Dance classes in some EU countries are subject to different VAT rates depending on whether the dance style is considered artistic or entertainment. In the UK, belly dancing and ceroc lessons are standard rated, but ballet is exempt.
Tag Archives: partial-exemption
VAT: HMRC partial exemption guidance updated
VAT Notice 706 has been updated on he option to send an email to get an approval for a partial exemption special method has been removed from sections 6.2, Appendix 2 and how to apply.
Para 6.2 – “Get approval for a special method
You cannot change your method without our prior approval. You must continue to use your current method, whether that is the standard method or a special method, until we approve or direct the use of another method or direct termination of its use.
You can get approval for a special method by using the online service.
If you are unable to use the online service, contact VAT Written Enquiries team by post.
You must explain clearly how your proposed method will work, you should see Appendix 2 in this guide.
When you propose a special method you must include a declaration that the method is fair from its effective date of application, and for the foreseeable future so that from its effective date a fair amount of input tax is recovered”.
Examples of special methods (PESM) are:
- 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
Partial Exemption guidance here
VAT: Electronic Invoicing (eInvoicing)
The rules for sending, receiving and storing VAT invoices in an electronic format.
What is an eInvoicing?
eInvoicing is the transmission and storage of invoices in an electronic format without duplicate paper documents. The format may be a structured format such as XML or an unstructured format such as PDF.
The benefits of eInvoicing
eInvoicing offers significant advantages over paper invoices. The electronic transmission of documents in a secure environment usually provides for:
- structured data for auditing
- improved traceability of orders
- decreased reliance on paper reducing storage and handling costs
- rapid access and retrieval
- improved cash flow
- security and easier dispute handling
Currently, a business does not have to use eInvoicing, but if it does, in conjunction with paper invoices, (a so-called dual system) it can only do this for a short period, ie; if eInvoicing is being trialled.
It is not necessary to inform HMRC that a business is using eInvoicing.
Requirements
eInvoices must contain the same information as paper invoices.
A business may eInvoice where the “authenticity of the origin”, “integrity of invoice data”, and “legibility” can be ensured, and the customer agrees to receive eInvoices
- authenticity of the origin means the assurance of the identity of the supplier or issuer of the invoice
- integrity of content means that the invoice content has not been altered
- legibility of an invoice means that the invoice can be easily read
A business is free to select a method of ensuring the above requirements. Examples of ensuring authenticity and integrity include:
- an advanced or qualified electronic signature
- Electronic Data Interchange (EDI)
- business controls which create a reliable audit trail between an invoice and a supply of goods or services
Formats
HMRC accepts a variety of eInvoice message formats, including:
- traditional EDI standards such as UN/EDIFACT, EANCOM and ODETTE
- XML-based standards
- comma-delimited ASCII, PDF
The eInvoices must be transmitted in a secure environment, using industry-accepted authenticity and security technologies, including, but not limited to: http-s, SSL, S-MIME and FTP.
Internal controls required
A business will need to demonstrate that it has control over:
- completeness and accuracy of the invoice data
- timeliness of processing
- prevention, or detection of, the possible corruption of data during transmission
- prevention of duplication of processing (by the person who receives the invoice)
- prevention of the automatic processing, by the person who receives the invoice, of certain types of invoice on which VAT may not be recoverable – for example, margin scheme invoices
- a recovery plan in case of a system failure or loss of data
- an audit trail between eInvoicing systems and the internal application systems which are used to process the eInvoices
Storage
The same rules apply to storage of eInvoices as to paper invoices. A business must normally keep copies of all invoices for six years.
HMRC Access
HMRC may request access to:
- the operations of any computer systems which produce or receive VAT invoices, and to the data stored on them
- supporting documentation including; file structures, audit trail, controls, safe keeping, and information about how the accounting system is organised
- information about the system’s interrogation facilities
HMRC must be able to take copies of information from the system.
If a business cannot meet the conditions for transmission and storage of eInvoicing, it will have to issue paper invoices.
Overages – what are they and what is the VAT treatment?
Land and property transactions are often complex and high value for VAT purposes. One area which we have been increasingly involved with is overages.
What is an overage?
An overage is an agreement whereby a purchaser of land agrees to pay the vendor an additional sum of money, in addition to the purchase price, following the occurrence of a future specified event that enhances the value of the land. This entitles the seller to a proportion of the enhanced value following the initial sale. Overages may also be called clawbacks, or uplifts.
Overages are popular with landowners who sell with the benefit of development potential and with buyers who may be able to purchase land at an initial low price with a condition that further payment will be made contingent on land increasing in value in the future – this may be as a result, of, say, obtaining Planning Permission.
VAT Treatment
This is not free from doubt. HMRC’s current view is that the VAT treatment of the overage follows the VAT treatment of the initial supply. This means that it is deemed to be additional consideration for the original supply, so if the land was subject to an Option To Tax (OTT) when originally disposed of the overage payment would be subject to VAT at 20%. Conversely, if the land was sold on an exempt basis, the overage is similarly VAT free and it is important to recognise this and not to charge VAT unnecessarily which would create difficulties for the buyer (because it would not be a VAT-able supply, HMRC would disallow a claim for input tax).
It is crucial to identify this VAT outcome, especially as there could be a long period between the original sale and the overage and there may be a succession of overage payments. Comprehensive records should be made and retained on the VAT status of land sold.
Uncertainty
Uncertainty arises because HMRC have changed its view on overages. The original interpretation was that there were two separate supplies, each with distinct VAT treatments. As there was no link to the original supply, the overage was mandatorily standard rated, even if the initial supply was exempt.
Additionally, take the position where the original sale was standard rated due to an OTT on the land, and the buyer subsequently built and sold new dwellings (which effectively disapplies the OTT via para 3, Notice 742A) it could be argued that the overage should be exempt as it is linked to the sale of the new houses.
We understand that HMRC’s analysis is that VAT treatment of overages is determined at the time of the original supply such that it cannot be affected by subsequent events.
In our view, the “new” HMRC view may be open to challenge – We await updated published guidance on this.
VAT refunds guidance
VAT Claims
HMRC has completely rewritten its manual VRM7000 on VAT repayments and set-off.
When a business makes a claim for VAT (for whatever reason) HMRC have the power to set-off a payment against other amounts due.
HMRC also has a discretion to take account of any taxpayer liabilities in other regimes HMRC administers such as corporation tax or excise duty.
In summary, the new guidance covers:
- Inherent set-off via The VAT General Regulations 1995, Section 80(2A) and Regulation 29. This is where, say, a supply was incorrectly treated as standard rated when it was exempt. It would not be possible to claim the overcharged output tax (subject to unjust enrichment) without recognising the potential overclaim of input tax as a result of partial exemption.
- Set-off under The VAT Gen Regs 1995, Section 81(3) HMRC. This covers HMRC liability to only pay a claim after setting off any VAT, penalties, interest or surcharge owed to it. Section 81(3) is mandatory and applies to the current liabilities of a taxpayer, regardless of the period incurred.
- Set-off under section 81(3A). This is a special provision which requires HMRC to set any liabilities that would otherwise be out-of-time to assess, against any amounts for which HMRC is liable under a claim. It does this by disregarding the assessment time limit, to undo all the consequences of a mistake.
- VAT group set-offs. When a company leaves a VAT group, it is still jointly and severally liable under section 43(1) VAT Act 1994 for any outstanding debts of the group incurred while the company was a member. Any VAT claim by the ex-member will be subject to set-off against these group debts.
- Set-offs against other taxes and duties. HMRC has the discretion under Section 130 of the Finance Act 2008 to set-off debts due from any other tax regimes HMRC is responsible for. This is subject to the insolvency rules in section 131 Finance Act 2008. A taxpayer should always check that no further liabilities have arisen since the claim was made.
- Transfers of rights to claim to another person (Section 133 of the Finance Act 2008) – A claim will be subject to set-off of any outstanding liabilities to HMRC from both transferor and transferee. NB: HMRC policy is to make reasonable efforts to recover outstanding debts from the original creditor before applying set-off to the current creditors claim.
VAT: Charity exemption for show admittance – The Yorkshire Agricultural Society case
Latest from the courts
In the Yorkshire Agricultural Society First Tier Tribunal (FTT) case the issue was whether payments for entry into the annual The Great Yorkshire Show qualified as exempt via The VAT Act 1994, Schedule 9, Group 12, item 1 –
“The supply of goods and services by a charity in connection with an event—
-
-
- that is organised for charitable purposes by a charity or jointly by more than one charity,
- whose primary purpose is the raising of money, and
- that is promoted as being primarily for the raising of money.”
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HMRC raised an assessment on the grounds that the supply of admittance fell outwith the exemption so it was standard rated. It appears that this view was formed solely on the basis that the events were not advertised as fundraisers.
The exemption covers events whose primary purpose is the raising of money and which are promoted primarily for that purpose. HMRC contended that the events were not advertised as fundraisers and therefore the exemption did not apply. Not surprisingly, the appellant contended that all of the tests at Group 12 were fully met.
The FTT found difficulty in understanding HMRC’s argument. It was apparent from the relevant: tickets, posters and souvenir programmes all featured the words “The Great Yorkshire Show raises funds for the Yorkshire Agricultural Society to help support farming and the countryside”.
Decision
The FTT spent little time finding for the taxpayer and allowing the appeal. The assessment was withdrawn. There was a separate issue of the assessment being out of time, which was academic given the initial decision. However, The Tribunal was critical of HMRC’s approach to the time limit test (details in the linked decision). HMRC’s argument was that apparently, the taxpayer had brought the assessment on itself by not providing the information which HMRC wanted. The Judge commented: “That is not the same as HMRC being in possession of information which justified it in issuing the Assessment. It is an inversion of the statutory test”.
HMRC’s performance (or lack of it)
Apart from the clear outcome of this case, it also demonstrated how HMRC can get it so wrong. The FTT stated that it was striking that there was very little by way of substantive challenge by HMRC to the appellant’s evidence, nor any detailed exploration of it in cross-examination. The FTT, which is a fact-finding jurisdiction, asked a series of its own questions to establish some facts about the Society’s activities and the Show in better detail. No-one from HMRC filed a witness statement or gave evidence, even though HMRC, in its application to amend its Statement of Case, had said that the decision-maker would be giving evidence. The decision-maker did not give evidence. HMRC were wrong on the assessment and the time limit statutory test and did not cover itself in glory at the hearing.
Commentary
More evidence that if any business receives an assessment, it is always a good idea to get it reviewed. Time and time again we see HMRC make basic errors and misunderstand the VAT position. We have an excellent record on challenging HMRC decisions. Charities have a hard time of it with VAT, and while it is accurate to say that some of the legislation and interpretation is often complex for NFPs, HMRC do not help by taking such ridiculous cases.
VAT: Was an option to tax valid? The Rolldeen Estates Ltd case
Latest from the courts
In the First-Tier tribunal (FTT) case of Rolldeen Estates Ltd there were a number of issues, inter alia; whether the appellant’s option to tax (OTT) was valid, if not, whether HMRC had the power to deem it valid, whether HMRC acted unreasonably and whether appellant estopped from relying on earlier meeting with an HMRC officer.
Background
The letting of property is an exempt supply, however, a landlord the owner can OTT the property and charge VAT on that supply. If the OTT is exercised, the supplier is able to reclaim input VAT on costs such as repairs and maintenance, but charges output VAT on its supplies. The OTT provisions are set out at The VAT Act 1994, Schedule 10.
The appellant in this case had previously submitted an OTT form VAT1614A and charged VAT on the rent to its tenant. Subsequently, the property was sold without charging VAT. HMRC issued an assessment for output tax on the sale value.
Schedule 10
A taxpayer does not need HMRC’s permission to OTT, unless that person has already made exempt supplies in relation to that property – in particular, if the property has already been let without VAT having been charged. In that scenario, the person must apply to HMRC for permission to exercise the OTT, and permission will only be given if HMRC are satisfied that the input tax is fairly attributed as between the exempt period and the taxable period. When OTT the company stated that no previous exempt supplies of the relevant property had been made and this was also confirmed in subsequent correspondence with HMRC.
Appellant’s contentions
The company informed HMRC that the OTT was invalid so that no VAT was due on the sale. Evidence was provided which demonstrated that Rolldeen had made exempt supplies before the date of the OTT so that HMRC’s permission had therefore been required before it could be opted. No permission had been given and therefore there was no valid OTT in place even though the appellant had purported to exercise that option. Also, the appellant submitted that it was unreasonable of HMRC to have exercised the discretion to deem the OTT to have effect, because they had failed to take into account the fact that during an inspection, HMRC had known that Rolldeen had made exempt supplies before OTT.
HMRC’s view
VATA, Schedule 10, para 30 allows HMRC retrospectively to dispense with the requirement for prior permission, and to treat a “purported option as if it had instead been validly exercised”. HMRC issued a decision stating that it was exercising its discretion under Schedule 10, para 30 to treat the relevant property as opted with effect from the date of the VAT1614A and that VAT was due on the sale and the assessment was appropriate.
Decision
The FTT found that:
- after an inspection by HMRC it knew that prior exempt supplies had been made
- although HMRC knew exempt supplies had already been made Rolldeen was estopped* from relying on that fact, because both parties had shared a “common assumption” that the OTT had been valid
- para 30 could be used to retrospectively validate the OTT (albeit only in relation to supplies made after 1 June 2008). In this case that was sufficient as the sale of the property occurred on in March 2015
- HMRC had not acted unreasonably because they had not taken into account their own failure to carry out a compliance check
- this is exactly the sort of situation for which para 30 was designed
- it was entirely reasonable and appropriate of HMRC to deem the purported option to have been validly exercised
The appeal was rejected and the assessment was valid.
Commentary
Again, proof, if proof is needed, that OTT can be a complex and costly area of the tax and care must always be taken. Advice should always be sought, as once an OTT is made, there is usually no going back.
An interesting point in this case was that no case law was cited on this issue and the FTT was unable to identify any.
* The principle of “estoppel” means that a person may be prevented from relying on a particular fact or argument in certain circumstances.
VAT: Exemption of fund management services
HM Treasury has published a consultation paper on the treatment of the service of management of special investment funds (SIFs).
SIF meaning in VAT terms
There is no definition of a SIF in existing legislation.
Morgan Fleming Claverhouse Trust plc (case C-363/05) ruled on the interpretation of the term ‘Special Investment Funds as defined by Member States’.
The key points in this judgment are:
- the term ‘special investment funds’ is capable of including closed-ended investment funds, such as investment trust companies (ITCs)
- Member States have a discretion to define ‘special investment funds’ for the VAT exemption but, in doing so, must pay due regard to:
- the purpose of the exemption
- the principle of fiscal neutrality.
According to the Court, the purpose of the exemption is to facilitate investment in securities for investors through investment undertakings. This requires there to be VAT neutrality between the direct investment in securities and investment through collective investment undertakings, as the latter incurs a management charge. Furthermore, there must be equality of VAT treatment for funds which are similar to, and in competition with, funds falling within the scope of the exemption.
As a result of the case, the exemption was extended so that there was a level VAT playing field for all similar collective investment undertakings which compete in the UK retail market. This includes closed and open-ended collective investment undertakings, umbrellas and sub-funds, as well as some pension schemes.
The fund management exemption is limited to the management of SIFs. Consequently, the management of other investment funds will generally be standard-rated.
Legislation
The current VAT fund management regime is provided for by UK legislation, retained EU law and case law. The VAT Act 1994 implemented the Directive. Schedule 9, Group 5, Items 9 and 10 of the Act lists specific types of funds, the management of which is exempted from VAT.
Place of supply
This is important for SIFs management as if the supply is in respect of overseas funds the services are excluded from the exemption (they are outside the scope of UK VAT) when received overseas. This means that there is no output tax on the supply, but unlike exemption, it affords full recovery on input tax incurred in the UK. The perfect VAT outcome.
HMRC Consultation
The technical consultation sets out proposed reform of the legislation that provides for the VAT treatment of fund management. This is required because the fund management industry continues to innovate and introduced new types of funds to the marketplace, and the existing approach has struggled to keep pace with the evolution of the industry and proliferation of fund types.
The purpose of the exercise is to improve the legislative basis of the current VAT treatment of fund management.
Danger?
It is proposed that the following criteria for a fund to be considered a SIF would be legislated for:
a) the fund must be a collective investment
b) the fund must operate on the principle of risk-spreading
c) the return on the investment must depend on the performance of the investments, and the holders must bear the risk connected with the fund; and
d) the fund must be subject to the same conditions of competition and appeal to the same circle of investors as a UCITS (Undertakings for Collective Investment in Transferable Securities), that is funds intended for retail investors
There is a danger that if the exemption is broadened, fund managers which can now recover input tax may be denied so in the future.
If you have any queries, please contact us.
VAT: Is the supply of football pitches an exempt right over land? The Netbusters case.
Latest from the courts.
In the First-tier Tribunal (FTT) case of Netbusters (UK) Limited the issue was whether the supply was the standard rated provision of sporting facilities, or an exempt right over land.
Background
Netbusters organised football and netball leagues and provided the playing facilities (artificial pitches for football and courts for netball). The hire of the facilities was for a defined period of time and no other party had the right to access the pitches during those times. The hire could be a block, or one-off booking. The appellant contended that the supplies were exempt via VAT Act 1994, Sch 9, Group 1 – “The grant of any interest in or right over land or of any licence to occupy land…” However, item 1 Note (para m) excludes the “the grant of facilities for playing any sport or participating in any physical recreation” in which case they become standard rated. To add complexity, Note 16 overrides the exception for sporting facilities (so they are exempt) if the grant of the facilities is for:
“(a) a continuous period of use exceeding 24 hours; or
(b) a series of 10 or more periods, whether or not exceeding 24 hours in total, where the following conditions are satisfied—
(i) each period is in respect of the same activity carried on at the same place;
(ii) the interval between each period is not less than one day and not more than 14 days;
(iii) consideration is payable by reference to the whole series and is evidenced by written agreement;
(iv) the grantee has exclusive use of the facilities; and
(v) the grantee is a school, a club, an association or an organisation representing affiliated clubs or constituent associations.”
I have a simplified flowchart which may assist if you, or your clients, need to look at these types of supplies further.
Another issue was whether Netbusters’ league/tournament management services which were, in principle, available independently of pitch hire, but in practice rarely were provided in that way, were separate supplies or composite. There was a single price payable for both pitch hire and league management services.
The appellant contended that its supplies were exempt via VAT Act 1994, Sch 9, Group 1 or that Revenue and Customs Brief 8 (2014): sports leagues, is applicable which states “HMRC accepts that the decision of the FTT is applicable to all traders who operate in circumstances akin to Goals Soccer Centres plc. This includes traders who hire the pitches from third parties such as local authorities, schools and clubs…”
HMRC argued that there was no intention to create a tenancy and the agreements between the parties did not provide for exclusive use of the premises, so the supplies fell to be standard rated.
Decision
The appeal was allowed; the supply was a singe exempt supply because the objective character of the supplies were properly categorised as the granting of interests in, rights over or licenses to occupy land. It was found to be significant Netbusters (or its customers) had the ability to exclude others from the pitches during the period of the matches.
It was therefore unnecessary to consider whether Netbusters’ supplies grants of facilities satisfy all the conditions set out in Note 16 (although the FTT were disinclined to do this anyway as a consequence of the way respondent prepared its case).
Commentary
The issue of the nature sporting rights has a long and acrimonious history both in the UK and EU courts. Any business providing similar services are advised to review the VAT treatment applied.
VAT: HMRC Toolkits updated
HMRC has updated the following online toolkits for June 2020:
Output tax and
The Toolkits
These toolkits can be a useful resource. Although designed for agents and advisers, they can equally be of assistance to businesses when completing VAT returns. The contents are based on HMRC’s view of how tax law should be applied, so they should not be used as a substitute for proper professional advice. These toolkits set out areas of risk, provide general checklists, details of record keeping and links to HMRC information. Many find that these toolkits are more user friendly than “traditional” HMRC guidance and they address many contentious areas.
Overview
For a helpful general guide to input tax and checklist please see here. And an introduction to partial exemption here.