Tag Archives: non-business

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 Latest from the courts; vouchers (again)

By   13 February 2017
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The Court of Appeal (CA) case: Associated Newspapers Limited (ANL) considered the VAT treatment of free vouchers.

Business promotions are an area of VAT which continues to prove complex.  This is further exacerbated by changes to the legislation at EC and domestic level and ongoing case law.   A background to the issue of vouchers here 

And a background to the hearing of this particular case at the Upper Tribunal here

Background

The appeal concerned the VAT consequences (in respect of both input and output tax) of promotional schemes carried out by ANL in order to boost the circulation of the newspapers: Daily Mail and the Mail On Sunday.  ANL gave away Marks & Spencer vouchers to people who bought these newspapers for a minimum of three months. The questions where whether attributable (to the provision of the vouchers) input tax was recoverable, and, was there a deemed supply such that output tax was due on the vouchers.  One scheme was managed for ANL by The Hut.com Limited. The Hut received a fee for its services which was subject to VAT and which ANL sought to deduct as input tax. The Hut also purchased the retailer vouchers in batches (usually at a discount) and invoiced them to ANL at cost and also subject to VAT.  In another scheme, ANL purchased vouchers directly from Marks & Spencer.

Decision

HMRC sought to rely on  paragraph 14 of VAT Information Sheet 12/2003, viz: “Where face value vouchers are purchased by businesses for the purpose of giving them away for no consideration (e.g. to employees as ‘perks’ or under a promotion scheme) the VAT incurred is claimable as input tax subject to the normal rules. Output tax is due under the Value Added Tax (Supply of Services) Order 1993. Therefore all vouchers given away for no consideration will be liable to output tax to the extent of the input tax claimed”.

However, the CA agreed with the decisions made at the Upper Tribunal.  Although the vouchers were given away (no consideration) input tax was recoverable because there was an overarching business purpose for the expenditure (increasing sales).  Additionally, it was decided that the provision of the vouchers was not caught by the deemed supply rules so there was no output tax due when the vouchers were given away to readers. ANL also sought to reclaim input tax on vouchers purchased directly from Marks & Spencer – usually at a discount from their face value, but at a price which purported to include VAT. The CA also agreed with the UT on this point; that no VAT was charged on these retailer vouchers, and consequently, there was no input tax to recover.

Commentary

An interesting case, and one that will reward with a reading in full.  It does seem that HMRC’s views on vouchers need revising in light of this decision.  As always, if your business, or your clients’ businesses, are involved with vouchers in any way it is important to ensure that the VAT treatment is correct.  This is especially relevant in light of; previous case law, recent changes to the rules applicable to the treatment of vouchers (as set out in the link above) as well as this specific case.

Please contact us should you wish to discuss this matter.

Crime doesn’t pay……..VAT. Is there tax on illegal activities?

By   4 January 2017
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A gentle introduction to VAT for the new year.  A number of people have been surprised to find that crime does pay tax, thank you very much. It seems bad enough that the police should chase and catch you, put you in the dock and send you to prison, without finding that your first visitor is HMRC….

Dodgy perfume?

Goodwin & Unstead were in business selling counterfeit perfume. They were also up-front about what they were doing. Unstead claimed that “Everything I can carry in my vehicle, everything I trade in and sell, is a complete copy of the real thing. I do not sell goods as the real thing. In fact I sell my goods for a quarter of the original price. I am not out to defraud or con the public. I only appeal to the poseurs in life.”

The real manufacturers might have sued these men for passing off the product of their chemistry experiments in trademarked bottles, but it was HMRC who sent them to jail – for failing to register and pay VAT on their sales. The amount they should have collected was estimated at £750,000, which shows that they must have appealed to a great many poseurs.
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If they had paid the VAT, Customs would have had no problem with them. Their customers must have been reasonably satisfied – if your counterfeit perfume smells something like the real thing, why worry?
They tried to get out of jail with an ingenious argument – if the sale of the perfume was illegal, surely there shouldn’t be VAT on it. It wasn’t legitimate business activity, so it wasn’t something that ought to be taxable. The European Court had no time for this. They pointed out that it would give lawbreakers an advantage over lawful businesses; they wouldn’t have to charge VAT. The judges suggested that maybe people would even deliberately break the law so they could get out of tax; in this case, the only thing that made the trade illegal was treading on someone’s trademark rights, and that was something that might happen at any time in legitimate businesses. The judges said that VAT would apply to any trade which competed in a legal marketplace, even if the particular sales broke the law for some reason. Counterfeit perfume is VATable because real perfume is too. Of course, Customs have traditionally had two main roles – looking for drug smugglers, and dealing with VAT-registered traders. They have generally treated both with much the same suspicion, but the ECJ made it clear in this case that the two sets of customers are completely separate.

“Personal” services?

Customers paid the escort £130, of which £30 was paid to the agency. VAT on £130 or VAT on £30?

The first hearing before the Tribunal went something like this (this may be using artistic licence, but the published summary implies it was so):

HMRC: “We think the VAT should be on £130 because the escorts are acting as agents of the escort business.”
Trader: “No, it’s just £30, the £100 belongs to the escort and is nothing to do with me.”
Tribunal chairman: “All right, tell me a bit about how the business operates.”
Customs: “No.”
Tribunal chairman: “What?”
Customs: “You don’t want to know.”
Tribunal chairman: “How can I decide whether the escorts are acting as agent or principals without knowing how the business operates?”
Customs: “Don’t go there, just give us a decision.”
Tribunal chairman: “Trader, you tell me how the business operates.”
Trader: “I agree with him, you don’t want to know.”
The Tribunal seems to have been a bit baffled by this. They were aware that Customs had a great deal more evidence which had been collected during the course of a thorough investigation, and they asked the parties to go away and decide whether they might let the Tribunal see a bit more of it so they could make a judgement rather than a guess.

What about drugs then?

It’s well-known that you are allowed to smoke dope in some establishments in Amsterdam, although the Dutch authorities are thinking about restricting this to Netherlands’ residents. They may find that such a rule contravenes the European Law on freedom of movement – under the EU treaty, you can’t be meaner to foreigners than you are to your own people just because they are foreign. That’s a nice idea, but individuals and governments keep trying it on. Anyway, the Coffeeshop Siberie rented space to drug dealers who would sell cannabis at tables for people to take advantage of the relaxed atmosphere. Presumably they are preparing to examine passports or local utility bills before making the sale, if only the Dutch are to be allowed to get stoned. Anyway, the Dutch authorities asked the coffee shop’s owners for VAT on the rent paid by the dealers, and the owners appealed to the ECJ. This time, surely, it was sufficiently illegal. Although the consumption of drugs was tolerated, it was still against the law, and it must therefore be not VATable.
The judges pointed out that the coffee shop was not actually selling drugs. They were just providing the space for other people to sell drugs. Although selling drugs was completely illegal, and there was no legitimate market in cannabis, renting space was a normal business activity. Renting space to someone who did something illegal with it was in the same category as the dodgy perfume sales in Goodwin & Unstead: it was a bit illegal, but not illegal enough. The VAT was still due.

Counterfeiting?

In a German case, the ECJ ruled that the importation of counterfeit money was outside the scope of VAT. The Advocate-General observed that a line must be drawn between, on the one hand, transactions that lie so clearly outside the sphere of legitimate economic activity that, instead of being taxed, they can only be the subject of criminal prosecution, and, on the other hand, transactions which though unlawful must nonetheless be taxed, if only for ensuring in the name of fiscal neutrality, that the criminal is not treated more favourably than the legitimate trader’.

So, there you have it, if you are of a criminal disposition, and you want to avoid VAT, funny money is the way to go.  Please note, this does not constitute advice…..!

VAT – A Christmas Tale

By   12 December 2016
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Well, it is Christmas….

Dear Marcus

My business, if that is what it is, has become large enough for me to fear that HMRC might take an interest in my activities.  May I explain what I do and then you can write to me with your advice?  If you think a face to face meeting would be better I can be found in most decent sized department stores from mid September to 24 December.

First of all I am based in Greenland but I do bring a stock of goods, mainly toys, to the UK and I distribute them.  Am I making supplies in the UK?

The toys are of course mainly for children and I wonder if zero rating might apply?  I have heard that small T shirts are zero rated so what about a train set – it is small and intended for children. Does it matter if adults play with it?

My friend Rudolph has told me that there is a peculiar rule about gifts.  He says that if I give them away regularly and they cost more than £150 I might have to account for VAT.  Is that right?

My next question concerns barter transactions.  Dads often leave me a food item such as a mince pie and a drink and there is an unwritten rule that I should then leave something in return.  If I’m given Tesco’s own brand sherry I will leave polyester underpants but if I’m left a glass of Glenfiddich I will be more generous and leave best woollen socks.  Have I made a supply and what is the value please?  My feeling is that the food items are not solicited so VAT might not be due and, in any event; isn’t food zero-rated, or is it catering? Oh, and what if the food is hot?

Transport is a big worry for me.  Lots of children ask me for a ride on my airborne transport.  I suppose I could manage to fit 12 passengers in.  Does that mean my services are zero-rated?  If I do this free of charge will I need to charge air passenger duty?  Does it matter if I stay within the UK?  My transport is the equivalent of six horse power and if I refuel with fodder in the UK will I be liable for fuel scale charges?  After dropping the passengers off I suppose I will be accused of using fuel for the private journey back home.  Somebody has told me that if I buy hay labelled as animal food I can avoid VAT but if I buy the much cheaper bedding hay I will need to pay VAT.  Please comment.

Can I also ask about VAT registration?  I know the limit is £83,000 per annum but do blips count?  If I do make supplies at all, I do nothing for 364 days and then, in one day (well night really) I blast through the limit and then drop back to nil turnover.  May I be excused from registration?  If I do need to register should I use AnNOEL Accounting?  At least I can get only one penalty per annum if I get the sums wrong.

I would like to make a claim for input tax on clothing.  I feel that my red clothing not only protects me from the extreme cold but it is akin to a uniform and should be allowable.  These are not clothes that I would choose to wear except for my fairly unusual job.  If lady barristers can claim for black skirts I think I should be able to claim for red dress.  And what about my annual haircut?  That costs a fortune.  I only let my hair grow that long because it is expected of me.

Insurance worries me too.  You know that I carry some very expensive goods on my transport.  Play Stations, Mountain Bikes, i-pads and Accrington Stanley replica shirts for example.  My parent company in Greenland takes out insurance there and they make a charge to me.  If I am required to register for VAT in England will I need to apply the reverse charge?  This seems to be a daft idea if I understand it correctly.  Does it mean I have to charge myself VAT on something that is not VATable and then claim it back again?

Next you’ll be telling me that Father Christmas isn’t real……….

HAPPY CHRISTMAS EVERYBODY!

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

Latest from the courts – Recovery of VAT on cars purchase

By   14 September 2016
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Input tax incurred on the purchase of cars

There is a specific blocking order (Value Added Tax (Input Tax) Order 1992) which prohibits the recovery of input tax incurred on the purchase of cars. The block applies if there is any private use of the car whatsoever (even one mile).  HMRC’s approach has been that unless a business can demonstrate that there is no private use the input tax is disallowed.  Previous case law, notably Elm Milk Limited relied on the terms of the insurance covering the car (whether private use was permitted) and inter alia, the physical security of the car.

The case

In the First Tier Tribunal (FTT) case of Zone Contractors Limited TC05330 it was held that VAT was reclaimable on six cars purchased for business use.  The reason for the decision was that the relevant employment contracts specifically and explicitly prohibited any private use of the vehicles.

HMRC claimed that the business had not demonstrated that the use of the cars was monitored and controlled sufficiently to evidence the fact that there was no private use. However the FTT decided that the employment contracts could be relied on and permitted the claims. What is relevant in this case is that the court decided that no reliance could be placed on insurance documentation preventing recovery on the grounds of the policy including cover for use for social, domestic and pleasure and that HMRC could not rely on such documentation to disallow a claim as they had in the past.

Action

If a business has been denied input tax recovery on cars by HMRC, or has refrained from claiming input tax based on previous case law, it may well be beneficial to review the circumstances in light of this case. We can assist in lodging claims where appropriate.  After all, the VAT of £8000 on a £40,000 car is significant; even if only one has been purchased.

VAT Latest from the courts – what is an economic activity by a charity?

By   5 September 2016
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In the VAT case of Longridge on the Thames (Longbridge) here the Court of Appeal considered previous decisions at the First Tier Tribunal (FTT) and Upper Tribunal (UT) on whether Longbridge carried on an economic activity. This is an important case as it goes some way in determining the meaning of “business” in light of the term “economic activity” used in EC legislation.  The term “business” is only used in UK legislation, The Principal VAT Directive refers to “economic activity” rather than business, and since UK domestic legislation must conform to the Directive both terms must be seen as having the same meaning.  Since the very first days of VAT there have been disagreements over what constitutes a “business”. I have previously commented on this matter here 

Background

Longbridge is a charity. It uses volunteers to provide boating activities (mainly to young people) on the Thames. The fees charged by Longbridge were often at below cost and the charity relied on donations to continue its operations. It constructed a new building and sought VAT zero rating of these costs on the basis that the building was to be used for non-business purposes. Consequently, it was crucial to the relief claimed that the charity was not carrying out a business in VAT terms.  The FTT and the UT found that the charity’s “predominant concern” was not to make supplies for a consideration and therefore it was not in business. These findings were based on long standing case law, the most salient being; Lord Fisher and Morrison’s Academy Boarding Houses Association. Lord Fisher set out a series of tests which HMRC rely on to determine whether a business exists – considered here and here 

Decision

The Court of Appeal allowed HMRC’s appeal.  It decided that Longridge was carrying on an economic activity and therefore the construction of the new building could not be zero rated.  The decision is worth considering in full, however, the court held that there was a “direct link” between the fees paid and service the recipients received, even if it was subsidised in certain instances and that Longbridge was furthering its charitable objectives.  The requirement for a direct link was clearly demonstrated in The Apple and Pear Development Council case. The establishment of the direct link meant that Longridge was carrying in business (in UK law).

Commentary

The important test for whether an economic activity is being carried on is now; the direct link between payment and service. There is no longer the requirement to consider the test of “predominant concern” and in fact it was stated in the decision by the judges that this test is “unhelpful and may be misleading.” We must now ignore; the motive of the provider of the service, its status as a charity, the amount charged, whether subsidies are received by the charity, and whether volunteers are involved in the relevant activities.

This is a very big change in the analysis of whether a business exists and basically means that previous cases on this matter were wrongly decided.  It brings the UK into line with the EC on the definition of an economic activity and therefore provides clarity on this matter – which has long been an area which has desperately required it.

It means that, unless the decision is reversed at the Supreme Court, we say goodbye to the unloved Lord Fisher tests. However, this may be very bad news for charities and not for profit entities that have relied on these tests to avoid VAT registration and charging VAT on their supplies.  It is likely that many more charities will be dragged into the VAT net.  It remains to be seen whether this case will trigger a renewed targeting effort on charities by HMRC, but what is clear is that charities need to be conscious of this new turn of events and consider their position.  We strongly recommend that any bodies which have had previous discussions with HMRC on this point and any entity which is affected by this decision take professional advice immediately.

VAT – Latest from the courts: impact of outside the scope income

By   25 July 2016
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Outside the scope (of VAT)  income leads to loss of input tax: Upper Tribunal (UT) decision

In the recent UT case of VCS it was decided that input tax relating to outside the scope activities of the appellant was not recoverable.

Background

VCS is a car park operator, which manages and operates car parking for its clients on private land. Inter alia, providing parking control services, including the issue of parking permits and enforcement action (solely at the discretion of VCS).

In practice, most of VCS’s revenue is derived not from providing parking permits, but from parking charge notices (“PCNs”) which it issues to motorists who are in breach of the rules for parking in the car parks. In the period considered, approximately 92% of VCS’s income came from PCNs, and just 8% from parking permits. In March 2013 the Court of Appeal (CoA) decided that the PCN revenue was not subject to VAT. This was because VAT is chargeable only in respect of revenue from the supply of goods or services. The CoA held that the PCN revenue was not earned in respect of supplies of services liable to VAT. Rather, the PCN revenue represented damages for breach of contracts between VCS and the motorists and/or damages for trespass by the motorists.

Decision

The UT agreed with the First-tier Tribunal’s decision that that VCS was not entitled to recover input tax that related to outside the scope (PCN) income and that it was reasonable to assume that since 92% of the income generated by VCS was outside the scope of VAT, only 8% of the input tax incurred on its costs should be deductible.

Commentary

It is clear that there is a direct link between the general overheads of the business in respect of which VCS incurred input VAT and both VCS’s taxable supplies of parking permits and the PCN income.  The appellant’s contention that a taxable person (such as VCS) is entitled to deduct all the input tax if the goods or services are used to any extent for the purposes of taxed transactions was doomed to failure and the chairman stated that “…we accept HMRC’s interpretation of Article 168 PVD. Accordingly, where purchased goods or services are used by a taxable person both for transactions in respect of which VAT is deductible (ie; taxable supplies) and for transactions in respect of which VAT is not deductible (ie; where the transactions do not constitute economic activity or do not constitute taxable supplies (even though they may be transactions undertaken in the course of a taxable person’s business) or where the supplies are exempt), VAT may only be deducted in so far as (that is, to the extent that) it is attributable to taxable supplies.”.

There are no surprises in this decision, but it serves as a timely reminder that not only is “VAT free” income not always a beneficial treatment, but any income that does not relate to a business’s’ taxable supplies can create costs and complexities, whether it be outside the scope, non-business, or exempt.

Outside the scope income can be received by any business in certain circumstances, and it must be recognised in its VAT reporting as this case demonstrates that not all input tax may be recovered and there is no de minimis for input tax attributed to outside the scope and non-business, it is simply not input tax.

Full case Vehicle Control Services Limited (VCS)

VAT – The “business” of shooting; a tale

By   15 July 2016
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Sometimes one is involved in a dispute which goes to the core of the tax.  This is a case which highlights basic VAT principles, HMRC’s approach to an issue and the lengths to which a taxpayer has to go to defend his position.

Are you sitting comfortably?

A day out in the countryside; striding across beautiful landscape, amongst friends, enjoying each other’s’ company and a bit of sport – can this really be the subject of such intense debate with HMRC? Well, unfortunately this seems to be the case when it comes to the operation of a day’s shooting. In the eyes of the taxman, whether or not a profit or a surplus is achieved, shooting, conducted in the course of furtherance of a business is subject to VAT.

This is not usually an issue which shooting syndicates find themselves having to address; they are not concerned with the ins and outs of what constitutes a business for the purposes of the VAT legislation. However, HMRC was pursuing this issue in earnest and they have a team devoted solely to attacking shoots.

Who is HMRC targeting?

HMRC seem to be focusing on syndicate run shoots which are not registered for VAT but who HMRC believe are operating on business principles. If an organisation is operating as a business then it may be liable to register for VAT if certain income thresholds are exceeded. The shoot will then have to charge output VAT on the supplies it makes.  In my case there would have been a significant assessment plus penalties and interest which could double the past VAT bill.

How is HMRC attacking the issue?

HMRC is looking closely at the specific activities of syndicate shoots in order to build an argument demonstrating that the organisation of the shoot is run on “sound business principles”.  The reason that there is room for debate on this matter is that what constitutes a business is not explicitly defined anywhere in the VAT legislation either in UK or EC law. Rather, the issue has been defined in case law.

The defining case was Lord Fisher, which co-incidentally also concerned a shoot. This case is relied upon throughout the VAT world to give guidance on what constitutes a business – and not just in respect of shoots but for all types of activity.

Anyway, back to this syndicate…

I was involved in a battle lasting four years which concerned a local shoot run for over five decades by a group of friends and which was provided only for the benefit of the syndicate members. The shoot was not open to the common commercial market place or members of the public and the shoot did not advertise. HMRC spent a great deal of time trying to understand the finer details of the running of this shoot and concluded that it was a business

We advised The Shoot to appeal to the VAT Tribunal against HMRC’s decision to levy VAT on its activities.

They key to the syndicate’s defence was to demonstrate that no true business would operate commercially in the way that The Shoot does.  If it did, it would be completely unprofitable and would soon be out of business. To demonstrate this effectively, every aspect of the shoot was examined in detail and compared and contrasted with the way a commercial shoot operates. This involved everything from the lunch arrangements, CVs of the gamekeepers and how beautiful the land is, right through to whether chicks or poults are purchased and whether local deer were sold to the highest bidder. However, the most important factor was the demonstration that the syndicate does not have a profit built in to the cost structure and the amounts that the syndicate members contribute. The syndicate is run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.”

It all sounds so simple to those familiar with the industry but unfortunately from a VAT ‘business’ perspective it has been a long, stressful and costly argument for the appellant to make.  A few days before the case was to be heard at the Tribunal, HMRC withdrew their assessment and conceded the case.

HMRC had seen the many witness statements filed by the members of the syndicate waxing lyrical about how this was an age-old hobby run by a few friends and in no way could it be considered a commercial business. They had seen the expert witness report written by a specialist in the field. The distinctions made between commercial and syndicate shooting were made very clear. They had also seen the powerful argument which concluded that the shoot “cannot seriously be suggested to amount to a ‘business’ for the purpose of the VAT code”.

What this means?

Of course this victory over HMRC was a fantastic result for the members of the The Shoot, but from a practical point of view quite frustrating in that the case was not heard; denying other entities the benefit of the predicted victory.  Alas, it was one case that HMRC could not afford to lose.

It is therefore likely that HMRC will continue to target other shoots where they think they can ‘win’ or at least not be challenged.

Have you been affected? – What should you do next?

If this makes for frighteningly familiar reading and you or your local syndicate shoot are, or have been, under HMRC investigation then it is vital that you should take professional advice.  As we orchestrated the defence for The Shoot we are the leading advisers in such matters.

 For completeness, the six tests derived from the Lord Fisher case (and others) are: 
  1. Is the activity a serious undertaking earnestly pursued?
  2. Is the activity an occupation or function, which is actively pursued with reasonable or recognisable continuity?
  3. Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  4. Is the activity conducted in a regular manner and on sound and recognised business principles?
  5. Is the activity predominantly concerned with the making of taxable supplies for a consideration?
  6. Are the taxable supplies that are being made of a kind which, subject to differences of detail, are commonly made by those who seek to profit from them?
 The recent case of Lajvér Meliorációs Nonprofit Kft. and Lajvér Csapadékvízrendezési Nonprofit Kft is also helpful in looking at what a business is details here

VAT – Charities and donations. Latest from the courts

By   22 June 2016
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What is a donation?

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

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

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

Background

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

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

Contentions on the consideration point

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

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

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

The Decision

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

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

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

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