Tag Archives: FTT

VAT: Latest from the courts – option to tax, TOGC and deposits

By   26 March 2018
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Timing is everything

The First Tier Tribunal (FTT) case of Clark Hill Ltd (CHL) illustrates the detailed VAT considerations required when selling property. Not only are certain actions important, but so is timing.  If a business is one day late taking certain actions, a VAT free sale may turn into one that costs 20% more than anticipated. That is a large amount to fund and will obviously negatively affect cashflow and increase SDLT for the buyer, and may result in penalties for the seller.

The case considered three notoriously difficult areas of VAT, namely: the option to tax, transfers of going concerns and deposits.

Background

CHL owned four commercial properties which had opted to tax. CHL sold the freehold of these properties with the benefit of the existing leases. As a starting point VAT would be due on the sale because of the option.  However, the point at issue here was whether the conditions in Article 5 of the Value Added Tax (Special Provisions) Order 1995 were met so that the sale could be treated as a transfer of a business as a going concern (TOGC) and could therefore be treated as neither a supply of goods nor a supply of services for VAT purposes, ie; VAT free. The point applied to two of the four sales. The vendor initially charged VAT, but the purchasers considered that the TOGC provisions applied. CHL must have agreed and consequently did not charge VAT. HMRC disagreed with this approach and raised an assessment for output tax on the value of the sale.

TOGC

In order that a sale may qualify as a TOGC one of the conditions is that; the assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part. It is accepted that in a property business transfer, if the vendor has opted to tax, the purchaser must also have opted by the “relevant date”.  If there is no option in place at that time HMRC do not regard it as “the same kind of business” and TOGC treatment does not apply.

Relevant date

If the purchaser opts to tax, but, say, one day after the relevant date, there can be no TOGC. The relevant date in these circumstances is the tax point. Details of tax points here

Basically put, a deposit can, in some circumstances, create a tax point. In this case, the purchaser had paid a deposit and, at some point before completion of the transfer of the property, the deposit had been received by the seller or the seller’s agent. The seller notified HMRC of the option to tax after a deposit had been received (in two of the relevant sales). The issue here then was whether a deposit created a tax point, or “relevant date” for the purposes of establishing whether the purchaser’s option to tax was in place by that date.

Decision

The judge decided that in respect of the two properties where the option to tax was not notified until after a deposit had been paid there could not be a TOGC (for completeness, for various other reasons, the other two sales could be treated as TOGCs) and VAT was due on the sale values. It was decided that the receipt of deposits in these cases created a relevant date.

Commentary

There is a distinction between opting to tax and notifying that option to HMRC which does not appear to have been argued here (there may be reasons for that). However, this case is a timely reminder that VAT must be considered on property transactions AND at the appropriate time. TOGC is an unique situation whereby the seller is reliant on the purchaser’s actions in order to apply the correct VAT treatment. This must be covered off in contracts, but even if it is, it could create significant complications and difficulties in obtaining the extra payment. It is also a reminder that VAT issues can arise when deposits are paid (in general) and/or in advance of an invoice being issued.

We recommend that VAT advice is always taken on property transactions ad at an early stage. Not only can situations similar to those in this case arise, but late consideration of VAT can often delay sales and can even cause such transactions to be aborted.

VAT: Are digital newspapers newspapers?

By   14 March 2018
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Are digital newspapers zero rated?

Background

A long running argument has reached the First Tier Tribunal (FTT) in the case of The News Corp case. The issue was whether digital versions of newspapers should share similar VAT treatment to traditional paper newspapers (in this case; The Times, The Sunday Times, The Sun and The Sun On Sunday) and therefore be zero rated.

Arguments

The contention by the appellant was that the digital editions of the titles are “newspapers” on the basis that they are the digital equivalent of the daily editions produced on ordinary newspaper printing paper (“newsprint”). In respect of the process of news-gathering and journalism, there is no distinction between the newsprint and digital editions. Content is produced by a single newsroom under a single editor. The website and tablet editors sit within the newsroom team and are part of the journalistic process. Thus, the manner in which the newsprint and digital editions are compiled is identical until the point at which the content is laid out for transposition onto the physical or digital medium. There was, therefore, essentially no difference in the journalistic content or news teams for the newsprint and digital editions.  It was also submitted that Item 2 Group 3 of Schedule 8 of VATA 1994 (below) should be interpreted purposively. The purpose of the provision was to promote literacy, the dissemination of information and democratic accountability. There was, however, a further principle of statutory interpretation which formed an important part of the appellant’s case. This principle was that legislation once enacted had to be kept up-to-date with, technological advances so that a statutory provision is “always speaking”. This was important in the present case because digital editions of newspapers did not exist in 1973 when VAT was introduced.

HMRC argued simply, that they do not fall within the definition of “newspapers” which is confined to newsprint newspapers.

Decision

Unsurprisingly, the appeal was dismissed on the grounds that digital newspapers are not covered by the zero rating provision at VAT Act 1994, Schedule 8, Group 3, which zero rates, inter alia, “newspapers” (Item 2). Group 3 provides as follows:

“Group 3—Books, etc
 Item No
1 Books, booklets, brochures, pamphlets and leaflets.
2 Newspapers, journals and periodicals.
3 Children’s picture books and painting books.
4 Music (printed, duplicated or manuscript).
5 Maps, charts and topographical plans.
6 Covers, cases and other articles supplied with items 1 to 5 and not
separately accounted for…”

This relief clearly relates to physical goods.  Consequently, it was necessary to determine whether digital newspapers are goods or services (which would not be covered by Group 3). It was decided that the supply in question was of “electronically supplied services” and this fact was fatal to the appellant’s case.  Therefore the standard rate applied if the place of supply of the services was in the UK.

The judge further noted (on the “always speaking” point) that EC legislation contains a “standstill” date of 1 January 1991 with regard to zero rating by EU Member States. Thus, the CJEU held that the scope of zero rating provisions cannot be extended beyond their 1991 limits and that they must be interpreted strictly. In the judge’s view, to extend Item 2 Group 3 beyond the supply of goods (newsprint newspapers) to cover the supply of services (digital newspapers) would be an impermissible expansion of the zero rating provisions.

So the answer is; digital newspapers are not newspapers.

VAT – Latest on the Nesquik case

By   23 February 2018
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Latest from the courts

I covered the Nesquik first Tier Tribunal (FTT) case here Well, legal matters have since moved on and the case reached the Upper Tribunal (UT) recently. Nestlé UK Limited the manufacturer of Nesquik appealed against the FTT’s decision that its fruit flavoured products are subject to 20% VAT despite the chocolate flavour being zero rated.

Unfortunately for Nestlé , the UT decision went against it and banana and strawberry Nesquik remains standard rated. Similar contentions (to those in the FTT case) were advanced by the taxpayer, however the UT dismissed Nestlé’s appeal.

The Tribunal recognised that there is not currently a logical and consistent regime which applies to VAT on food (there is a long list of examples which include gingerbread men, smoothies, various types of crisps, not to mention Jaffa cakes….).  I think most advisers could not agree more with the judge and I echo the comments I made after the FTT case: the entire legislation relating to food needs a complete overhaul.

Full details of the case here

VAT: Latest from the courts – Hastings Insurance Place Of Supply

By   22 February 2018
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In the First Tier Tribunal (FTT) case of Hastings Insurance the issue was where was the place of supply (POS) of services?

The POS rules determine under which VAT regime the supply is treated, whether the associated input tax may be recovered and how the services are reported. Consequently, determining the POS for any supply is vitally important because getting it wrong may not only mean that tax is overpaid in one country, but it is not declared in the appropriate country so that penalties and interest are levied. Getting it wrong also means that the input tax position is likely to be incorrect; meaning that VAT can be over or underclaimed.  The rules for the POS of services are notoriously complicated and even subtle differences in a business’ situation can produce a different VAT outcome.

Background

Hastings is an insurance services company operating in the UK.  The appeal relates to whether the appellant was able to recover input tax it incurred in the UK which was attributable to supplies of; broking, underwriting support and claims handling services made to a Gibraltar based insurance underwriter (Advantage) which supplied motor insurance to UK customers through Hastings. In order to obtain credit for the relevant input tax, the supply to Advantage must have a POS outside the EU, eg: the recipient had a place of belonging in Gibraltar and not the UK. HMRC argued that Advantage belonged in the UK so that the input tax could not have been properly recoverable.  Consequently, the issue was where Advantage “belonged” for VAT purposes.

The POS rules set out where a person “belongs”.

A taxable person belongs:

  • where it has a business establishment, or;
  • if different, where it has a fixed establishment, or;
  • if it has both a business establishment and a fixed establishment (or several such establishments), where the establishment is located which is most directly concerned with the supply

Further details on this point are explained here

Contentions

It was not disputed that Advantage had a business establishment in Gibraltar. The question was whether it also had a fixed establishment in the UK and, if so, whether the supplies of services were made to that fixed establishment rather than to its business establishment in Gibraltar. HMRC contended that Advantage had a fixed establishment in the UK which was “more directly concerned with the supply of insurance” such that the POS was the UK. This was on the basis that Advantage had human and technical resources in the UK which were actually used to provide its services to UK customers. Hastings obviously argued to the contrary; that Advantage had no UK fixed establishment and that services were supplied to, and by, Advantage in Gibraltar.

Technical

It may be helpful to look briefly at CJEU case law which considered what an establishment other than a business establishment is. It is: “characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources”, where looking at the location of the recipient of the supply, “to enable it to receive and use the services supplied to it for its own needs” or, where looking at the location of the supplier, “to enable it to provide the services which it supplies”. 

Decision

The FTT concluded that the input tax in dispute is recoverable because it was attributable to supplies made to Advantage on the basis that it belonged outside the EU (as interpreted in accordance with the relevant EU rules and case law). After a long and exhaustive analysis of the facts the summary was;

  • The appellant’s human and technical resources, through which it provided the services to Advantage, did not comprise a fixed establishment of Advantage in the UK, whether for the purposes of determining where Advantage made supplies of insurance or where the appellant made the supplies of its services.
  • Even if, contrary to the FTT’s view, those resources comprised a fixed establishment in the UK, there is no reason to depart from the location of Advantage’s business establishment in Gibraltar as the place of belonging/supply in the circumstances of this case.

Summary

If this case affects you or your clients it will be rewarding to consider the details of the arrangements which are helpfully set out fully in the decision. This was, in my opinion, a borderline case which could have been decided differently quiet easily.  A significant amount of the evidence produced was deemed inadmissible; which is an interesting adjunct to the main issue in itself. Whether HMRC take this matter further remains to be seen.  It is always worthwhile reviewing a business’ POS in depth and we are able to assist with this.

VAT: Timeshare is exempt

By   19 February 2018
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Latest from the courts

The Fortyseven Park Street Ltd (FPSL) Upper Tribunal case.

Brief technical overview

In general terms the provision of a “timeshare” in the UK is standard rated for VAT. This is because HMRC regard supplies of this type to be similar to hotels, inns, boarding houses and are treated as “serviced flats” (other than those for permanent residential use). The appellant sought to argue that what it provided was not “similar” to a hotel or boarding house.

Background

The issue in the FPSL case was whether “Fractional Interests” (akin to timeshares) in a property amount to an exempt supply of that property. The Fractional Interests entitled FPSL’s clients up to 21 days a year in block of apartments in Mayfair.

The First Tier Tribunal (FTT) determined that here were three main issues:

  • The FTT decided that the supplies of the Fractional Interests fell within the exemption from VAT provided for the leasing or letting of immovable property.
  • However, the FTT further found that the land exemption was excluded because the grant of the Fractional Interests was the provision of accommodation in a similar establishment to an hotel.
  • The therefore FTT dismissed FPSL’s argument that under the principle of fiscal neutrality the supplies of the Fractional Interests should be treated in the same way (exempt) as more traditional timeshare interests.

Decision

The UT decided that the relevant interests provided amounted to an exempt supply of the property. This was on the basis that the judges concluded that the grant of the Fractional Interest was the grant of a right to occupy a residence and to exclude others from enjoying such a right, and was thus within the concept of the “letting of immovable property”.  It was also found that the supply was a passive activity and not outside the land exemption by reason of FPSL having added significant value to the service despite providing; certain additional facilities, services (eg; concierge) and benefits to clients – this was not, it was decided, a situation where the appellant had actively exploited the asset to add value to the supply (which may have made it taxable). The UT also ruled that as the concierge was provided by a third party, it could not be combined to form a single supply made by FPSL thus emphasising the fact that this was a more passive activity.

It was noted that there was a distinction in this case from supplies of boutique hotels (which are standard rated hotel accommodation) because residents were contracting for the supply of a long-term right to occupy an apartment and not a series of short-term stays and that the high amount paid for the Fractional Interest brought with it certain financial obligations which are not found in the hotel industry.

Commentary

This is an interesting case and the decision somewhat surprising.  There is a subtle distinction between what was provided here and serviced flats or hotel accommodation, but the UT found it sufficient to apply exempt treatment. If you, or your clients may be affected by this decision, please contact us.

Is the Upper Tribunal bound by High Court decisions?

By   11 July 2017
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Upper Tribunal versus High Court

In the case of Meena Seddon Settlement which actually involved Inheritance Tax, the First Tier Tribunal (FTT) was required to decide whether the Upper Tribunal is bound by decisions made in the High Court. The FTT decision will doubtless affect VAT cases in the future.

It decided to follow a precedent set by the Upper Tribunal over an earlier decision by the High Court.

The taxpayer contended that the matter should be decided on the basis of a previous High Court decision. HMRC argued on the basis of a later Upper Tribunal decision. In normal circumstances, a later decision should take precedence over the earlier if both decisions have the same authority and have fully considered the previous judgments. However, if the taxpayer was correct to say that the Upper Tribunal was bound by precedents set by the High Court, the later decision could be disregarded as being wrong in law.

The FTT decided that it was the intention of Parliament that the Upper Tribunal was not bound to follow High Court precedents. This was notwithstanding the fact that a High Court could have a supervisory role over the Upper Tribunal in cases of judicial review. Therefore, it determined the case on the authority of the later Upper Tribunal decision in favour of HMRC.

VAT: Latest from the courts – extent of exemption for financial services

By   5 July 2017
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Coinstar Limited

In the Upper Tribunal (UT) case of Coinstar Limited the issue was whether the services Coinstar provided were exempt supply of financial services via Value Added Tax Act 1994, Schedule 9, Group 5, item 1 – “The issue, transfer or receipt of, or any dealing with, money, any security for money or any note or order for the payment of money.”

Background

I’ve no doubt that you’ve seen those kiosks with machines in supermarkets into you which you tip your bag full of loose change in return for a voucher.  The voucher can then be redeemed at the checkout against the supermarket bill. Coinstar provides this service and charges 9.9% of the value of the coins inserted into the machine.  HMRC considered this to be a table service of “coin counting”, while Coinstar claimed that it was an exempt supply under the above legislation.

Decision

The UT affirmed the decision of the First Tier Tribunal and dismissed HMRC’s appeal, ruling that Coinstar was providing an exempt financial service. The Transaction was not a coin counting service, but a service of exchanging a less convenient means of exchange into a more convenient one which was provided in return for the 9.9% fee.  This involved a change in the legal and financial status of the parties such that the exemption applied.

Commentary

Another case which demonstrates the fine line between exemption and taxable treatment of “financial” services.  HMRC’s argument here was that this was a single supply of coin counting (which is outside the exemption) but clearly, a person emptying their big pots of change into the machine did not want it to be simply counted, the aim was to obtain a voucher in return for the shrapnel (or, if feeling philanthropic, there is an option to donate the coins to charity – for which Coinstar made no charge). It is fair to observe that just because a supply may be “financial” in nature it is not automatically exempt.  It pays to check the liability of such services because, as may be seen, HMRC often attack exempt treatment.  I have recently had to untangle a position where there was doubt about whether an online service amounted to exempt intermediary service. HMRC ultimately agreed that exemption applied in this case, but that was not their starting point.

VAT: More on agent/principal – Latest from the courts

By   3 July 2017
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Lowcost Holidays Ltd

There is a very important distinction in VAT terms between agent and principal as it dictates whether output tax is due on the entire amount received by a “middle-man” or just the amount which the middle-man retains (usually a commission). It is common for the relationship between parties to be open to interpretation and thus create VAT uncertainty in many transactions.

It appears to me that this uncertainty has increased as a result of the growing amount of on-line sales and different parties being involved in a single sale.

By way of background, I looked at this issue at the end of last year here

The case

On a similar theme, the First Tier Tribunal (FTT) case of Lowcost Holidays Ltd the issue was whether the Tour Operators’ Margin Scheme (TOMS) applied to Lowcost’s activities.

Background

Lowcost was a travel agent offering holiday accommodation in ten other EU Member States, and other countries outside the EU, for the most part to customers based in the UK. The issue between the parties is whether Lowcost provided holiday accommodation to customers as a principal, dealing in its own name, under article 306 of Directive 2006/112, the Principal VAT Directive and therefore came within TOMS or whether it acted solely as an intermediary or agent (in which case TOMS would not apply and the general Place Of Supply rules apply).

Decision

The FTT found in favour of the appellant. HMRC had argued that Lowcost was buying and selling travel and accommodation as principal, however, the FTT decided that the contracts which Lowcost entered into with; hotels, transport providers and holidaymakers were clear that the arrangement was for the appellant acting as agent. The helpful Supreme Court case of SecretHotels2 (which I commented on here) was applied in this case. The main point being that the nature of a supply is to be determined by the construction of the contract – unless it is a ‘sham’ and great weight was given to the terms of Lowcost’s contracts rather than what HMRC often call the “economic reality”.  Specifically highlighted to the court was the fact that Lowcost set the prices for the holidays, which HMRC pointed out would be inconsistent with an agency arrangement. The FTT decided that this was outweighed by the actual terms of the contracts.

Consequently, as Lowcost acted as agent (for the providers of the services not the holidaymaker) the Place Of Supply was determined by reference to where the supply was received under the general rule.  In this case, this is VAT free when the services were received by principals located outside the UK.

As with all TOMS and agent/principal matters it really does pay to obtain professional advice.

VAT: Latest from the courts – Brockenhurst College

By   19 May 2017
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The Court of Justice of the European Union (CJEU) has released its decision in Brockenhurst College here

Unusually, it has gone against the Advocate General (AG) Kokott’s opinion (here) and concurs with previous decisions reached by the UK courts. This is good news for the taxpayer and other providers of educational services. The decision has been referred back to the Court of Appeal (CoA) for it to consider points such as the distortion of competition and the fulfilment of a separate function, however, it is likely that this will not affect the decision by the CJEU and HMRC’s appeal will be dismissed.

Background

The case considered two types of supply made by Brockenhurst College:

  • The supplies made from its restaurant, used for training chefs, restaurant managers and hospitality students. The claim was made on the basis that these were exempt supplies of education and not standard rated supplies of catering
  • Tickets for concerts and other live performances put on by students as part of their educational courses. These were similarly claimed to be exempt.

Students were enrolled in performing arts and catering and hospitality courses.  As part of their course of study they were required to run a restaurant and stage live performances. Persons not enrolled on the relevant courses would pay for and attend these events. The services were usually supplied to a limited public including; parents, siblings, friends etc, and were supplied at a reduced cost as part of the practical element of the students’ education. The appellant argued that the experience was invaluable to their studies and should be regarded as ‘closely related’ to the principal supply of education.  HMRC considered that the services in question were supplied to third parties in return for payment. Consequently, the services, whilst of benefit and practical experience to the students were separate VATable supplies made to third parties and the supplies cannot, therefore, be closely related to the supply of education to the student.

The First Tier Tribunal (FTT) concluded that the supplies in question were exempt as being closely linked to education because:

  • the College was an eligible body and so its principal supplies were exempt supplies of education
  • the supplies were integral and essential to those principal exempt supplies
  • the supplies were made at less than their cost
  • the supplies were not advertised to the general public. Instead, there was a database of local groups and individuals who might wish to attend the restaurant or performances
  • the supplies were not intended to create an additional source of income for the College

HMRC disagreed with the conclusion on the basis that the supplies were outside the education exemption because the students were not the beneficiaries of the supplies in question, but only benefitted from making them. HMRC appealed to the Upper Tribunal (UT).

The UT rejected HMRC’s argument and agreed with the FTT. It held that the supplies were closely related to the exempt supplies of education because they enabled the students to enjoy better education. The requirement in the domestic law for the supplies to be for the direct use of the student was met because they were of direct benefit to him.

HMRC subsequently appealed to the CoA which referred it to the CJEU.

The AG’s opinion was that closely related transactions are to be regarded as independent supplies to the principal supply, but do not include the supply of restaurant or training services supplied to third parties who are not themselves receiving the principal supply of training. The third parties pay for their own consumption (of either the catering or performance) and do not pay for the provision of education. It is very rare that the CJEU makes a decision that goes against the AG’s opinion.

CJEU Decision

The CJEU ruled that activities consisting of students of a higher education establishment supplying, for consideration and as part of their education, restaurant and entertainment services to third parties, may be regarded as supplies closely related to the principal supply of education and accordingly be exempt from VAT – provided that those services are essential to the students’ education and that their basic purpose is not to obtain additional income for that establishment by carrying out transactions which are in direct competition with those of commercial enterprises liable for VAT, which it is for the national court to determine.

Action

We understand that there are a number of cases stood behind Brockenhurst.  Any other colleges, FE, universities or other eligible bodies carrying out similar activities to Brockenhurst need to consider their tax position. It is possible that retrospective claims may be made, depending on specific circumstances. Treating such supplies as exempt may also impact on a body’s partial exemption position and could create business/non-business implications. This may also impact on activities like hairdressing, motor maintenance and beauty treatments which colleges provide on a similar basis to the activities in this instant case.

We are happy to discuss the implications of this case with you.

Latest from the courts: Excise Duty – against which party may an assessment be raised?

By   19 October 2016
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A little “light” relief from VAT.  Indirect taxes extend to Customs and Excise Duties (as well as IPT and various other “lower profile” taxes) and we are able to assist with all of these.

In an interesting Excise Duty case; B & M Retail Limited (B & M) the Upper Tribunal were asked whether an assessment for Customs Duty due on wine and beer could be issued to an entity “down the chain” to an entity which was holding goods at a given time.

Background

HMRC detained the relevant the goods under The Customs & Excise Management Act 1979 (“CEMA”) Section 139 on the grounds that, in their judgment, on the balance of probabilities, Excise Duty had not been paid on the goods. Under B & M’s terms and conditions of business its suppliers were required to warrant that the sale of alcohol to B & M was on a “Excise Duty paid” basis.

The First Tier Tribunal (FTT) decided that despite an HMRC investigation resulting in the fact that they were not satisfied that duty had been paid on the goods, B & M was not responsible for the duty (and subsequent penalties) as the goods had passed through other various entities before they reached the appellant.  The decision was based on the fact that the duty point must have arisen before the goods reached B & M and consequently, the duty was payable by someone further up the supply chain and not simply by the entity which was holding the Excise Duty goods at the Excise Duty point.

Decision

However, the Upper Tribunal disagreed with the FTT and overturned the verdict.  The Upper Tribunal stated that “… the recognition by HMRC that one or more other Excise Duty points must, in principle, have been triggered before B & M received the relevant goods did not preclude HMRC from assessing B & M for excise duty …”.  The Upper Tribunal did, however, remit the case to the First Tier Tribunal to review the evidence to ensure that the assessment is in time and that, as a matter of fact, the Excise Duty due on the beer and wine remains unpaid.

Conclusion

It would appear that this decision currently gives HMRC the right to raise an assessment for duty and penalties anywhere along the supply chain when an entity is holding the goods, even though a “previous” entity may have been responsible for the payment. This is not * * polite cough * * small beer as the amount in question was £5,875,143 of duty and a penalty of £1,175,028.  This is helpful to HMRC as, in this instant case, it would appear that entities further up the supply chain were either not registered, or became deregistered, making it more difficult for HMRC to recover the Duty due.

It is important for every importer to be clear about the Excise Duty position and to carry out detailed due diligence on the relevant shipment.  It is now not possible to escape an assessment by demonstrating that a third party is responsible for the payment of the duty.