1. business and industrial

A regular VAT bulletin for all ICPA members
Issue 1 – July 2012
VATUPDATE
Welcome to your
new newsletter
A warm welcome to the first issue of VAT Update, a ‘VAT digest’ brought to
you by the ICPA and VAT expert Vaughn Chown, keeping you up-to-date
elcome to the first issue of our new quarterly
newsletter, VAT Update. Written by Vaughn Chown of
Gabelle, the independent tax advisers, it looks at some
of the VAT issues that have arisen over the past three months. At
the time of writing, no further information relating to the Budget
announcements have been issued. Members could not have
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failed to have heard, however, that changes to the hot food and
caravan legislation will be made to accommodate representations
presented during the consultation period which ended in May.
Vaughn will be happy to discuss any of the topics covered or
any other VAT-related matter. His contact details are on the back
Tony Margaritelli, ICPA
page.
Joint ventures and VAT
V
AT relating to joint ventures is often a
complex area requiring detailed analysis of
the joint venture parties’ intent, the
provision of services, if any, and the VAT liability of
those services
HMRC often consider that joint ventures do not
exist unless detailed agreements between the
parties are retained and that one party is, more often than not,
providing services to the other joint venture party which are taxable
at the standard rate often leading to irrecoverable VAT being
incurred. In the VAT Tribunal case of Maritsan Developments
Limited TC01971 published on 22 May 2012, a joint venture
formed between two individuals had the intention of acquiring a
property and selling it for a profit. The case provides some useful
pointers as to when a joint venture exists and whether VAT is
chargeable between the joint venture parties. The Tribunal made
the following points:
• The agreement between the individuals was in the nature of a
joint venture. The fact that the joint venture arrangement was
expressed with commendable brevity did not mean that it cannot
exist as suggested by HMRC. The sharing of profits points towards
the existence of a joint venture as do the pooling of resources,
sharing of information and other acts towards a common goal. The
agreement to share the net profit was prima facie evidence of the
existence of a joint venture. The equal sharing of losses would be
implied (Partnership Act 1890 s 24(1)). They expected to share
expenses equally. The fact that they described their arrangement as
a joint venture was of some significance, and seemed to the
Tribunal to reflect the substance and reality of the situation as they
had found it to be.
• Each party contributed his particular skills, talents, abilities
and business connections in pursuit of the common goal of
acquiring the property and selling it at profit with the benefit of
planning permission for residential development on a conditional
back-to-back missives basis. That was each party’s capital
contribution to the joint venture. None of this constituted supplies of
services to either party. Neither party provided their services to the
other for remuneration.
• The activities of each party constituted their contribution to
the capital of the joint venture. As such, that was not a supply of
services for a consideration and was therefore outside the scope of
VAT.
• The substance and reality of the arrangements were that they
were bound together as individuals in a joint venture.
There was a joint venture; no VAT was therefore required to be
charged between the parties.
This case may be appealed, but it does offer some guidance as
to how the Tribunals will review the VAT implications of a joint
venture.
Claims to HMRC for refunds of VAT in cases where HMRC have
not accepted the existence of a joint venture and VAT has been
charged and is irrecoverable by the recipient should be considered.
VATUPDATE
Security for VAT...
pre packs, penalties and
jurisdiction of the Tribunal
T
he recent case of The Distinctive Pub Company (Stratford)
Limited TC01992, published on 1 June 2012, serves as a
timely reminder that new VAT registrations and transfers of
going concerns may be required to provide security to HMRC to
enable them to continue to trade where a previous business has
defaulted. The following observations were made by HMRC with
regard to the transfer of the business comparing the Company with its
predecessor:
(1) The trading address was the same.
(2) The trading style was the same.
(3) There was no break in style between the two businesses.
(4) The old business and assets were purchased from the
administrators as a “Pre-pack sale”.
(5) The purchase of the business and its assets from the
administrators over a period of time was an indication that the
business was not adequately funded causing concern that the VAT
may be at risk.
(6) The contracts of the employees were transferred to the Company.
(7) Two directors of the Company were both directors of the old
business.
(8) The old business failed in January 2011 owing VAT debts of
£62,067 plus direct taxes.
(9) The old business had a history of VAT arrears dating back to
February 2004, had several time to pay arrangements with the HMRC
Debt Management Unit, had several unpaid cheques and had 20
periods of default surcharge from 1997.
(10) Returns were rendered late without payment; the last return
rendered was for 03/10.
The appellant was a pub to whom HMRC referred to in a letter as a
“cash trader” which had “received the VAT declared on returns, but
chosen not to pass it over to HMRC by the due date as legally
required”.
At the time the request for security was made by HMRC the
business had not submitted its first VAT Return, but by the time of the
review it had been submitted albeit late. The subsequent return was
filed and the VAT paid on time. The company stated it would submit
monthly VAT returns and in the circumstances the amount of security
was re-calculated on the basis of these returns to £7,650.
The Company appealed to the Tribunal on the grounds that a
period of regularly submitting and making monthly returns and
payments over 12 months will prove that the business was not going
to default again.
Paragraph 4(2) of schedule 11 VATA HMRC may “require a taxable
person, as a condition of his supplying or being supplied with goods
or services under a taxable supply, to give security, or further security,
for the payment of any VAT that is or may become due from” him “if
they (the Commissioners) think it necessary for the protection of the
revenue”.
The jurisdiction of the Tribunal in an appeal against a requirement to
provide security is only supervisory. It cannot substitute its own
decision for that of the Commissioners. The only question the Tribunal
can ask is whether the actions and decision of HMRC were
unreasonable. For the appeal to be successful, it would have to be
shown that the Commissioners took into account some irrelevant
matter or had disregarded something to which they should have given
weight.
The Tribunal found that HMRC acted reasonably and had not taken
irrelevant matters into account or failed to take into account all relevant
matters at the time the decision to issue the Notice for Security was
made. The Appeal was dismissed.
This case clearly demonstrates that the Tribunal’s jurisdiction in
security cases is supervisory and beyond determining whether HMRC
have acted reasonably, they have no power to substitute their own
decision. The requirement to provide security should be given
consideration when transferring businesses as going concerns or from
a pre pack sale.
Disclaimer The information contained in this publication is for general guidance only. You should neither act, nor refrain from
acting, on the basis of any such information. Professional advice should be taken based on particular circumstances, as the
application of laws and regulations will vary. Please be aware that laws and regulations are also subject to frequent change. Whilst
every effort has been made to ensure that the information contained in this publication is correct, neither the author nor his firm
shall be liable in damages (including, without limitation, damages for loss of business or loss of profits) arising in contract, tort or
otherwise from any information contained in it, or from any action or decision taken as a result of using any such information.
VATUPDATE
First-tier Tribunal
allows suspension
of a VAT penalty
T
he First-tier tribunal’s decision in Shelfside (Holdings) Ltd
(published on 22 May 2012) highlights the availability of
‘suspended’ penalties and that HMRC do not always apply
them correctly.
The case involved errors in the company’s partial exemption
calculations (for the VAT periods 8/10 and 11/10) with potential lost
tax revenue of £53,160.60. In HMRC’s opinion, the company’s
actions were deemed to have been ‘careless’ and HMRC raised a
15% penalty.
The company appealed on the basis that, first, they had not been
careless and, secondly, even if the tribunal were to find they had
not taken reasonable care, the penalty should be suspended under
paragraph 14, Schedule 24 FA2007, or mitigated in some way.
The tribunal found that the company had not taken reasonable
care by not seeking professional VAT advice; however, due to the
confusing and difficult nature of the partial exemption calculation, it
found that the penalty should have been suspended.
Suspended penalties were introduced in the 2007 Finance act.
Paragraph 14, Schedule 24 provides HMRC with the power to
suspend all or part of the penalty, provided the person complies
with the conditions imposed. The conditions could be on a specific
action which may need to be completed - sometimes within a
specified time scale.
It is important to note that a penalty cannot be suspended if the
actions resulting in the inaccuracy are found to be deliberate.
Advisers who are entering penalty negotiations may wish to
consider requesting a suspension of the penalty and then working
with HMRC to put together achievable compliance conditions for
their clients going forward.
VAT liability on the
supply of phone cards
T
he European Court of Justice
has decided in the case of
Lebara [2012] ECJ-520/10 that
the supply of phone cards by Lebara to
distributors in other member states who
then on-sold the cards to customers
involved a single supply of
telecommunication services by Lebara.
HMRC contended that there were
two supplies by Lebara, being the issue
of the card and the redemption of the
card by the end user, both of which
were subject to VAT. However, the
Court found that only a single supply of
telecommunication services was made.
Lebara only received a single actual
payment in the course of supplying its
telecommunication services. Further,
that payment could not be treated as a
payment made to Lebara by the end
user, even if the resale of the phone
card by the distributor ultimately leads
to the burden of making that payment
being passed on to the end user.
Lebara sold phone cards to distributors for an amount lower
than the face value of the cards. The distributors, acting in their
own name and not as agents of Lebara, resold the cards at their
face value. The phone cards were activated by Lebara following a
request by the distributor, provided that the distributor had paid
for them. Lebara did not know the identity of the user, but had
systems in place which enabled it to track each card sold,
whether the card was still valid, the amount of unused credit and
the numbers called - the distributors did not have access to that
system.
Lebara did not account for VAT on the sale of phone cards to
distributors on the basis that the transaction was a supply of
telecommunication services in the Member State in which the
distributor was established and that, in consequence, it was the
distributor which had to pay the VAT
in that Member State in accordance
with the reverse charge mechanism.
Lebara contended that the actual
use of the card did not entail the
supply by Lebara, for consideration, of
services to the end user. The Court
agreed that there was a single supply
of telecommunication services subject
to VAT in the distributors’ member
states under the reverse charge.
As a result of this case HMRC have
issued Revenue & Customs Brief
12/2012 VAT: Changes to the
treatment of single purpose face value
vouchers published on 10 May 2012.
This confirms that a new clause will
be introduced in the Finance Bill to
amend VAT ACT 1994 Sch10A so
that single-purpose face value
vouchers will be subject to VAT when
they are issued rather than on
redemption. A single-purpose face
value voucher according to HMRC, is
one that carries the right to receive only one type of goods or
services all subject to a single rate of VAT. HMRC provide the
following example which they confirm is not affected by the
decision despite all the supplies being at the same rate of VAT...”
A cinema operator sells face value vouchers which can be
redeemed for any services or goods provided in its venues, for
example watching the film, buying popcorn or merchandise. As
these are supplies of more than one type, such vouchers will not
be affected by this change and the normal Schedule 10A rules
will continue to apply.”
The new accounting procedure will be effective from Royal
Assent to the 2012 Finance Bill. However, VAT repayment claims
may be possible for transactions before that date which have
been incorrectly taxed.
VATUPDATE
Businesses may be overpaying
VAT on road fuel for private use
n Revenue & Customs Brief 11/12VAT: Road Fuel Scale Charges
(RFSCS) – issued on 25 April – HMRC has confirmed that
businesses may have been overpaying VAT on road fuel for
private use when using the RFSCS. Reclaims of VAT are possible for
the past 4 years and possibly ex gratia payments prior to that.
Businesses generally have to account for VAT on the private use of
road fuel by accounting for a road fuel scale charge. HMRC has
historically issued the charges applicable to vehicles on an annual
basis.
Where a business had provided fuel to an employee for their
private use and had made a charge for that fuel, the business had
been required to account for VAT on the basis of the RFSCS, unless
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they had accounted for VAT on the basis of detailed records of
private mileage or the charge made was at least for the cost of the
fuel.
HMRC now recognises that accounting for VAT using the RFSCS
is not always correct. A business that has made a charge for the
private use of the fuel should be given the option of accounting for
VAT on the basis of the amount charged to the employee rather than
the RFSCS. VAT on the overpayments will be repaid by HMRC.
Any businesses that consider they have overpaid VAT as a result
of this HMRC error should submit a claim for repayment of the
difference between the amount already accounted for and the
amount due on the basis of the charge to the employee.
HMRC’s interpretation
too restrictive in zero
rated construction case
new dwelling built in its place.
The planning and conservation consents followed the application
and required the work done to follow that proposal.
HMRC argued that a new dwelling was not being built and the
construction services did not therefore qualify for zero rating. They
contended that for zero rating to apply, the retention of a façade
had to be as a result of the planning consent, not simply requested
as part of the planning application.
The VAT Tribunal disagreed with HMRC and allowed the appeal
and zero rating on the basis that if there was a positive requirement
for retention of the relevant façade, whatever the reason for its
imposition, the relevant statutory condition had been met.
Businesses should review past claims for zero rating of residential
buildings which have been denied where walls have been retained
as there may be reclaims available.
T
he First-tier tribunal in the case of the Trustees of the Eaton
Mews Trust (TC 01943, decided on 20 April 2012) has
allowed a claim for zero rating in relation to a new build even
though the retention of some of the original walls was proposed in
the planning application itself. The planning application had
proposed that the party walls on either side and the rear wall of an
existing dwelling in a terrace should remain, with the rest of the
building, which was in a conservation area, then demolished and a
When is income
not liable to VAT?
I
n the First Tier Tribunal case of Dr Amir Ali Majid [2012] UKFTT 144(TC)
published on 6 March 2012, HMRC sought to argue that income from Dr
Majid’s self employed office as a part-time Immigration Judge rendered him
liable to VAT registration due to the level of his taxable supplies. However, the
Tribunal considered there was no clear association between his past practice as a
barrister and his acceptance of the office of Immigration Judge. Dr Majid was not
liable to be registered for VAT solely in respect of his earnings as a part-time
Immigration Judge and accordingly the Tribunal allowed his appeal.
This was an unusual and exceptional case but highlights an important distinction
between being self employed for direct tax purposes and a taxable person for VAT
purposes.
The Tribunal found that the process by which HMRC arrived at the decision that
Dr Majid was liable to register for VAT omitted a step in the required logic. Merely
because Dr Majid had been deemed for income tax purposes to be self-employed,
it was assumed by HMRC that he was a taxable person for VAT purposes and that
he should therefore have been registered. The question whether he was a person
independently carrying on an economic activity did not appear to have been
asked. In the Tribunal’s view, this led to an erroneous decision by HMRC. His legal
qualification was (and is) essential to his role as an Immigration Judge, but there
was no evidence that he accepted the role as part of his practice. Accordingly, the
Tribunal found that he did not fall within VATA 1994 s 94(4).
This case highlights an important issue when considering VAT registration often
overlooked in EU legislation...a person must be independently carrying on an
economic activity.
VATUPDATE
‘Private benefit’
charges will affect
business entertainment
VAT claims
meeting to proceed without interruption, then a private use charge
will not apply.
If there is no other alternative than to hold a meeting outside the
office, only similar basic provisions would be allowable. Hospitality
provided following a meeting will not meet the strict business
purpose test and neither will hospitality involving the provision of
alcohol. Taking a customer to a restaurant is very likely to lead to a
private use charge.
H
CORPORATE HOSPITALITY EVENTS:
Many businesses offer their customers or potential customers’
general entertainment and hospitality.
Examples include:
– golf days
– track days
– trips to sporting events
– evening meals
– trips to nightclubs
Where the related expenditure is incurred for the purpose of the
business, and recovered, an output tax charge will be due. This is
because such events are unlikely to have a strict business purpose
or are necessary for the business to make its supplies.
If the entertainment provided triggers a private use charge the
business can treat the VAT incurred as non-deductible rather than
deducting the input tax and offsetting with an output tax charge.
Businesses should consider the particular facts of each claim and
whether the claim for input tax is incurred necessarily for the taxable
person to provide goods or services.
HMRC apply the private benefit charge on a “strict business
purpose test” basis which can often be challenged.
MRC’s revised Business Entertainment Notice 700/65
issued on 29 February 2012 states that a ‘private benefit’,
triggering an output tax charge, will arise in almost all cases
where business entertainment is provided and the VAT is reclaimed
on entertaining overseas customers.
This interpretation by HMRC has not been widely publicised, in
what appears to be HMRC effectively trying to close the door on
reclaiming VAT on the cost of foreign business entertainment.
HMRC say that to avoid the output tax charge, the business can
decide to reclaim no VAT on entertainment and treat the input tax
as non deductible.
HMRC consider that hospitality provided because it would be
polite, because it is expected, or because it would improve
relationships is not for strict business purposes and would incur an
output tax charge if the VAT on expenditure was reclaimed.
Examples of HMRC’s VAT treatment of business entertainment
taken from the new notice are set out below:
MEETINGS:
If normal basic food and refreshments such as sandwiches and soft
drinks are provided in your office during a meeting to enable the
VAT exemption for financial advice:
Retail Distribution Review (RDR)
T
he FSA have introduced changes in the way in which
financial services businesses generate their income and as a
result have introduced The Retail Distribution Review (RDR),
which requires advisers to move from receiving commissions to fees
agreed with customers. Where advisers can evidence the
arrangement of a Retail Investment Product for a customer their
services will be exempt from VAT. Evidence is crucial to the
verification of exempt supplies.
HMRC’s proposed guidance provides some clarity to the
confusion which has reigned for the past few months.
Investment advisers are however, still faced with applying the
circumstances of their business to determine the correct VAT
liability.
HMRC consider there are six possible services being supplied
which are:
• Gather information about the customer.
• Carry out research to find suitable investment options.
• Provide the customer with reports, forecasts and financial health
checks.
• Recommend specific products and discuss prices at which they
can be arranged.
• Act between the product provider and the customer with a view
to arranging the sale of the Retail Investment Products agreed with
the customer.
• Review and monitor the continuing needs of the customer where
agreed.
HMRC consider that all the services above will be exempt from
VAT where they are within the agreement concluded with the
customer and importantly where the adviser performs the services
outlined in the fifth bullet point above AND retains evidence that
they have performed that service.
If no evidence is retained by the adviser the services will be
standard rated. In addition, where any of the services are
contracted for separately they will be considered liable to VAT at the
standard rate.
The VAT liability will depend upon what is done – not the fee
arrangement.
To exempt their services, an adviser will need to keep sufficient
evidence to support the VAT treatment applied to the services. The
evidence will need to be specific to the services performed for the
customer and demonstrate that the adviser acted between the
customer and the product provider with a view to arranging Retail
Investment Products.
Retail Investment Products as defined by the FSA are:
• A life policy.
• A unit.
• A stakeholder pension scheme.
• A personal pension scheme.
• An interest in an investment trust savings scheme.
• A security in an investment trust.
• Any other designated investment which offers exposure to
underlying financial assets, in a packaged form which modifies that
exposure when compared with a direct holding in the financial
asset.
• A structured capital at risk product.
Financial advisers should ensure their contracts are properly
drafted and their services evidenced to take advantage of the VAT
exemption offered.
VATUPDATE
A timely reminder to Intrastat
review grant funding Declarations
F
and its VAT liability
A
berdeen Sports Village Limited
found itself before the First-tier
Tribunal over the VAT liability of the
funding provided by its joint venture
partners, Aberdeen University and
Aberdeen City Council.
Aberdeen Sports Village provides sports
facilities at its regional facility and received
‘Annual Grant Funding’ from Aberdeen
University and Aberdeen City Council.
Aberdeen Sports Village considered that
the funding was a donation and therefore
was not subject to VAT.
HMRC disagreed, and raised
assessments totalling £352,472 to collect
VAT on sums received from Aberdeen
University and Aberdeen City Council,
contending that the amounts were
consideration for taxable supplies made.
The Tribunal agreed with HMRC and
considered that Aberdeen University and
Aberdeen City Council received a number
of tangible benefits from Aberdeen Sports
Village and that the “Annual Grant
Funding” was consideration for them. The
appeal was dismissed.
This case highlights the need to
consider funding arrangements carefully to
determine whether taxable supplies are
being made.
rom 1 April 2012, businesses that
are required to submit Intrastat
declarations must submit them on
line or by some other electronic format by
the 21st day of the month.
This means that declarations will be due
21 days after the end of the month in
which the business
has EU trade to
declare. HMRC
must, for example,
receive the June
2012 Intrastat
declaration by
21 July.
Failure to submit
or incorrect
submission of
Intrastat declarations can lead to criminal
penalties being imposed, although HMRC
often will compound any penalties.
A new opportunity to reclaim VAT
on pre-registration expenditure
H
MRC have formally clarified reclaims of VAT under Regulation
111 of the VAT Regulations 1995. Within set time limits, this will
now allow VAT to be recovered on business assets on hand at
the date of VAT registration provided the assets were intended for
business use when the VAT was incurred. The time limit for goods is
four years.
Where a business deregisters due to reduced turnover, output tax on
goods on hand at de-registration may have to be declared under
Paragraph 8 of Schedule 4 of VATA 1994. This is a deemed self-supply
when a person ceases to be VAT registered.
If the business turnover increases again after de-registration the
business may once again become a taxable person and have to
register for VAT. If this occurs, and to the extent that the goods are still
held and will be used in the new VAT registration, VAT on the deemed
supply at de-registration can be considered when establishing an input
tax claim under regulation 111.
Although there will be no VAT invoice to support any such claim,
HMRC will allow alternative evidence to reclaim the VAT on registration.
HMRC will accept proof that payment of VAT on the deemed supply
was made to HMRC on de-registration. This will be accepted as
alternative evidence in support of an input tax claim, allowing deduction
under regulation 111 of the VAT Regulations 1995.
Input tax claims where the goods fall under the capital goods
scheme must, however, be made under the capital goods scheme.
Capital goods scheme items will not be subject to the four-year time
limit.
VAT Update is produced for the ICPA by Armstrong Media (0207 216 6427). It is written by
Vaughn Chown, Head of VAT at Gabelle LLP (see www.gabelletax.com). He can be contacted
on 020 7182 4034 or 07730 217337; or by email at [email protected].
VAT Update is published quarterly, in July, October, January and April. For details contact
The ICPA, Imperial House, 1a Standen Avenue, Hornchurch, Essex RM12 6AA.
Tel: 0800 074 2896/Fax: 01708 453 123. Email: [email protected]. Web: www.icpa.org.uk