Tag Archives: property

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

VAT: Intention is crucial – The Sonaecom case

By   18 May 2020
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We cannot control the future…

The Sonaecom case

In the opinion* of the CJEU AG (C-42/19) the importance of a taxpayer’s intention was of utmost importance, regardless of whether that intention was achieved.

Background

Sonaecom intended to acquire a telecoms provider company. As is usual in such cases, input tax was incurred on consultancy received, from, amongst others; accountants and legal service providers. The intention post acquisition was for Sonaecom to make certain charges to the acquired co. These would have been taxable supplies.

Unfortunately, the intended purchase was aborted.

 The issue

The issue before the AG was; as no taxable supplies took place as the deal fell through – to what should the input tax incurred on advice be attributed?

Opinion

In the AG’s view the fact that the acquisition was aborted was no reason for the claim for input tax to denied. This was based on the fact that:

  • Sonaecom was not a “pure holding company”
  • There was a genuine intention to make taxable supplies (to the acquired co)
  • There was a direct and immediate link between the costs and the intended supplies
  • Although the acquisition costs would exceed the proposed management charges, this was not a reason to invalidate the claim
  • The above analysis was not affected by the fact that the transaction did not take place

Commentary

There are often issues in relation to intentions of a taxpayer. It is clear, and was emphasised in this case, that intention is all important. Of course, intentions can change over a period of time and commercial and political events may thwart or cause intentions to be re-evaluated. There is often an issue about evidencing an intention. HMRC usually require comprehensive documentary evidence to demonstrate an objective. Such evidence is sometime not available for various reasons. Consequently, it is prudent for businesses to record (board meeting minutes etc at the very least) the commercial reasons for taking a certain course of action. This issue quite often arises in transactions in land and property – which can create additional technical issues.

There is legislation in place to cover situations when intentions, or actual events change and which affect the original input tax position: The Capital Goods Scheme (CGS) and The Value Added Tax Regulations 1995, Regs 108 and 109.

Other areas of VAT which often to raise issues are management charges and holding companies. HMRC apparently continue to be eager to attack taxpayers in these areas and I have looked at the role of holding companies and the VAT treatment here, here and here.

I think it is useful to bear in mind a question which, in itself does not evidence an intention, but provides commercial coherence – Why were the costs incurred if there was no intention to make the acquisition? This does leave aside the future management charges position but goes some way to provide business logic.

It will be interesting to see how this case proceeds, but I would find it very surprising if the court diverges from this AG opinion.

*  AG’s Opinion

The Court of Justice of the European Union (CJEU) consists of one judge from each Member State, assisted by eleven Advocates General whose role is to consider the written and oral submissions to the court in every case that raises a new point of law, and deliver an impartial opinion to the court on the legal solution.

VAT: Interaction of Clawback and the Capital Goods Scheme – The Stichting Schoonzicht case

By   10 March 2020
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Latest from the courts

The difference between intended use and first actual use of an asset.

In the Dutch case of Stichting Schoonzicht (C‑791/18) the AG was asked to provide an opinion on the interaction between clawback and the Capital Goods Scheme (CGS) via Directive 2006/112/EC, Articles 185 and 187. Details of the CGS here. In the UK clawback is set out in The General Regulations 1995, Reg 108.

Background

Stichting Schoonzicht constructed a number of apartments which it intended to sell on completion. This would have been a taxable supply and afforded full input tax recovery on the costs incurred on the development. Unfortunately, due to market conditions, the business was unable to find buyers at the appropriate sale price. Therefore, a decision was made to let some of the flats on a short-term basis until the market picked up. This was done and created an exempt supply. The intention to make taxable supplies remained, but in the meantime, exempt supplies had actually been made. This could affect the original input tax claim. Details of partial exemption here.

Technical 

The Dutch referring court entertained doubts about the compatibility of the ‘first-use full adjustment’ requirement provided for under Netherlands law and the CGS.

So the issue was whether the CGS (Article 187 of the VAT Directive) applied such that any required adjustments to the initial input tax claim could be made via a CGS calculation, or whether, as the Dutch authorities contended, there should be a one-off clawback of the input tax previously claimed.

Decision

In the AG’s opinion, the Dutch tax authorities could clawback 4/7 of the input tax on the construction (as four of the flats were let and three remained unoccupied). The AG decided that the CGS could co-exist with clawback and that EU Member States are allowed to adjust the initial deduction of input tax using clawback where actual use varies from intended use. A distinction was made between clawback and the CGS. The CGS is intended to adjust input tax claims as a result of fluctuations in the taxable use of capital assets over a period of time (ten years for buildings in the UK).

Commentary

In the UK, there are published easements for input tax recovery in similar circumstances: “VAT: Partial Exemption – adjustments when house builders let their dwellings”. However, this is an interesting AG opinion, is worth a read and it will be interesting to see how this develops. However, with prior planning, this situation may be avoided in the UK (where new house sales are zero rated).

VAT overpayments – HMRC to consider changes

By   24 February 2020
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VAT overpayments – New direct claims?

If a recipient of a supply makes an overpayment of VAT (usually as a result of standard rated tax being charged when a supply is reduced rated, zero rated or exempt) the remedy for the customer is to go to the supplier to obtain a new invoice/VAT only credit note and. repayment of the VAT paid. However, this can cause practical problems, disputes and an actual cost if a supplier has ceased business or become insolvent. HMRC has recognised that if the supplier has paid output tax on the supply then there is an inherent unfairness.

Following the decision in PORR Építési Kft. (C 691/17) which considered the principles of; proportionality, fiscal neutrality and effectiveness, HMRC invited interested parties to discuss a direct HMRC claim process where the taxpayer has pursued a refund via its supplier for overpaid incorrectly charged VAT but where, as stated in the cases, “recovery is impossible or excessively difficult”. In such cases the taxpayer “must be able to address its application for reimbursement to the tax authority directly”. In the past, HMRC has directed that such claims from them are pursued via the High Court (or County Court if under £30,000). The meeting discussed the new route to direct claims without initial court action including guidance, time limits and claim processes.

We await the outcome eagerly as this situation is quite common, I have found it is an issue particularly in; property and construction supplies, Financial Services and cross-border transactions (place of supply issues). If HMRC are minded to introduce a “direct claim” this will bring welcome relief to taxpayers and introduce fairness for all parties and do away with windfalls received by HMRC.

VAT: Issue of zero-rating certificate – The Westow Cricket Club case

By   18 December 2019
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Issue an incorrect certificate to obtain zero rated building work at your peril! Don’t get caught out – A warning.

In the First Tier Tribunal (FTT) case of Westow Cricket Club (WCC) the appeal was against a penalty levied by HMRC for issuing a certificate to a contractor erroneously under The VAT Act 1994, Section 62 (1).

Background

WCC was an entity run by volunteers but was not a charity, although it was a Community Amateur Sports Club (“CASC”). It decided to build a new pavilion and wished to take advantage of certain zero rating which was available for the construction of a building that the

“…organisation (in conjunction with any other organisation where applicable) will use the building, or the part of the building, for which zero-rating is being sought …..solely for

a relevant charitable purpose, namely by a charity in either or both of the following ways:

….(b) As a village hall or similarly in providing social or recreational facilities for a local community.”

– Public Notice 708 para 14.7.1.

To ensure that the issue of such a certificate was appropriate, the appellant wrote to HMRC giving details about the building project and seeking guidance on the zero rating of supplies to WCC in the course of the construction of the pavilion. The response was important in this case as WCC sought to rely on it as a reasonable excuse. Part or the reply stated:

“HM Revenue & Customs policy prevents this Department from providing a definitive response where we believe that the point is covered by our Public Notices or other published guidance, which, in this case, I believe it is. In view of the above, please refer to section 16 of Public Notice 708 Buildings and construction. This explains when you can issue a certificate. Section 17 includes the certificates. Furthermore, I would refer you to sub-paragraph 14.7.4 which covers what is classed as a village hall or similar building. Providing the new pavilion meets the conditions set out, and it appears to do so, the construction work will be zero-rated for VAT purposes…”

Decision 

Regrettably, the FTT found that, despite HMRC’s letter expressing a ‘non definitive’ view; which was wrong, this was insufficient to provide reasonable excuse and could not be relied upon. The FTT made references to the fact that the club was not a charity and could not therefore issue the certificate. Consequently, the 100% penalty was applicable and not disproportionate (the penalty imposed is nothing more than the VAT that would have been paid by any other CASC seeking to build a pavilion incurring a vatable supply of a similar sum).

Commentary

HMRC was criticised for potentially leaving taxpayers in ‘no man’s land’ by expressing a view whilst at the same time saying that this was not a definitive response. This is a common tactic used by HMRC and one which many commentators, including myself, have criticised.

Tribunal’s unease

The judge commented that he trusted that HMRC will take note of his concerns and if this is a matter of policy to revisit it in light of the comments made in this decision. Let us hope HMRC listens. It is also an important case for charities (and others) to note when considering if they are able to obtain the construction of buildings VAT free. This is not a straightforward area, and the penalty for getting it wrong is clearly demonstrated here.

Always get proper advice – and don’t rely on vague rulings from HMRC!

VAT: What’s a TOGC (and what’s not)? – The General Distribution Storage case

By   7 October 2019
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Latest from the courts

A Transfer of a Going Concern (TOGC) is an area of VAT which produces a lot of issues and is a subject which is returned to on a regular basis in the courts. The General Distribution Storage Ltd (GDSL) First Tier Tribunal (FTT) TC 07352 [2019] case provides a warning that getting it wrong can be costly.

Background

The appellant owned the freehold of a commercial property. This property was rented to a third party. Subsequently, the property was sold with the benefit of the existing lease, to Hartlone Scaffolding Ltd (HSL). Output tax was charged and paid on the value of the sale as the property was subject to an option to tax. HSL also opted to tax before the date of completion. On the same day, HSL sold on the property to Foundry Investments Ltd (FIL) and again, VAT was charged and paid.

FIL made a claim for the input tax charged which caused a pre-credibility enquiry from HMRC. During the inspection, HMRC noted that, although GDSL had charged VAT, it had neither declared, nor paid the VAT to HMRC. An assessment was issued to recover this output tax.

The appellant claimed that no VAT was due because the sale of the tenanted building qualified as a VAT free TOGC, ie; it was not a taxable sale of an opted commercial property, but rather, it was the sale of a property letting business which was a going concern.

Technical

TOGC provisions

Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions (summarised below). It is always the seller who is responsible for applying the correct VAT treatment. Transfer Of a Going Concern treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control. Full details of TOGCs  here.

TOGC Conditions

The conditions for VAT free treatment of a TOGC:

  • The assets must be sold as a business, or part of a business, as a going concern
  • 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 (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
  • There must be no break in trading
  • Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
  • Where only part of a business is sold it must be capable of separate operation
  • There must not be a series of immediately consecutive transfers

Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply.

Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.

Decision

It was decided that TOGC could not apply in these circumstances. The buyer, HSL, at the time of the sale, could not have intended to carry on the property letting business as it immediately sold on the freehold (at a profit) on the same day. As above, TOGC treatment does not apply if there is a “series of immediately consecutive transfers”. The appeal was consequently dismissed, and output tax was therefore properly due.

Commentary

This appears to have been the only available conclusion. It illustrates the importance of considering VAT whenever a supply of property is made. It is unclear why VAT was initially charged and why this was not declared to HMRC (and it if was thought a TOGC, why the VAT position was not subsequently corrected by the issue of a VAT only credit note). This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business (or property) is sold. Extensive case law (example here and changes to HMRC policy here ) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view.

Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.

I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. Yes, I know I would say that!

VAT: ‘Intention’ – The Euro Beer case

By   7 October 2019
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Latest from the courts, the Euro Beer Distribution Ltd First Tier Tribunal (FTT) case.

The intention of a taxpayer is extremely important for a number of reasons. It is relevant where:

  • a VAT registration is requested
  • input tax is claimed
  • and in this case; whether deregistration is compulsory

Broadly, immediate action is dependent upon whether a business intends to make taxable supplies in the future. This intention dictates whether registration is possible, whether input tax may be claimed, and whether a business may remain VAT registered. Even if a business has the intention to make taxable supplies, it is sometimes difficult to evidence this to HMRC’s satisfaction.

Background

Euro Beer was in the business of importing and selling alcoholic drinks. It had been in business since 2004 and was also approved and registered as an owner of duty suspended goods under the Warehousekeepers and Owners of Warehoused Goods Regulations 1999.

Technical

HMRC compulsorily deregistered Euro Beer via VAT Act 1994, Schedule 1, para 13 (2) on the grounds that it believed that the appellant had ceased making taxable supplies. Nil returns had been submitted since 2016 and, after enquires, formed the view that there was no intention to make supplies in the future.

Euro Beer contended, unsurprisingly, that there was an intention to make taxable supplies in the future such that continued VAT registration was appropriate. Additionally, the reason for the nil returns was simply, at that time, business had dried up. The appellant provided limited evidence to support its intention. This comprised; emails between the directors and third-party contacts.

Decision

The appeal was dismissed and Euro Beer’s VAT deregistration (and revocation of approval from the Warehousekeepers and Owners of Warehoused Goods Regulations 1999) was confirmed as appropriate.

Commentary

This was hardly a surprising decision and one wonders why it got to court. It does, however, emphasise the importance of the concept of intention. This can be a subjective matter and HMRC place significant weight on documentary evidence. There is no question in law that HMRC must register/maintain registration/repay input tax if it is satisfied that there is a business which does not make taxable supplies but ‘intends to make such supplies in the course or furtherance of that business’ – VAT Act 1994, Schedule 1, para 9 (b). However, ensuring HMRC is satisfied is often problematic.

This is specifically difficult in the area of land and property. VAT registration and the associated input tax claims of a property developer is often the source of disputes. It is important to differentiate between an intention, and what actually happens. Often business plans change, or the original intention is not fulfilled. In such cases, there is a mechanism for repaying input tax claimed (VAT Gen regs 1995 reg 108) but this is only applicable in certain circumstances. The case of Merseyside Cablevision Ltd (MAN/85/327, VTD 2419) demonstrates that if an intention to make taxable supplies is thwarted, input tax claimed is not clawed back (a person who carries on activities which are preparatory to the carrying on of a business is to be treated as in business and is a taxable person).

It should be noted that a business does not have to specify a date by which it expects to make taxable supplies, or to estimate the value of them.

The lesson is; to document every business decision made:

  • board minutes, emails, business plans, letters etc
  • retain all correspondence with; third-parties
  • provide written advice from legal advisers, accounts etc
  • invoices demonstrating expenditure in respect of a new venture are persuasive
  • budgets and considered estimates can be of use
  • retain all advertising media, offers, promotions and other publicity.

Clearly for land and property additional; planning permission, land registry details, plans, surveys, fees, etc will build up a picture that there is an intention to make taxable supplies.

These are just examples and different business may have alternative evidence.

In commercial terms, it will be difficult for HMRC to be unsatisfied if a business is incurring costs in relation to a project – why would they devote time/staff/advisers/financial resources to something when there is no intention of deriving income?

One final point on the Euro Beer case. The judge stated; ‘an intention to make supplies requires more than a mere hope to be in a position to make supplies at some unspecified time in the future’. It is not enough for a business to ‘generally’ state that there is an intention.

VAT DIY Housebuilders’ Scheme – useful information

By   9 September 2019
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The DIY Housebuilders’ Scheme is a tax refund scheme for people who build, or arrange to have built, a house they intend to live in. It also applies to converting commercial property into a house(s). Details here.

However, there are often uncertainties and disputes over precisely what tax may be claimed on various expenditure. To this end, HMRC has published a comprehensive list of items, sorted alphabetically, which should avoid a lot of potential disagreements on claims.

It should be noted that a claim for services can only be made for conversions (at the reduced rate of 5%) as any services in respect of a new build property should be zero rated.

What else can a housebuilder not claim for?

There is no claim available for:

  • building projects outside the UK
  • materials or services that are not subject to VAT, eg; are zero-rated or exempt or provided by a non VAT-registered supplier
  • professional or supervisory fees, eg; architects and surveyors
  • the hire of plant, tools and equipment, eg; generators, scaffolding and skips
  • building materials that aren’t permanently attached to or, part of, the building itself
  • some fitted furniture, electrical and gas appliances, carpets or garden ornaments
  • supplies for which you do not have a VAT invoice.

If you would like assistance with making a claim, please contact us.

VAT: Domestic Reverse Charge for builders – introduction delayed

By   9 September 2019
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As you were…

The UK Government has announced that it is to delay the introduction of the VAT Domestic Reverse Charge (DRC) for construction businesses by a year after a coalition of trade bodies and organisations highlighted its potentially damaging consequences. Details of DRC here

The DRC was due to come into force from 1st October this year, but it has been announced via Revenue and Customs Brief 10 (2019): domestic reverse charge VAT for construction services – delay in implementation that it has been deferred for a year. The new implementation date will be 1 October 2020 unless there are further delays.

The move has been welcomed by all parties affected by the rules and HMRC said that it was committed to working closely with the sector to raise awareness and provide additional guidance to make sure all businesses will be ready for the new implementation date.

Invoices etc

HMRC have also recognised that some businesses have already put changes in place to anticipate the original introduction date and appreciate that it may not be possible to reverse these changes before 1 October 2019. Where “genuine errors” have occurred, HMRC has stated that it will take into account the late change in its implementation date.

 Comments

The Chief Executive of the Federation of Master Builders said “I’m pleased that the government has made this sensible and pragmatic decision to delay reverse charge VAT until a time when it will have less of a negative impact on the tens of thousands of construction companies across the UK. To plough on with the October 2019 implementation could have been disastrous given that the changes were due to be made just before the UK is expected to leave the EU, quite possibly on ‘no-deal’ terms.” The situation hasn’t been helped by the poor communication and guidance produced by HMRC. Despite the best efforts of construction trade associations to communicate the changes to their members, it’s concerning that so few employers have even heard of reverse charge VAT.”

It has been stated by certain trade bodies that more than two-thirds of construction firms had not heard of the VAT changes and of those who had, around the same number had not prepared for them. My own experience backs this up and talking to other tax people and building businesses it is clear that this is not an issue which has been publicised widely and despite accountancy firms doing their best to bring it to the attention of relevant clients and contacts, many remain unaware.

Commentary

Discussions over Brexit (obviously!) have been blamed for the situation, although there is no word about why HMRC waited until a month before the intended implication to decide to delay the DRC. A lot of work has been carried out on this matter, and changes to documentation, processing and systems have taken place which will need to be reversed before 1 October 2019. At least the delay will provide HMRC with a new chance to let affected parties know next time and gives them time to identify why so many building businesses were unaware of the reverse charge.

Whether the DRC IS introduced next year remains to be seen. To my mind, it does not deal with the major sources of tax leakage in the construction industry and, as usual, complaint business will play by the book and those that do not will find a way round the rules. To exclude labour only services appears to be a folly. Perhaps they will be amended before next year.