, and you won’t be able to reclaim the input tax shown on them.

Both parties need to sign a formal self-billing agreement. This is a legally binding document. The agreement must contain:

  • your supplier’s agreement that you, as the self-biller, can issue invoices on your supplier’s behalf
  • your supplier’s confirmation that they won’t issue VAT invoices for goods or services covered by the agreement
  • an expiry date – usually for 12 months’ time but it could be the date that any business contract you have with your supplier ends
  • your supplier’s agreement that they’ll let you know if they stop being registered for VAT
  • details of any third party you intend to outsource the self-billing process to

Reviewing self-billing agreements

Self-billing agreements usually last for 12 months. At the end of this you will need to review the agreement to make sure you can prove to HMRC that your supplier agrees to accept the self-billing invoices you issue on their behalf. It’s very important that you don’t self-bill a supplier when you don’t have their written agreement to do so.

Record keeping

If you are a self-biller you’ll need to keep certain records. These are:

  • copies of the agreements you make with your suppliers
  • the names, addresses and VAT registration numbers of the suppliers who have agreed that you can self-bill them

If you don’t keep the required records, then the self-billed invoices you issue won’t be proper VAT invoices.

All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC”.

It is important that a business does not add VAT to self-billed invoices that it issues to suppliers who are not VAT-registered.

A business will only be able to reclaim  input tax shown on self-billed invoices if it meets all the record keeping requirements.

If you are a VAT registered supplier

If one of your customers wants to set up a self-billing arrangement with you, they’ll ask you to agree to this in writing. If you agree, they will give you a self-billing agreement to sign.

For VAT purposes you will be required to do all of the following:

  • sign and keep a copy of the self-billing agreement
  • agree not to issue any sales invoices to your customer for any transaction during the period of the agreement
  • agree to accept the self-billing invoices that your customer issues
  • tell your customer at once if you change your VAT registration number, deregister from VAT, or transfer your business as a going concern

The VAT figure on the self-billed invoice your customer sends you is your output tax.   You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.

The Case

The issues were whether the lack of formalised self-billing agreements disqualified the use of self-billing, and if that was the case, whether alternative evidence should have been accepted to support a claim for input tax. The CoA discharged HMRC’s assessment which was issued to GB Housley – a scrap metal merchant.

The assessment was based on input tax claims made on the basis of the self-billed documents.  It was ruled that although the self-billing was used in error, HMRC should have considered alternative evidence and used its discretion on whether to allow the claims on transactions which took place. For this reason, as it is unclear whether HMRC would have assessed if they had considered other information, the assessment should be removed.

A timely warning to ensure that all of the conditions of self-billing arrangements are met, and that this is clearly demonstrable.  Ongoing monitoring is crucial for businesses operating self-billing as an overlooked change can affect the VAT treatment.

In this case, it looks like the applicant was rather fortunate, but this outcome cannot be relied on if self-billing is applied incorrectly.

We are able to advise on such agreements, arrangements and accounting.

VAT: Latest from the courts – Pole Tax?

By   20 December 2016
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(Pardon the dreadful pun).

The Court of Appeal case of Wilton Park Ltd and Secrets Ltd

Background

The appellant operated an “exotic dancing” club which featured table and lap dancing.  It received commission from self-employed dancers which was treated as exempt from VAT.  This was on the basis that the commissions were charged on redemption of vouchers (known as Secrets Money) such that it represented the services of dealing with security for money.  Customers were able to purchase Secrets Money with the addition of a 20% commission. The vouchers were used to pay individual dancers who subsequently needed to exchange the vouchers for cash.  The taxpayer charged a 20% fee for such a conversion.

The issue

The issue was whether face-value vouchers issued by appellant companies constituted “…any security for money” within the VAT Act 1994, Schedule 9, Group 5, item 1.   HMRC argued that the redemption of the vouchers was part of a taxable supply of performance facilitation services by the taxpayer and thus standard rated.

Decision

Not surprisingly, the CoA dismissed the appeal, agreeing with both the FTT and UT in holding that the provision of the club’s facilities formed part of the consideration for the commission an consequently was not an exempt supply.

Commentary

This appears a rather desperate appeal, and there still remains the possibility that the taxpayer could take the matter to the Supreme Court.  It illustrates that simply putting in a mechanism which adds a degree of complexity does not affect the overriding VAT analysis.  What was provided and what was paid for here seems reasonably apparent and it is quite a leap to consider the structure was simply exchanging vouchers for cash.  It also occurs that this would be a very straightforward way for other businesses to avoid paying VAT if the appellant had been successful.

For more on this subject (should that be your thing…….) a read of the Spearmint Rhino case not only explores the structure/relationship between dancers and club owners but is also rather good entertainment and provides an amusing yet illustrative overview of the agent/principal issue (and is not salacious in the least…..).

VAT – Input tax on buy out costs and VAT grouping

By   23 November 2016
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Latest from the courts

May input tax incurred by a VAT group be attributed to the activities of a single member of that group?

In the First Tier Tribunal (FTT) case of Heating and Plumbing Supplies Ltd, the issue was whether input tax incurred on professional costs of a management buyout were recoverable.

Background

A company was formed with the intention of buying the shares of a trading company.  The purchasing company and the trading company were then VAT grouped and the professional costs were invoiced to, and paid for, by the VAT group (the tax point being created after the date that the VAT group was formed).  HMRC disallowed the claim for the relevant input tax on the grounds that the purchasing company itself did not make any taxable supplies (it did not engage in an economic activity).  While this may have been correct, the appellant contended that in these circumstances, the VAT group must be considered as a single taxable person and that the activities of the group as a whole that should be considered. The input tax was an overhead of the group, and because the group itself only made taxable supplies (via the representative member) the input tax was recoverable in full by the representative member

Decision

Following recent case law in Skandia America at the Court of Justice, the judge here decided in favour of the appellant. It was ruled that HMRC may not look at the purchasing company in isolation but rather, the group must be considered as a whole.  The FTT stated that “when a VAT group is formed the identities of the individual members of the group disappear…” meaning that a VAT group is a single taxable entity, the VAT status of the individual members being irrelevant in this situation. This confirms our long held view on the status of VAT groups and provides welcome clarification on the matter.

Relevance

This case highlights that HMRC’s policy of looking at the activities of a group member individually is inappropriate.  This is so even if the grouping structure provides input tax recovery which would not have been available had the companies been VAT registered independently.

Typically in these circumstances, HMRC will either challenge the decision, or amend its guidance to reflect this ruling.  We await news on how HMRC will react.

Action

If a business has either been denied input tax on buy out or similar acquisition costs, or made a decision not to recover this VAT, it would be prudent to lodge a claim with HMRC (plus interest).

We are able to assist with such a claim.

www.marcusward.co