HMRC has issued a policy paper: Revenue and Customs Brief 13(2016)
This brief explains the change in policy relating to the treatment of dwellings that have been formed from either the construction of new buildings, or from the conversion of non-residential buildings into a dwelling. HMRC now accepts that single dwellings can be formed from more than one building.
Please contact us if this change affects you in relation to current, or past developments.
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 incurred in other EC Member States may be recovered in certain circumstances. However, some claims are specifically blocked by Member States. Unfortunately, there are differences between each Member State’s domestic legislation.
For full details of how to make a claim for VAT incurred abroad, please see here
Here is a summary of VAT which cannot be claimed via the refund system:
Austria
VAT cannot be recovered on:
• The purchase, hire, operation and repair of passenger motor vehicles, except driving school vehicles, taxis and hire car vehicles;
• Entertainment expenses, except for business meals where the purpose of the meeting and the identity of the participants are documented.
Belgium
VAT cannot be recovered on:
• Manufactured tobacco;
• Spirits, except those intended for resale or supply in respect of a service (e.g. bars, hotels and restaurants);
• Accommodation, meals and beverages under an accommodation or a catering contract, unless these costs are incurred by a company’s staff effecting outside supplies of goods or services or by taxable persons who in turn supply the same services for consideration;
• Entertainment expenses (although expenses incurred in respect of an advertising event may be recoverable);
• Generally; the purchase of motor vehicles used for passenger transport and goods and services relating to such vehicles (although in some cases a 50% restriction applies and there are exceptions depending on use).
Bulgaria
VAT cannot be recovered on:
• Goods or services intended for making VAT-exempt supplies;
• Goods or services intended for “non-business” supplies;
• Entertainment expenses;
• Motorcycles or passenger cars (with less than five seats, excluding the driver’s seat), although certain exceptions apply;
• Goods or services related to the maintenance of a motorcycle or passenger car; and
• Goods that have been confiscated by the State or a building that has been demolished because it was unlawfully constructed.
Croatia
VAT cannot be recovered on;
• Entertainment expenses;
• Purchase and lease of aircraft, vessels, cars and means of personal transport for leisure purposes;
• Supplies exempt from VAT via The Croatian VAT Act Articles 39, 40 and 114;
• Supplies of goods exempt from VAT via The Croatian VAT Act Articles 41 (1) and 45 (1) (2) – (intra-Community supply of goods);
• VAT charged in contravention of the provisions, ie; VAT charged when it should not have been.
Cyprus
VAT cannot be recovered on:
• Non-business supplies; if a supply has both business and non-business purposes, VAT can be reclaimed only on the business portion of the supply;
• Supplies or imports of passenger cars;
• Certain second-hand goods, e.g. cars and antiques for which the VAT margin scheme is used;
• Business entertainment and hospitality expenses, except the provision of
entertainment to employees;
• Supplies used or to be used to make a supply in Cyprus; and
• Goods and services, such as hotel accommodation, purchased for resale and that are for the direct benefit of travellers.
Czech Republic
VAT cannot be recovered on:
• Entertainment expenses.
Denmark
VAT cannot be recovered on:
• Meals for the owner and staff of a business. However, VAT on meals incurred for business purposes is partly refundable;
• The acquisition and running of places of residence for the owner and staff of a business;
• The acquisition and operating costs connected to holiday homes for the owner and staff of a business;
• Entertainment expenses, representation costs and gifts. However, VAT on business entertainment is partly refundable;
• The driving of foreign tourist buses;
• The acquisition, repair and operation of motor vehicles designed for the conveyance of not more than nine persons; and
• Payments in kind to the staff of a business. No more than 25% of VAT may be recovered on restaurant bills and no more than 50% of VAT on hotel accommodation.
• There is a right to deduct a specific amount of VAT for companies that lease
passenger cars if:
• The leasing period is at least six months; and
• The vehicle is used for business purposes for at least 10% of the mileage.
Estonia
A VAT refund is available if an Estonian company can make a similar VAT deduction on its business expenses. This limits the VAT deduction, for example, on meals and entertainment expenses. VAT on accommodation costs is deductible if the trip is not for leisure purposes.
Finland
VAT cannot be recovered on:
• Immovable property that the taxable person or its staff uses as a residence, nursery, recreational or leisure facility, as well as goods and services connected with it or its use;
• Goods and services related to transport between the place of residence and place of work of the taxable person or its staff;
• Goods and services used for business entertainment purposes and business gifts;
• (With some exceptions) Passenger cars, motorcycles, caravans, vessels intended for recreational or sports purposes and aircraft with a maximum permissible take-off weight not exceeding 1,550 kg, or on goods and services related to their use;
• Purchases intended for the private consumption of the entrepreneur or his personnel;
• Purchases related to exempt sales of investment gold;
• Purchases of taxable goods and services for direct benefit of passengers made in the name of a foreign travel service company; and
• Purchases that are VAT-exempt, but have erroneously been charged with VAT.
France
VAT cannot be recovered on:
• Accommodation costs incurred on behalf of the management or staff of a company. (VAT is recoverable when such expenses are incurred for the benefit of persons not employed by the company, provided the expenses are incurred in the interest of the company or when it supplies the same services for consideration);
• The supply, import, leasing, repair and maintenance of most cars for passenger transport and other related costs, such as petrol. (However, 80% of VAT on diesel fuel can be recovered and VAT is recoverable when the cars are purchased by a car dealer for resale or by a person who hires out cars.);
• Goods transferred without remuneration or for remuneration that is much lower than their normal price, unless the value of the goods is very low (except business gifts whose collective value does not exceed EUR 65, including VAT, per beneficiary per year); and
• Domestic transport of passengers and related expenses (except for public transport supplies and transportation from home to work, subject to conditions).
If French VAT has been incorrectly charged, a foreign taxable person can, in principle, obtain a refund (unless a corrected invoice has been issued—a specific procedure applies for a supplier to issue a corrected invoice).
Germany
VAT cannot be recovered on:
• Supplies of goods and services that are not used for business purposes, including gifts; or
• Supplies of services acquired or goods imported connected to certain exempt activities.
Greece
VAT cannot be recovered on:
• Intra-community supplies and exports.
• The supply, import or intra-community acquisition of tobacco products that are destined for use in non-taxable transactions;
• The supply, import or intra-community acquisition of alcoholic beverages that are destined for use in non-taxable transactions;
• Entertainment expenditure, including expenditure on hospitality and amusement;
• The acquisition, leasing or hire, modification, repair or maintenance of passenger vehicles with up to nine seats, pleasure boats except if they are used for the sale, leasing or transportation of persons for a fee;
• Accommodation, food, transport and entertainment expenses incurred for company personnel or representatives;
• The supply of goods and services in connection with real estate located in Greece (in certain circumstances);
• Expenses unrelated to the business activity of the claimant; and
• Incorrect VAT invoicing.
• If the VAT imposed is used for both taxable and exempt transactions, a refund will be granted only in respect of the taxable transactions.
Hungary
VAT cannot be recovered on:
• Use of goods or the services directly for exempt supply of goods and/or services; or
• Use of goods or services for purposes other than taxable business activities, except when the goods or services are entirely used in the interest of achieving taxable objectives.
• Motor fuels and other fuels, goods that are necessary directly for the operation of passenger cars;
• Passenger cars, motorcycles above 125 cc, yachts, sporting and leisure boats;
• Residential buildings (except where a taxable person engaged in the leasing of such buildings opted for taxation of the rental);
• Purchases of goods and services related to the construction and renovation of residential buildings;
• Food and beverages;
• Services received in connection with the operation and maintenance of passenger cars;
• Services of restaurants and other public catering services;
• Entertainment services;
• Taxi services;
• Parking services and highway tolls, with the exception of parking services used and highway tolls paid for a motor vehicle whose gross weight is equal to 3.5 tons or more (including buses); and
• 30% of telephone and mobile phone costs and services related to data submission by internet protocol.
Ireland
VAT cannot be recovered on:
• Petrol except diesel;
• Food, drink, hotels/accommodation or other personal services (as from 1 July 2007, VAT on accommodation is recoverable if certain stringent conditions are satisfied);
• Entertainment expenses; and
• The purchase, hire or importation of passenger motor vehicles (VAT on motor vehicles used for certain purposes is recoverable).
Italy
VAT cannot be recovered on:
• Entertainment expenses.
• It is possible to deduct VAT paid on cars/fuel/maintenance used for the company’s business. The percentage deduction set by Italian VAT legislation is 40% in the case of both private and business use. The deduction is 100% if exclusively used for business purposes.
Latvia
VAT cannot be recovered on:
• The acquisition of unused immovable property and services received in relation to the construction, reconstruction, renovation, restoration or repair of immovable property;
• Goods and services purchased for personal use;
− Rental, maintenance and repair of a passenger car if these services are not used for business purposes. If the vehicle is used for business purposes, VAT can be recovered for the business use (in proportion to that use), but the claimant must provide supporting documentation with the application (e.g. route description in Latvian or English);
− Purchase of fuel, lubricants and spare parts intended for a passenger car if they are not used for business purposes;
− Expenses for recreation activities;
− Catering (including restaurants);
− Health improvement activities; and
− Entertainment.
Lithuania
VAT cannot be recovered on:
• The purchase or lease of a passenger car;
• Transport of passengers by cars (taxi services);
• Entertainment and representation expenses. However, where a taxable person is established in the EU, 75% of the VAT incurred on entertainment and representation expenses (goods and
services) is refundable;
• The supply of goods or services on which VAT does not have to be accounted for;
• Goods supplied to another EU member state if the supply of these goods would have been subject to the zero rate; and
• Goods exported from the EU if the supply of these goods would have been subject to the zero rate.
Luxembourg
VAT cannot be recovered on:
• Supplies on which VAT has been charged by mistake;
• Goods or services that are VAT exempt.
• Goods or services used for private purposes.
Malta
VAT cannot be recovered on:
• Tobacco or tobacco products, except those intended for resale;
• Alcoholic beverages, except those intended for resale or for the supply of catering;
• Works of art, collectors’ items and antiques, except those intended for resale;
• Non-commercial motor vehicles (and goods and services for the purpose of
repairing, maintaining and fuelling non-commercial motor vehicles), except those intended for resale, charter/hire, driving instructions or for the purpose of the carriage of goods or passengers for consideration;
• Vessels or aircraft, except those intended for resale or charter/hire for the purpose of the carriage of goods or passengers for consideration;
• Purchases relating to the provision of hospitality or entertainment, subject to certain exceptions; and
• Purchases relating to the provision of transport or entertainment to employees, subject to certain exceptions.
The Netherlands
VAT cannot be recovered on:
• Supplies of goods and services that are not used for business purposes;
• Supplies acquired or imported in connection with an exempt business activity;
• Food and drinks in restaurants, hotels and cafes;
• Business entertainment in excess of EUR 227 per year per person;
• Employee benefits in-kind in excess of EUR 227 per year per person;
• VAT on costs for the lease or rental of cars (these are limited to an 84% VAT refund – a 16% adjustment is made for private use).
Poland
VAT cannot be recovered on:
• Goods and services, the acquisition of which resulted from a donation or free provision of services;
• Lodging and catering services, with some exceptions;
• The deductibility of input VAT on the purchase (lease) of passenger cars is limited to 60%, but not exceeding PLN 6,000 per car.
• The purchase of engine fuel, diesel oil and gas for passenger cars or other motor vehicles.
Portugal
VAT cannot be recovered on:
• Accommodation, food and drinks (except in the case of specific events);
• Entertainment expenses;
• Purchase, hire, importation and repairs of vehicles, boats, and aircraft (unless these assets are used in specific activities). However, it is possible to recover VAT incurred on commercial cars and trucks;
• Fuel expenses (50% of the VAT on diesel is recoverable and 100% if certain
vehicles are involved);
• Tobacco; and
• Travel expenses, including tolls (except in the case of specific events).
Romania
VAT cannot be recovered on:
• Invoices on which VAT was unlawfully charged;
• Acquisitions that can be VAT exempt;
• Acquisitions made by tour operators that apply the margin scheme in the Member State in which they are established;
• Tobacco products and spirits, except those intended for resale or for supply during the performance of a catering service and;
• Acquisitions of passenger vehicles and fuel (with some exceptions).
Slovak Republic
VAT cannot be recovered on:
• Supplies of goods and services where the application of VAT was not in compliance with the Slovak VAT legislation;
• Supplies of goods that are or may be exempt from VAT (intra-Community supply of
goods, export of goods); or
• Supplies made under the tour operator margin scheme.
Slovenia
VAT cannot be recovered for:
• Yachts and boats for sport and amusement, fuel, lubricants, spare parts and related services;
• Aircraft and fuel, lubricants, spare parts and connected services;
• Cars and motor bikes and fuel, spare parts and related services;
• Accommodation, meals and beverages, unless these costs are incurred by a taxable person in the course of supplies made as part of their economic activity and;
• Entertainment expenses.
Spain
VAT cannot be recovered on:
• Entertainment expenses;
• Food and drinks, tobacco;
• Jewels and precious stones;
• VAT on accommodation, restaurant and travel expenses will be refundable only to the extent the expenses are deductible for personal and corporate income tax purposes.
• VAT incurred on car rentals and fuel will be refundable only if the car is exclusively used for business activities.
• If not exclusively used for business activities, refunds of VAT on car purchases, car importations and car leases will be possible, but only if the car can be considered an investment good for Spanish VAT purposes (ie; it must be used for at least one year within the company), and only for the proportion that the vehicle is used for business purposes (a business use of at least
50% will be required).
Sweden
VAT cannot be recovered on:
• Permanent accommodation;
• Travel services (only applicable to persons supplying travel services);
• Unreasonable entertainment services;
• Purchase of motor vehicles; and
• Car rentals (these are 50% refundable), with certain exceptions for vehicles intended to be sold or leased by a taxable person whose particular economic activity involves the sale or leasing of motor vehicles, vehicles intended to be solely used for passenger transport for hire or reward and vehicles intended to be used for driving license education and transport of the deceased.
United Kingdom
VAT cannot be recovered on:
• Non-business supplies (if a supply covers both business and non-business use VAT can be reclaimed on the business element of the supply);
• Supplies the claimant intends to use for carrying on an economic activity in the
U.K. or that the claimant intends to export from the U.K. (i.e. economic activities, the place of supply of which is the U.K.);
• Business entertainment and hospitality expenses and other expenses on which the recovery of VAT is restricted in the U.K.;
• Goods and services purchased for resale (e.g. as part of package holiday) and which are for the direct benefit of travellers;
• VAT that has been incorrectly invoiced or where VAT has been charged on the dispatch of goods to another Member State, or the export of goods outside the EU;
• The purchase or import of passenger motor vehicles, unless used wholly for business purposes and
• Certain second-hand goods, such as antiques, for which a tax invoice will not be issued.
• Not more than 50% of VAT can be recovered on the lease of passenger motor vehicles not used solely for business purposes.
Please contact us if you have any queries on claiming overseas VAT.
Refunds of VAT for UK businesses incurring other EC Member States
If a business incurs VAT in another EC Member State it is possible to recover it. It is not claimed on a UK VAT return, but via a special claim process which I have set out below. Unfortunately, this procedure is likely to be unavailable after Brexit. I hope that this is a timely reminder as well as a guide as the deadline for the year of the claim is 30 September.
My next article will look at precisely what VAT is recoverable in each Member State in a country by country guide – here
Claim Process
Gone are the days when a business had to make claims directly to the Member State where VAT was incurred; using numerous, complicated forms, in the language of the Member State of claim, and then waiting months, if not years to hear anything.
Now, a simple online claim to HMRC is all that is required. HMRC then coordinate payment for a business from the relevant country. This is a practical overview of the procedure.
All applications must be submitted using the electronic online system. You must be VAT registered in the UK to obtain a refund.
In order to make a claim a business must meet the following conditions:
a) transport services and ancillary services
b) any goods or services where VAT is payable by the person to whom the supply is made (the reverse charge).
By submitting your application you are declaring that you meet these conditions.
How do I claim?
A separate online application is required for each Member State from which you wish to claim. In order to start an application you must access the relevant online services section and enter standard data into the required fields, along with invoice for expenditure you wish to reclaim.
Period application covers
The refund period must not be more than one calendar year or less than three calendar months. Generally refund periods do not have to cover strict calendar quarters. However, some Member States have their own requirements, and details of these can be obtained from the relevant tax authority.
Minimum amount that may be claimed
If the refund application relates to a period of less than a calendar year, but not less than three months the minimum amount claimable is EUR 400 or the equivalent in national currency.
If the refund application relates to a period of a calendar year or the remainder of a calendar year the minimum amount claimable is EUR 50 or the equivalent in national currency.
Invoices included on the application
Invoices relating to supplies of goods or services with a tax point during the period of the refund application should be included. Additionally, a business may claim for invoices not included in a previous application as long as they relate to the same calendar year.
VAT which cannot be included on a claim
A claim cannot include VAT which has been;
Information required from invoices being claimed
If an invoice includes items covering more than one expenditure code the code relating to the highest proportion of expenditure is the one that should be used.
Restriction of applications in respect of partial exemption
A business must apply the appropriate recovery rate for the goods or services purchased against each invoice or importation on your application, and show the amount of VAT recoverable in the appropriate box. The recovery rate to be applied is the last percentage appropriate to the refund period covering the invoice date. Following an annual adjustment, you will not be required to amend refund applications already submitted. The invoices can only be entered once and the percentage to be used is that covering the invoice date.
Restriction of applications in respect of non-business expenses
Expenditure incurred in another Member State that relates to non-business activities is not claimable under the refund scheme.
Language needed on the application
Member States generally require the application to be in their own language they may allow the use of a second language in the free text fields, and English is a common option. The language(s) required by the Member State of Refund will be displayed on the electronic portal as you complete the application.
Invoices which may be required to be submitted electronically
A business may be requested to submit invoices with values of EUR 1,000 or more (EUR 250 or more in the case of fuel) with the application. All other invoices should be retained as they may be requested at a later date by the Member State of Refund.
Claim updates
A business will be informed electronically at the following key stages of the process.
Time limits for submitting an application
Applications must be submitted to HMRC at the latest by 30 September of the calendar year following the refund year and will only be considered submitted if the applicant has completed all of the required standing data fields (see above).
Time limits for the Member State of refund to process an application
The Member State of Refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.
Payment method
The refund will be paid in the Member State of Refund or, at the applicant’s request, in any other Member State. In the latter case, any bank charges for the transfer will be deducted by the Member State of Refund from the amount to be paid to the applicant.
Error on applications
The electronic portal provides a correction facility whereby a business can recall the original application and amend existing details. You may not, however, add new lines.
Penalties
All Member States take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed and further refund applications suspended.
Applications refused
If the Member State of Refund refuses an application fully or partly they must also notify you of the reasons for refusal.
If this happens you can appeal against the decision using the appeals procedure of that Member State. This means that the normal VAT appeals rules of that Member State on time limits, form of appeal etc., will apply.
Interest on delayed applications
Interest may be payable to you by the Member State of Refund if payment is made after the deadline. If applicable, it will be paid from the day following the deadline up to the date the refund is actually paid. Interest rates must be the same as those applied to refunds of VAT to taxable persons established in the Member State of Refund under the national law of that Member State.
Claims on UK VAT returns
VAT incurred overseas must not be claimed on a UK VAT return. If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.
Further to the recent announcement of our comprehensive and extensive new International tax service offering here I thought it a good idea to provide a brief guide on when a business or an adviser needs to consider indirect tax when selling overseas. I hope this summary will be of use. Please contact us if you feel that any issues here are relevant to you or your clients.
International and cross-border transactions can be extremely complex and frustrating (take it from me if you haven’t already experienced it). From the physical movement of goods to the many various types of services, VAT is a minefield. Not only is it very complicated, but different languages, rules and practices can add to the overall issues with dealing with the tax. This shouldn’t be a barrier to companies doing business across the world and we are here to support and assist you.
We are experienced in advising not only on UK indirect tax, but issues in other EC Member States and matters outside the EC.
Do you know whether you have indirect tax responsibilities in other countries? Do you know whether you are taking advantage of all available reliefs?
There are often complex and conflicting issues concerning VAT when dealing with customers or suppliers outside these shores. Although the EC-wide VAT system is supposed to be harmonised, not unsurprisingly, there are significant differences in domestic law and the application of EC legislation. It is easy to get caught out or not even consider VAT issues outside the UK. There are special rules for a lot of activities, with the rules for International Services particularly complex.
Experience insists that overseas tax authorities do not mitigate any assessments and penalties simply because your business is based outside their country. Another twist is that HMRC are simply not interested in any transactions outside the UK so will not assist with taxpayers’ queries.
So what sort of questions should a business be asking itself and in what circumstances could VAT rear its ugly head?
When should I be considering VAT?
How we can help
We can assist whether you have an ad-hoc query or you require a full service in an overseas country. We can:
So don’t let tax interfere with your business expanding overseas, we are here to help you.
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)
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.
VAT Distance Selling: What is it and how will it affect my business?
Q – My internet business is expanding and I am now selling goods all over the EC. Does this create any VAT issues?
A – It could do; if you are selling to individuals (or any other non-business entity) then you should be charging UK VAT regardless of where your customer belongs in the EC. However, when these type of sales reach a certain limit, you will be required to VAT register in each Member State in which the threshold is breached. These are called the Distance Selling rules and apply in situations where the seller is responsible where the supplier is responsible for the delivery of goods B2C; typically mail-order and increasingly goods purchased online (so called “delivered goods”).
Q – What are those limits?
A – Each Members state sets its own limit. However these may be broken down into two categories:
€ 35,000 (or near equivalent in domestic currency) Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Hungary, Ireland, Latvia, Lithuania, Malta, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Italy.
€ 100,000 (or near equivalent in domestic currency) Austria, Germany, Luxembourg, Netherlands, UK.
Q – What are the practical implications?
A – Each Member State has different rules for VAT registration and filing of returns. All dealings, save for a few Member States, are undertaken in the language of that country, so broadly, there could be 27 sets of rules and many languages to master in order to comply with the Distance Selling rules! Additionally, we find that some business are unaware of these rules, or discover the impact of them after the limits have been reached. This creates penalties for late registration and filing in nearly all Member States. However, mitigation (along the lines of “reasonable excuse” in the UK) in varying degrees is available in some countries. We have found that it is possible, via negotiation to have penalties reduced or removed after making full disclosure of past turnover. As one may expect, the approach varies from country to country.
Q – Do I have any choices?
A – Yes, although it is not necessary to register until the thresholds set out above are breached; it is possible to VAT register there on a voluntary basis rather than accounting for UK VAT. The considerations are usually; the VAT rate in the Member State concerned (compared to the UK) and; administrative simplification, ie; not having to change over from UK VAT to another Member State’s VAT regime when the limit is reached.
Q – But what if I have accounted for UK VAT on these sales already, what can be done about that? I don’t want to have to pay VAT twice to different authorities.
A – In our experience, HMRC do repay UK VAT overpaid if overseas output tax is due, but this sometimes becomes a struggle and HMRC require full explanation and precise evidence to support a repayment.
Q- Do these rules affect sales made to customers outside the EC?
A- No, these are usually zero rated as exports.
Q So I need to identify the location of all of my customers and monitor sales to ensure I comply with the rules and to identify whether to charge VAT, at what rate, and to which authority?
A – Yes, I am afraid so!
Please contact if you would like us to deal with overseas authorities on your behalf, or you would like assistance with technical issues or with language matters
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
TC05078 Blue Chip Hotels Ltd
This is a FTT case which considered the VAT analysis of a supply in two ways. The appellant was an hotel which offered a wedding “package”. The package comprised; a room which was licensed for civil wedding ceremonies, the hire of other rooms, catering, accommodation, car parking and the use of the grounds for photographs. The only activity carried out in the “wedding room” was the wedding ceremony itself. The hotel treated the hire of the wedding room as exempt and added VAT to the remainder of the package.
The two technical points were:
Somewhat to the puzzlement of the Tribunal, HMRC had accepted that if the wedding room was supplied without any other element of the wedding package it could be treated as an exempt supply of land.
On the first point the Tribunal decided that the hire of the wedding room should be treated as a separate supply for VAT purposes. However, this was only relevant if the taxpayer could demonstrate that the provision of the wedding room was a supply of land.
On the second point, the issue was whether what the hotel supplied was more than the mere hire of the wedding room as a passive letting of land. The tribunal was of the view that an additional service was being provided, this being the service of a legal wedding ceremony which could be carried out only because of the licensed nature of the wedding room. That is; what was being paid for was the right to participate in a particular event, only part of which entailed the provision of the physical space in which that event occurred.
The Tribunal concluded that the supply of the wedding room could not be treated as an exempt supply of land via VAT Act, Schedule 9, Group 1, the provision of licensed premises in which a civil wedding could legally be carried out went beyond the passive letting of land and was outside the scope of the exemption.
This seems to go against the decision in Drumtochty Castle Ltd (TC2111) inter alia, where the Tribunal found that in similar circumstances to those in this instant case that what was being offered was a single package such that exemption could not be applied to certain elements. Although it may simply demonstrate that even subtle differences in the facts can result in a different VAT outcome. As previously observed in a number of these types of cases, it is crucial to analyse precisely what is being provided, even in cases where the VAT treatment has remained unchanged for a number of years. Case law develops at a very fast rate and legislation changes regularly, both of which can affect the tax position.