Tag Archives: indirect-tax

VAT: TOMS – negative margin permitted? The Square case

By   31 January 2023
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Latest from the courts

In the First-Tier Tribunal (FTT) case of The Squa.re Limited (TSL) the issue was whether unsold inventory or inventory sold at a loss could affect the calculation of the Tour Operators’ Margin Scheme (TOMS).

Background

TSL provided serviced apartments to travellers. The company leased accommodation from the owners of the properties who were frequently, if not exclusively, private individuals who were not registered for VAT.

These leases were often for an extended period, eg; annual leases, such that the appellant is committed under the terms of the lease even where the accommodation cannot then be on supplied or not supplied for a profit.

The Issue

The issue was whether TOMS operated in such a way as to permit a negative calculation resulting in repayment to the appellant. HMRC issued an assessment because, while they accepted that there may be a zero margin on a TOMS supply, they considered that a negative margin was not permitted by the scheme. TSL maintained that a repayment of overdeclared output tax was appropriate if a loss was made (an “overall negative margin”) as TOMS does not exclude the possibility of a negative margin.

The dispute between the parties was a technical one only and concerned the interpretation of the statutory provisions implementing TOMS into UK law.

Legal

The domestic implementation of the TOMS is authorised by The Value Added Tax Act 1994, Section 53 and found in Value Added Tax (Tour Operators’) Order 1987 (SI1987/1806). Guidance is provided via Notice 709/5 and Sections 8 to 13 have the force of law.

Decision

The Tribunal determined that it was clear from the legislation that the taxable amount is concerned with the supply made, and not the VAT incurred on the various cost components. Under normal VAT accounting the output tax charged on supplies is calculated by reference to the consideration received by the supplier from the customer. There can realistically be no concept of negative consideration.

The FTT considered that there is no basis inherent within TOMS which would permit a calculation of a negative sum. There had been a supply (of a designated travel service) for a consideration, and it is the taxable amount of that supply which was to be determined. A negative taxable amount is a “conceptual impossibility”. A negative margin arises as a consequence of a lack of profitability, but VAT is a transaction tax and not a tax on profit.

When sold at a loss where the total calculation resulted in a negative margin the annual sum due by way of output tax would be nil (not a repayment).

Where the accommodation is not sold at all, the FTT noted that this cost represented a cost of doing business but, on the basis that there has been no onward supply, there is no supply which meets the definition of a designated travel service. The relevant accommodation is not for the direct benefit of any traveller so there is no supply and TOMS is irrelevant.

Whilst the FTT considered that were it the case that identified costs incurred in buying in goods and services which are not then the subject of an onward supply should be excluded from TOMS calculations, costs associated with the block booking of accommodation of the type incurred by TSL were to be included. Where such costs exceed the value obtained by onward supply, the negative margin forms part of the annual calculation. However, where the global calculation results in a negative margin the tax due for the year under TOMS is nil and there was no basis for a repayment to TSL.

There was no basis on which to permit an overall TOMS negative margin and the appeal was dismissed.

Commentary

Another demonstration of the complexities of TOMS and the potential pitfalls.

It may be useful to note that input tax claims are not permitted in TOMS calculations, however, any VAT incurred on any bought in, but unsold, services would not be excluded from recovery as there is no TOMS supply. The input tax on unsold inventory was a general cost of doing business and, as such, recoverable in the normal way. Consequently, there may be circumstances for businesses using TOMS where input tax incurred on unsold elements may be claimed outside of TOMS

A VAT Did you know?

By   30 January 2023
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Children’s clothing made from the skin of goats is zero rated, but only if not made from Yemen, Mongolian or Tibetan goats.

VAT: Insurance partial exemption

By   24 January 2023
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HMRC has issued new guidance for the insurance sector. It will be relevant to those dealing with partial exemption for insurers, including business and HMRC when discussing how partial exemption applies in practice for an insurer.

The guidance is intended to help insurers agree a fair and reasonable partial exemption special method (PESM) with the minimum of cost and delay. It also helpfully sets out definitions of various insurance/reinsurance transactions and business structures.

Background

Insurance businesses usually make a mixture of exempt and taxable supplies and may also provide specified services to customers located outside of the UK which incur a right to recover input tax.

When determining how to calculate the recoverable elements of input tax, the starting point is with the standard partial exemption method, as defined within The VAT Regulations 1995, regulation 101, but this will rarely be suitable for the insurance sector.

Many insurance businesses are complex organisations that provide many different services of differing liabilities to customers, often in different countries, using costs form suppliers around the world in different proportions. In addition, certain costs may have little relation to the value of the supplies for which they are incurred.

Therefore, most insurance businesses will need to apply to HMRC for approval to use a PESM.

Fair and reasonable

Partial exemption is the set of rules for determining recoverable input tax on costs which are used, or intended to be used, in making taxable supplies which carry a right of deduction. The first step is usually allocating costs which are directly attributable to taxable or exempt supplies. The balance (overhead input tax, or “the pot”) is required to be apportioned by either a standard method (The “standard method” requires a comparison between the value of taxable and exempt supplies made by the business) or a PESM.

A PESM needs be fair and reasonable, namely:

  • robust, in that it can cope with reasonably foreseeable changes in business
  • unambiguous, in that it can deal, definitively with all input tax likely to be incurred
  • operable, in that the business can apply it without undue difficulty
  • auditable, in that HMRC can check it without undue difficulty
  • fair, in that it reflects the economic use of costs in making taxable and exempt supplies

HMRC will only agree the use of a PESM if a business declares that it has taken reasonable steps to ensure the method is fair and reasonable. HMRC cannot confirm that a special method is fair and reasonable but will make enquiries based on an assessment of risk and will never knowingly approve an unfair or unreasonable special method.

Attribution of input tax

In the insurance sector, relatively few costs are either used wholly to make taxable or exempt supplies.

The VAT regulations (see above) require direct attribution to be carried out before cost allocation to sectors. However, direct attribution at this stage can cause difficulties where tax departments are unaware of how particular costs are used and have a large number of such costs to review.

It has therefore been agreed between HMRC and the Association of British Insurers that, whilst direct attribution must still take place, it need not always be the first step, and could, for some costs, follow the allocation stage. Methods could refer to direct attribution both pre- and post-allocation, so that costs are dealt with in the most appropriate way. The underlying principle is that the method must be both fair and reasonable.

Types of PESMs

The guidance gives the following examples of special methods:

  • sectors and sub-sectors
  • multi pot
  • time spent
  • headcount
  • values
  • number of transactions
  • floor space
  • cost accounting system
  • pro-rata
  • combinations of the above methods

with descriptions of each method.

VAT: What is open market value? The Jupiter case

By   11 May 2021
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Latest from the courts

In the First Tier tribunal (FTT) case of Jupiter Asset Management Group Ltd the issue was the value of management services to an associated third party VAT group.

Background

The value is important because if HMRC believe that a supply between two connected parties (as defined by The Income and Corporation Taxes Act 1988 Section 839) is undervalue and the recipient cannot recover the relevant input tax in full, it is permitted via The VAT Act 1994, Schedule 6, PART 2, para 1 (1) to substitute open market value (OMV) by way of a Notice.

This paragraph is specifically intended to counter tax avoidance. If a supply between connected persons is made below open market value for a legitimate reason that the trader can substantiate, and which is unconnected with avoidance HMRC has the discretion not to issue a Notice. In Jupiter, HMRC directed that OMV be used to calculate the charge as it considered that value was too low and issued an assessment for underdeclared output tax.

Decision

In the absence of comparable supplies, OMV was to be determined by reference to:

  • the full cost of making the supplies;
  • the full cost included the costs incurred on goods and services used in making the supplies and general overhead costs the input tax in respect of which had been recovered
  • the remuneration paid to the executive directors to the extent that that remuneration related to activities performed by the executive directors in making the supplies of the management services

Consequently, the appeal against the output tax assessment was dismissed.

Commentary

An expected outcome, but ne which emphasises that care should be taken with transactions between connected parties, management charges and inter-company charges in general. This is even more relevant since the decision in the Norseman Gold plc case

A VAT did you know?

By   29 April 2021
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Wigs for teddy bears are subject to duty, but in a recent Upper Tribunal case it was ruled that ‘realistic” hearts used for a Build-A-Bear toy are duty free. 

VAT: Is a car wash a car park? The RK Fuels Ltd case

By   26 April 2021
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Latest from the courts

More on car parking.

In the RK Fuels Ltd First Tier Tribunal (FTT) case, the issue was whether the lease of an area of the supplier’s petrol station to a business operating a car wash was an exempt right over land or whether it was excluded from the exemption because it was a car park (the ‘grant of facilities for parking a vehicle’ VAT Act Schedule 9, Grp. 1, Item [1] [h]) and was therefore standard rated.

Background

Although the tenant operated a car wash (and not a car park) and this was a permitted use under the commercial use agreement, the car wash was located on land used as a car park.

The appellant contended that the car park was rented to carry out the business of car washing, and this is clearly stated in the lease agreement. It is not rented as a car park to park cars. Furthermore, a VAT inspection was carried out by HMRC and the point about the rental income being exempt was raised and accepted by HMRC.

HMRC relied on, inter alia, the fact that the relevant part of the lease stated that “the landlord agrees to rent to the tenant the car park. The car park will be used for only the following permitted use (the Permitted use): as a car wash business. Neither the car park nor any part of the premises will be used at any time during the terms of this lease by the tenant for any purpose other than the permitted use.” And the fact that the appellant was permitted an alternative use of the car park to run a car wash does not cause the area to cease to be a car park, nor does it mean that it cannot be used as a car park. There is a need for cars to be parked on the land whilst waiting to be washed, dried, and cleaned. Without the ability to park a car on the land, the permitted use could not occur.

Decision

The appeal was dismissed. The judge found that a grant of facilities for parking vehicles was made, either expressly or by necessary implication and so was standard rated. Further, the occupation of the car park under the terms of the lease agreement is a means to enable the car wash facility to operate. The site for parking is any place where a motor vehicle may be parked. It was also found that the fact that a person may not leave a vehicle does not render a vehicle any less parked.

The fact that the land was referred to as a “car park” consistently throughout the lease agreement was always going to be a problem for the appellant.

The court went on to consider whether a licence over land had been granted. It is a long-standing principle that a central characteristic of a licence over land is the right to exclude others. As the tenant had no right to exclude others from the relevant land (because, as an example given; customers of the petrol station could park there to visit the shop) there was no exempt supply of the right over land.

Commentary

There were other subsidiary issues, namely on whether an option to tax had been made but this was redundant considering the court’s decision on the substantive point. The decision was unsurprising even considering the guidance set out in VAT Notice 742 para 4.3:

 “When a supply is of land rather than parking facilities 

If you grant an interest in, or right over or licence to occupy land in the following circumstances, your supply will be exempted, unless you have opted to tax… 

·         letting of land or buildings where any reference to parking a vehicle is incidental to the main use..”

Even if the argument could be made that the parking was incidental, as the decision was that there was not an interest in, or right over or licence to occupy land the ancillary use point fell away.

Another nail in the coffin of the appeal was that the court found that the decision in the Fareham Borough Council [2014] TC04129 (which found that the right to operate was not an exempt right over land) applied in this case.

Care should be taken when analysing the VAT treatment of a lease. It is tempting to consider that if there is a lease, and it is of land, it is sufficient to merit exemption, but this case demonstrates that further consideration must always be given.

VAT: Treatment of transactions involving cryptoassets. New guidance

By   8 April 2021
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Further to my articles on cryptoassets and Bitcoin HMRC have published an updated Cryptoassets Manual CRYPTO40000 which sets out its interpretation of trading in cryptocurrencies.

It covers:

  • economic activity
  • supplies of tokens
  • exchanges
  • exemption
  • value
  • case law
  • betting and gaming
  • other taxes; CGT, CT, CTCG, Income Tax, NIC and Stamp Taxes

Any business dealing in any way with cryptoassets needs to understand the VAT and other tax implications of services to, and by it.

VAT: Exporting and importing businesses -prepare for Brexit

By   8 December 2020
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New rules from 1 January 2021.

GOV.UK has published new guidance from the Department for International Trade.

The guidance sets out what a business will need to do 1 January 2021. It will be updated if anything changes.

It covers:

The UK Global Tariff

Find a commodity code

Check tariffs

Trade agreements

Exporting to and importing from the EU

Exporting to and importing from non-EU countries

Import controls and customs

Trade remedies

All business with goods crossing the new border will need to understand and prepare for the changes.

VAT: Changes to services post Brexit

By   18 November 2020
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As we know, the UK will leave the EU on 1 January 2021. A lot of articles have, understandably, focussed on the movement of goods between the UK and the EU, however, there will be significant changes for suppliers and consumers of services. Some of these will be beneficial, and some, charitably, will be a royal pain.

In this article I have tried to summarise the most important changes. Compared to supplies of goods, the changes to services are more certain, so businesses can make preparations with more confidence.

The changes to services

  • Currently, B2B supplies of services to EU recipients are generally UK VAT free (the customer accounts for VAT via a reverse charge). However, currently, for most B2C supplies UK VAT is chargeable. From next year, there is no need to distinguish between B2B and B2C supplies of services to EU recipients – all will be UK VAT free.  Also, there will no longer be the need to differentiate EU and outside the EU customers. A UK business making such supplies will no longer be required to obtain its customer’s VAT number and quote this on the relevant invoice. All that is required is that there is evidence that the recipient belongs outside the UK. I understand that HMRC has announced that VATA 1994, Sch4A para 16 will be amended to bring the EU in line with the rest of the world (well, in VAT terms!)
  • There will be no significant change to, inter alia; land, admission to events, digital and telecoms services which have special rules and fall outside the general VAT rule. Digital services (MOSS) changes slightly and are considered here.

NB: UK businesses will still be required to apply the reverse charge to services received from the EU as these will be VAT free when purchased.

  • Reclaiming VAT incurred in the EU. Currently, a singe claim is submitted to HMRC for all VAT incurred in other Member States. This way of claiming will change post Brexit. A business will be required to submit a claim to each individual EU country in which it has suffered VAT. Broadly, this will be what is known as an EU Thirteenth Directive claim. These need to be done in the language of the relevant country and on specific forms. There will, inevitably be different rules for; deadlines, amounts claimable, methods of claim, information required and procedures. Experience insists that there will be a lot more red tape, rejections and hassle. Good luck!
  • For various reasons, it is likely that more UK businesses will be required to VAT register in the EU. This may be via legal requirements, or commercial planning. As an example, a UK business supplying, say, telecoms services, may be required to register in a country where the supply is consumed (the so-called use and enjoyment rules). Each country has its own rules and some may apply the reverse charge procedure, but businesses supplying:
    • telecommunications services
    • broadcasting services
    • electronically supplied services (for business customers)
    • hired goods
    • hired means of transport
    • insurance repair services

will need to check the requirements of each Member State to which it makes supplies. Also, businesses in the EU making such supplies in the UK are likely to be required to register here.

  • UK businesses suppling financial services (FS) to customers in the EU will benefit from the post Brexit changes. Currently FS providers to recipients outside the EU are able to recover attributable input tax. Similar services received in the UK and the rest of the EU are deemed to be exempt and there is no input tax recovery (for partial exemption see here), From 1 January 2021 as the UK will be a third country (third country refers to any country outside the EU, and in this case outside its economic structures – the single market and the customs union) so any FS supplied to EU recipients will qualify as “specified supplies” such that attributable input tax will be reclaimable. The legislation here: Value Added Tax (Input Tax) (Specified Supplies) (EU Exit) (No. 2) Regulations 2019. So, some rare good news. Full details of FS input recovery here and HMRC guidance here.
  • It is likely that a UK business which is required or chooses to VAT register in an EU Member State will need to appoint either a formal agent or a fiscal representative. This requirement varies between EU countries, so a business will need to check the rules in each country.  This will add complexity and costs. A fiscal representative is jointly liable for any VAT debts and penalties, so most entities acting as representatives will require a bank guarantee or similar to cover its exposure.
  • EU businesses supplying certain services in the UK. There may be an increased requirement for overseas businesses to VAT register in the UK, regardless of whether they have a place of belonging here. Any EU businesses in this position requiring advice please contact me.
  • TOMS. The Tour Operators’ Margin Scheme (details here) is an EU-wide arrangement which, broadly, simplifies VAT for tour operators. This is an area which remains uncertain. It is possible that the UK will negotiate a Brexit which does not disturb TOMS (increasingly unlikely I would say). But in a no-deal Brexit the government has announced that UK tour operators can continue to apply TOMS to UK holidays. However, supplies of holidays outside the UK will not be subject to VAT. This will put UK tour operators at an apparent advantage compared to EU competitors. However, it is likely that they will soon be required to VAT register in every EU country in which it sells holidays. Watch this space.

Commentary

A mixed bag of changes to businesses supplying services. It is crucial for all suppliers of services to the EU to review their position and put plans in action sooner rather than later. If you, or your clients, are unsure about these changes, or would like specific advice, please contact me. I can also offer a review of a business to advise on what planning is required, or beneficial. It is important to get this right as there could be significant penalties, back tax and other unwanted outcomes.