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The bi-monthly newsletter of VAT Solutions (UK) Limited
January/February 2009 WILL THE RECENT REDUCTION IN THE STANDARD RATE OF VAT ACTUALLY MAKE ANY DIFFERENCE? Inside this issue … As we all know, the Chancellor announced in the Pre-Budget Report on 1. Latest VAT news 24 November 2009 that the UK standard-rate of VAT would reduce from 2. In focus 17.5% to 15% for the period 1 December 2008 to 31 December 2009.
3. VAT cases Clearly, the aim of the reduction was to get consumers spending again by 4. VAT Tips bringing about lower prices, particularly in the retail sector. However, given that the reduction only reduces a £20.00 purchase to £19.58, there is considerable doubt as to whether the hoped for rise in spending will HMRC ISSUES NEW actually occur. Individuals may be expecting a greater impact on their INTEREST RATES household budgets than is likely to be the case, as many basic day- to- day purchases and essentials (i.e. most foods, domestic fuel and power, HMRC advised in News children’s clothes, insurance, mortgage and credit card interest) are not Release NAT 58/08 that, with subject to standard-rate VAT, and will be unaffected by the change. The effect from 6 December general consensus of experts seems to be that, in terms of benefit to the 2008, the rate of default public, the VAT reduction will be incidental, if not irrelevant. This was a interest charged on: view shared by many opposition MPs at the time, but interestingly, the • underdeclared VAT, air most critical comment appears to belong to Labour MP Frank Field, who passenger duty, described the measure as being akin to “spitting at a hurricane”! insurance premium tax, landfill tax, climate In the business world, the reduction will undoubtedly benefit those change levy, aggregates businesses which are unable to recover partially or fully the VAT that levy; they incur. Assuming the rate cut is passed on, there will be a benefit to • excessive repayments of those businesses or organisations in the exempt and non-business VAT, insurance premium sectors (e.g. financial service providers, insurers, care homes, welfare tax, land fill tax, climate providers, nurseries, and charities). They will also see a tangible change levy, aggregates reduction in costs, as the amount of irrecoverable VAT they suffer on levy and customs duties standard-rated goods and services decreases. However, in recovered by assessment administrative terms, all businesses are likely to be affected, as any ; and change in VAT rate creates numerous accounting and systems issues. • late payment of customs Some larger retail businesses, which will be under pressure to pass the duty; rate cut on, will suffer significant administrative costs in having to changes from 6.5% to 5.5%. implement price changes across multiple product lines with only a week’s notice. The suggestion in some quarters is that a lot of the smaller Conversely, the rate of retailers won't bother changing their prices, and will instead pocket the statutory interest paid: small difference for themselves as an offset against falling profits. • where an ‘official error’ has caused an As mentioned above, businesses only had a very short period of time in overpayment, a failure to which to amend their accounting systems and, where applicable, their claim credit, or a delay prices. However, as deferring the rate cut may have deferred consumer in certain repayments of spending, it was no doubt felt that any further delay into the busy VAT, insurance premium Christmas period would have been counter-productive. The last change in tax, land fill tax, climate the standard rate of VAT was over 17 years ago, when sophisticated ERP change levy, aggregates systems were in their relative infancy. This time around, it will have been levy and excise duties; or a far more difficult task to re-configure systems-based processes in order • where there has been to comply with the rate change by the due date. Retailers will also have undue delay in had to consider the impact of the change on their price point policy, and processing a claim for how they pass on the related reduced VAT charge to their customers. repayment of excise duty and customs duty. (By way of a helpful calculation tool, the old 7/47ths formula for working changes from 3.0% to 2.0%. out the VAT element of VAT inclusive amounts has now become 3/23rds) Page 1
VA T Voic e – Jan uary/F ebrua ry 200 9
Latest VAT News
REVENUE & CUSTOMS BRIEF 57/08 £70 becomes due if that period is exceeded - then the payment will be consideration for use VAT – Excess charges in non-local authority of the facilities and subject to VAT. car parks The Brief explains HMRC’s revised policy on With regard to excess charges retained by excess charges and other penalties levied in contractors, the Brief advises that where site non-local authority car parks. Following the owners allow contractors to retain all or part of Bristol City Council case, HMRC accepted the penalties collected, it will constitute further that excess charges made in local authority consideration for their services to the parking car parks were outside the scope of VAT. site owner, and be subject to VAT. However this treatment was only in respect of local authorities. HMRC have reconsidered As a final point, HMRC advise that if any their policy, accepting the Bristol City Council operators have declared VAT on non-VATable decision was based on the contractual charges, they can make a claim for repayment relationship between operator and customer, subject to the normal 3-year time limits. and as such, the VAT treatment of excess charges should be the same for all operators. REVENUE & CUSTOMS BRIEF 60/08 Therefore, certain excess charges made by non-local authority operators which were VAT: Court of Appeal decision in the case of previously considered to be consideration for Loyalty Management (UK) Ltd - further a taxable supply of parking are now regarded clarification of HMRC’s position, pending as outside the scope of VAT. outcome of appeal to the House of Lords A reminder from HMRC about the ongoing The penalty charges that will no longer be appeal in the Loyalty Management (UK) Ltd subject to VAT are those that are levied where case, which concerns the VAT treatment of a driver is in breach of the terms of the payments for Nectar Scheme rewards. contract with the car park operator. The most common situations where a driver may be in The Brief gives a short background the case, breach of the contract are: making reference to HMRC’s loss at the Court of Appeal in 2007, where it was decided that • no parking ticket on display the payments made by LMUK to Nectar • underpayment scheme 'Redeemers', known as 'service • overstaying purchased parking time charges', were for taxable supplies of • returning within a specified time ‘redemption services’ by the Redeemer to • parking outside marked bays LMUK. LMUK was entitled to claim input tax • parking in bays set aside for disabled drivers on the amounts it had paid to Redeemers, so or parents with children long as that decision remains in effect.
The Brief goes on to say that where the terms HMRC was granted leave to appeal to the and conditions make it clear that the driver House of Lords, which it duly did, with the HoL can continue to use the facilities after a set subsequently referring the matter to the ECJ. period upon payment of a further amount Pending an outcome to the case, HMRC point without being in breach of the contract – e.g. out that the VAT position is still the same as no charge for an initial 3 hours of parking, but that set out in R&CB 46/08, and further clarify Page 2
Latest VAT News (continued 1) VAT Voice – January/February 2009
that any Redeemers which are not treating the VAT Tribunal decisions in the cases involving the Rank Group. supplies as set out in R&CB 46/08, must do so from 17 September 2008 (the date the On 27 May 2008, the VAT Tribunal decided Brief took effect). Any guidance given to a that the VAT treatment of MCB provided by Redeemer prior to that date, which differed Rank was in breach of fiscal neutrality, and from guidance in that Brief, is withdrawn from consequently, these supplies should be the same date. The treatment advised in that exempt from VAT. In a further interim Brief will continue until further notice. decision on 19 August 2008, the Tribunal found that there had been a prima facie breach of fiscal neutrality in the VAT REVENUE & CUSTOMS BRIEF 61/08 treatment of Rank's gaming machine takings, and that these should have been treated as Intrastat - changes from 1 January 2009 being exempt from VAT before 6 December The Brief explains how businesses trading 2005, when UK law was changed to make all with other EU Member States could be gaming machine takings taxable. The Brief affected by changes from 1 January 2009, states that a second Tribunal hearing to hear and also gives advance notification of a further aspects of this issue is to be held in further change that is expected to take place October 2009. from 1 January 2010. HMRC says it has appealed against both Changes effective from 1 January 2009 decisions, and the High Court hearings are expected to be held in March or April 2009. • exemption threshold is increased from £260,000 to £270,000 In HMRC’s view, the law remains unchanged • delivery terms threshold is increased from in that VAT is and always has been properly £14,500,000 to £16,000,000 due on supplies of MCB and on the takings of gaming machines. As such, HMRC says Changes effective from 2010 businesses should continue to account for VAT on such supplies. With regard to the The Brief says that HMRC is committed to the Rank case, HMRC says that VAT Tribunal simplification of the Intrastat system, with the decisions are only binding on the specific aim of reducing the burden on business while case heard, as only the facts of that specific maintaining the quality of the trade statistics case are considered in full. As HMRC feels provided to users. HMRC has been working its view of the law is correct, and considers with other Member States over the past year that no other businesses are affected by the on a revision to the current EC legislation that decisions, any claims for alleged will allow it to remove some small traders from overpayments of VAT by other operators the Intrastat system. It is expected that the would not be considered until the conclusion revised regulation will be published at the end of the litigation. of 2008 or early in 2009, and HMRC will provide further details in due course. On the issue of Bingo Duty, HMRC says that in order to protect its position in law, 'protective assessments' of bingo duty will be REVENUE & CUSTOMS BRIEF 63/08 raised to safeguard revenue. The assessments will be issued on the basis that VAT: The decisions of the VAT Tribunal in the if there is no VAT to deduct from bingo cases of the Rank Group plc, in respect of the receipts, then additional bingo duty is due. supply of Mechanised Cash Bingo (MCB) and However, the assessments will only be gaming machine takings enforced if HMRC loses on the substantive The Brief concerns the VAT liability of MCB VAT liability issue. and gaming machine takings, following the Page 3
Latest VAT News (continued 2) VAT Voice – January/February 2009
Shopping on the Internet VAT INFORMATION SHEET 10/08 On 13 November, HMRC News Release 56/08 Electronically supplied services: Special entitled ‘New Rules For Online Shoppers’, scheme for non-EU businesses – changes regarding the new negligible threshold under This Info Sheet has been cancelled and which goods imported by post are not subject superseded by VAT Information Sheet 11/08 to Customs Duty.
From 1 December Internet shoppers will no VAT INFORMATION SHEET 11/08 longer have to pay customs duty on non-EU purchases worth up to €150 (approx £105), Electronically supplied services: Special compared to the previous limit of €22. There scheme for non-EU businesses – changes to has been some confusion in the press, and the VAT rates release reminds individuals this only relates Notification to scheme users that the standard to customs duty . The lower limit for Import rates of VAT changed in the UK and Ireland VAT is not being raised, and will still apply at with effect from 1 December 2008. In Ireland, the existing level of €22 (approx. £18). the standard-rate increased from 21% to 21.5%, whilst in the UK, of course, it dropped The News Release, which contains a link to a from 17.5% to 15% until 31 December 2009. more detailed HMRC podcast on the issue, can be accessed via the link below:
VAT INFORMATION SHEET 12/08 https://nds.coi.gov.uk/environment/fullDetail.as Electronically supplied services: Special p?ReleaseID=384169&NewsAreaID=2&Navig scheme for non-EU businesses - changes atedFromDepartment=False Notification to scheme users that the standard rate of VAT in Latvia will be increased from 18% to 21% with effect from 1 January 2009.
OTHER VAT NEWS
Tribunals Reform Project HMRC have set up a project with the Ministry of Justice to introduce simpler procedures for handling appeals, and a cheaper and more effective way to resolve disputes without the need for a tribunal hearing. The Project is looking to develop a more streamlined internal process for appeals made after 1 April 2009, as well as transitional arrangements for appeals already in the system.
HMRC have posted a ‘Frequently Asked Questions’ document on their website about the new processes and the Reform Project. It can be accessed via the link below: http://www.hmrc.gov.uk/about/trp-faq.htm
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VAT Voice – January/February 2009
In Focus
HMRC ISSUES NEW GUIDANCE ON THE FORCED RENTAL OF NEW DWELLINGS
Over the past year of financial crisis, the housing market has been hit particularly hard, and has slowed almost to a standstill. As a result of this, many housebuilders have had to consider renting out their unsold stock until such time as the market improves. In this article, we look at the VAT consequences of taking such action.
The freehold sale or grant of a long lease (21 years in England, or 20 years in Scotland) in a new residential property is a zero-rated taxable supply, and the housebuilder can recover all of its associated VAT. However, the renting of a residential property is an exempt supply, and the associated VAT cannot be recovered unless certain conditions are met.
So when the intention changes, from taxable to exempt, what adjustments to previously recovered input tax does the housebuilder have to make? Obviously, HMRC have had so many queries on this subject that they have published a number of VAT Information Sheets and Revenue & Customs Briefs to clarify the position for the beleaguered housebuilders.
The adjustments required to the recovery of input tax in these circumstances was covered by HMRC in VAT Information Sheet 07/08, which gives guidance (and worked examples – see below) on the VAT implications arising when housebuilders temporarily let their new dwellings whilst still trying to sell them.
The VAT Information Sheet was issued in response to recent enquiries from the housebuilding sector, and takes account of the High Court decision in the joined cases of Curtis Henderson and Briararch [1992] STC 732, which took place in the early 1990s.
The key points to which the Information Sheet refers are summarised as follows:
• if you temporarily let a dwelling before selling it, you may affect the VAT you can recover on your costs • many housebuilders who temporarily let a dwelling will not be affected but you need to check this to avoid making VAT mistakes • there is an easy way to check if you are affected by applying what we describe here as a ‘simple check for de minimis’
If you fail this check, you may have to:
• adjust the VAT previously recovered on your submitted VAT returns • restrict the VAT to be recovered on your current and future VAT returns • both adjust your past VAT recovery and restrict your future VAT recovery.
The VAT Information Sheet says that if a business needs to adjust VAT previously recovered, then exceptionally, and if so preferred, it may do so without contacting HMRC. Page 5
VAT Voice – January/February 2009 In Focus (continued 1)
A housebuilder is required to make a clawback adjustment as soon as the actual or intended use of a property differs from the original plans against which input tax was recovered. A clawback adjustment is a one-off event, and a housebuilder would only make a second adjustment if the building is never let. There is no need to amend the adjustment if the actual period of letting proves to be longer or shorter than anticipated.
Housebuilders that are not already partially exempt must first apply a simple ‘de minimis check’. If they do not fail this, there is no need to make an adjustment, and no need to go on to the second stage. If the check is failed, however, it is then necessary to go on to the second stage to work out the actual clawback adjustment. Where a housebuilder already has a partial exemption method, it will need to apply its partial exemption method to check for de minimis.
The ‘simple check for de minimis’ is carried out by reference to the expected time period the housebuilder will let its building for as a proportion of the economic life of that building, which, for VAT purposes, is 10 years. Provided the total exempt input tax does not exceed £625 per month on average (up to £7,500 per year), and is not more than half of the total input tax, the input tax is ‘de minimis’, and the clawback is not required.
Example of a ‘de minimis’ check taken from Information Sheet 07/08
A fully taxable housebuilder recovered £20,000 input tax on a house that it expected to sell for £300,000. After the end of the tax year, it decides to defer the sale by letting for two years, and so becomes partly exempt.
A simple check for de minimis is:
£20,000 input tax x two-year lease/10-year economic life = £4,000 exempt input tax.
The £4,000 exempt input tax is de minimis because over the tax year, it does not exceed £7,500 or 50% of his total input tax. The builder has no need to adjust the VAT previously recovered on his VAT returns. An important point is to note if the input tax was incurred over more than one tax year, the de minimis test should be applied to the input tax incurred in each of the tax years separately.
If the de minimis test is failed, it will be necessary to make a clawback adjustment based on the housebuilder’s realistic expectation, judged at the time the original plans were set aside. HMRC may ask for evidence to support this, such as:
• the business plan showing the price originally expected • reports of estate agents showing this price to be unobtainable, and maybe estimating when a sale will be achievable • board minutes from the time of the decision to grant short leases, or any other commercial documentation backing up the estimated use
The housebuilder calculates its clawback adjustment by comparing the input tax deducted with the input tax it would have deducted had it held its changed intention all along. If the housebuilder is already partially exempt, it calculates the input tax it would have deducted by using its partial exemption method at the time the costs were incurred. If it was not already partially exempt, however, it must apply the standard method unless it obtains HMRC approval to apply a special method instead. If the housebuilder so prefers, it can exceptionally base its clawback adjustment on an alternative calculation (and without prior approval), provided that calculation is fair.
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VAT Voice – January/February 2009 In Focus (continued 2)
A calculation based on the values of supplies is normally fair and straightforward, provided it is based on reasonable estimates and valuations.
Example of a ‘value-based’ fraction taken from Information Sheet 07/08
Estimated eventual sale value Estimated eventual sale value + estimated short let premiums and rents
Worked example A housebuilder expects to sell two houses for £500,000 each. The input tax recovered during the tax year was £50,000. After the end of the tax year, the decision is taken to rent them for a period of three years generating estimated rental income of £200,000. The housebuilder makes no other supplies.
£50,000 input tax incurred x £1,000,000 £1,200,000
= £41,667 recoverable input tax
£50,000 input tax previously recovered, so £41,666 = £8,334 to be repaid to HMRC
No adjustment should be made for potential bad debts during the lease period. If it is not possible to fairly estimate the values, a different calculation may be needed. Apportionments based on the expected time period of the rental or short-term let are not recommended, except where used as a quick de minimis check.
A housebuilder that decides to temporarily let before selling will need to apply a partial exemption method if it continues to incur exempt input tax in its current or future VAT periods. The exceptional treatment can only apply for the clawback adjustments. If the housebuilder is not already partially exempt, it must either apply the standard method, or else seek formal HMRC approval to apply a special method.
HMRC have also issued Revenue & Customs Brief 54/08 giving their view on what is acceptable and unacceptable VAT avoidance by housebuilders trying to avoid an adjustment to input tax recovery. The Brief accepts that many housebuilders are finding that they are unable to sell newly built dwellings in the current economic climate, and are, instead, choosing to rent those properties in the short-term.
To avoid the problem of an adjustment to previously recovered input tax, some housebuilders have considered selling dwellings to a connected company to achieve a zero-rated sale. Any exempt supplies are then made by the new owner, thus minimising any VAT recovery restriction for the original builder. HMRC have been asked whether they will challenge such arrangements as avoidance (on the basis that VAT recovery rights cannot be obtained by sales which have no commercial purpose and are undertaken with the sole aim of obtaining a VAT benefit) .
The Brief says HMRC do not consider that such a transaction would be unacceptable VAT avoidance in most cases, but goes on to outline the basic criteria in which a sale with the sole aim of preventing VAT costs would be considered abusive (e.g. where repair and maintenance costs are knowingly picked up by the original builder just before the transfer).
This new guidance and the earlier HMRC VAT Information sheet on the consequences of a short let do not deal fully with all situations, and, in particular, does not deal fully with mixed developments. In addition, it makes no comment on the direct tax consequences of selling a property to a connected company.
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VAT Voice – January/February 2009 In Focus (continued 3)
Finally, in the case of a speculative builder who constructs a house, is then unable to sell it, and then decides to live in it himself, he has a number of options. If the builder operates through a limited company, he can sell it himself personally, and would then have a zero-rated sale. He could rent it himself, and the above adjustment would apply. In the event that the builder is a sole proprietor, and he uses the house as his main residence, he will not have to make any adjustments to the input tax recovered. HMRC Internal Guidance, V1-8A, Section 22.8.2 states:
When a sole proprietor is in the business of constructing property for sale and builds a house on his own land for his own occupation, or by a connected person, he can either: • recover the VAT through his VAT return in the normal way; or • claim the VAT through the Refund Scheme .
In these circumstances, he would be entitled to recover the VAT through his own VAT return, so there would be no need to make any adjustments.
PRE-BUDGET REPORT 2008 – SUMMARY OF VAT CHANGES
1. TEMPORARY REDUCTION IN STANDARD RATE From 1 December 2008, the standard-rate of VAT will be temporarily reduced to 15% until 31 December 2009 (N.B. zero-rated and 5% reduced-rated supplies are unaffected). On 1 January 2010, the standard- rate will revert to 17.5% again. Where payment has been received or invoices issued at 17.5% prior to 1 December 2008, but the goods are not provided until after that date, suppliers may choose to issue a credit adjusting the VAT to 15%. The usual time limit for issuing such credit notes is 15 days, but this will be extended by secondary legislation to 45 days.
Anti-forestalling legislation will be introduced in the Finance Bill 2009 to prevent businesses from using artificial arrangements to obtain a 15% rate on supplies to be made after the reversion date. As a result of the reduction, legislation will be required to amend the percentages applicable to the flat rate scheme for small businesses, and there will also be revised amounts applicable to fuel scale charges. HMRC have issued a detailed guide on the issues which includes tables of the revised flat rate percentages and fuel scale charges, and can be downloaded at http://www.hmrc.gov.uk/pbr2008/vat-guide-det.pdf
2. INCREASE IN BESPOKE RETAIL SCHEME THRESHOLD From 1 April 2009, the current turnover limit of £100m beyond which retailers are not allowed to use any of the five published retail schemes (i.e. the Point of Sale Scheme, two Apportionment Schemes, and two Direct Calculation Schemes), will be raised to £130m. Businesses with turnovers above the limit must either agree a Bespoke Retail Scheme with HMRC, or use the normal VAT accounting rules.
3. SIMPLIFICATION OF ENTRY & EXIT RULES FOR THE FLAT RATE SCHEME From 1 April 2009, the current entry requirement that a business should have a total income of less than £187,500 will be removed. This will leave a solitary entry test that the taxable element of the total turnover should be less than £150,000.
With regard to leaving the scheme, there is a requirement that businesses check annually whether their income exceeds £225,000. Where this is the case, the business must leave the scheme. An amendment will now be made to the scheme rules which will allow the test to be calculated on the same basis that the entry calculation was made. For example, if entry eligibility was based on cash received, the leaving test can be based on cash received also. Likewise, if entry was based on invoices issued, then exit can be based on invoices issued too.
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VAT Voice – January/February 2009 VAT Cases
TRIBUNAL SAYS PENALTY DUE TRIBUNAL AGREES WITH CHARITY FOR FAILURE TO REGISTER AS THAT IT WAS MAKING TAXABLE A ‘HIGH VALUE DEALER’ SUPPLIES TO LOCAL AUTHORITY
The appellant, a high quality second-hand The appellant was a registered trust charity car dealer, appealed against a penalty acquired from the Bath Festival Society in 1993, imposed by HMRC under the Money from which, it also acquired the intellectual Laundering Regulations 2003. This was rights to the Bath International Musical Festival. the first such appeal to be heard before Bath City Council, the predecessor to Bath and the VAT and Duties Tribunal. North East Somerset Council (B&NES), was keen to ensure the survival of the festival and The penalty came about from a VAT audit, entered into a number of agreements with the where, although no VAT issues arose, it appellant, which was funded by the council and was found the appellant acted as a ‘high the Arts council. The issue at dispute was the value dealer’ after the 1 April 2004 start treatment of amounts received by the appellant, date of the Regulations without first and whether they were grants or consideration registering with HMRC. Under the for a supply of services. Regulations, a high value dealer is defined as a person who carries on ’the activity of HMRC argued that the sums paid were not dealing in goods of any description by way consideration with a direct link to an identifiable of business (including dealing as an service, but were a grant, and that the supply auctioneer) whenever a transaction made by the appellant was to the local involved accepting a total cash payment of community. Both parties accepted the key issue 15,000 euros or more’ . The appellant in the case was whether the appellant was questioned the power of HMRC to charge providing services to B&NES. In reaching a a retrospective registration fee, as well as decision, the Tribunal Chairman noted that the a penalty, for not registering. legislation gives the concept of supply a broad meaning. She added that the continuation of the HMRC’s argument for this rested on two festival was considered to be a matter of points; (a) that the terms of the regulation importance to the B&NES. If the appellant was imposes the right to charge a fee and (b) not providing these services, B&NES would be the fact that HMRC does not keep any required to supply the same services in house. penalty but passes it on to the Treasury. The Chairman also referred to the Business Brief regarding the facts of Edinburgh Leisure The Tribunal did not take a general view of which states ‘The payments from local this policy by HMRC, but commented that authorities to the appellant constituted (b) was not relevant as nothing in consideration for a supply, that of agreeing to European Regulation 2001/97/EC take over the provision of leisure services empowers or imposes these funding previously supplied by the local authority’.” arrangements. However, the Tribunal did agree with HMRC that a penalty should be The Tribunal concluded that this suggests imposed as Car Sales failed to make an HMRC accept that agreeing to take over a job application to register in good time ahead previously undertaken by an authority can of undertaking a high value transaction. amount to a supply of services. The Tribunal therefore found that the payments were within James Paul (Car Sales) Ltd (VTD 20,833) the scope of VAT, and allowed the appeal.
Bath Festivals Trust Ltd (VTD 20,840)
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VAT Cases (continued) VAT Voice – January/February 2009
TRIBUNAL AGREES WITH HMRC own accountant had made a voluntary THAT LEASE OF LAND WAS A disclosure after auditing his books), but he BARTER FOR USE OF FACILITIES felt that his business was entitled to operate under the benefits of the second-hand cars
margin scheme as laid down in VAT (Cars) The appellant, a sports and leisure business, Order 1992 (SI 1992/3122), which allows leased sports fields and sports facilities from VAT to be accounted for on only the profit King’s School, Gloucester, for a peppercorn margin of sales. HMRC's position was that rent. The school was allowed at certain times VAT Notice 718 establishes in law that a to use the leisure centre, which the appellant pre-requisite of the margin scheme is that otherwise exploited commercially. the trader keep adequate records, as laid
down in the Notice. These include a stock HMRC treated the transaction as the barter of book and copies of both purchase invoices taxable leisure centre services by the and sales invoices. appellant in return for the VAT exempt grant of a lease by the school, and various HMRC contended that the appellant failed to assessments were raised. The appellant keep such records. During a VAT inspection, argued that there was no supply of leisure the officer noted a dearth of sales invoices, centre facilities back to the school, as the and took the appellant's books away for school had retained its rights to the leisure inspection and VAT audit. Following the centre under the demise of the lease. examination of the records, HMRC formed
the view that the record-keeping conditions The Tribunal subsequently found for HMRC, of the margin scheme had not been met, largely on the documentary evidence that and issued a notice of their intention to underpinned the aforementioned lease. The assess for VAT due on the total sales case is interesting because it gives thought to consideration over the past three years. the matter of calculating a price where there is Although the appellant’s accountant no cash consideration for the services received permission to reconstruct the rendered. Reference was made, in this case, accounts in order to meet the requirements, to the list price of leisure centre services and submitted new records in the time offered to the general public (adjusted for any allowed, HMRC found these inadequate, block-booking discounts) on a period-by- and went ahead with the assessment. The period basis. accountant had been forced to create a new Riverside Sports & Leisure Ltd (VTD 20,848) stock book and issue new sales invoices based on copies of purchase invoices obtained from the other dealerships with TRIBUNAL SAYS HMRC WAS RIGHT which the appellant traded. Furthermore, not TO DISALLOW USE OF MARGIN every transaction had been fully traced. To SCHEME DUE TO POOR RECORDS HMRC, this confirmed that record-keeping had indeed been inadequate. The reconstructed accounts which they would The appellant operated a second-hand car have accepted referred only to new copies dealership which ceased trading by May of purchase invoices and sales invoices 2007. The case concerned an appeal by the being obtained, not the issue of new appellant against an assessment by HMRC invoices. HMRC therefore raised the for £73,384 in VAT on sales of second-hand assessment, although in the course of the cars over a three-year period. hearing, they did accept that the amount should be reduced to £72,508. The appellant accepted that accounting errors had led to an underpayment of VAT (and his
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VAT Cases (continued) VAT Voice – January/February 2009
The Tribunal found that, as the appellant The case analyses the inappropriateness of had failed to keep the records that were 'zoning' (using rental apportionment as a means required by law as a pre-condition of to calculate the rent for a whole shop) as a operating the margin scheme, he had no means to reflect use. Following the decisions in right to benefit from the scheme, and HMRC Optika Limited and Banbury Visionplus , the were within their rights to assess him for Tribunal concluded that the appellant did not VAT on the full amount of his sales receipts. segregate its business based on area, the The appeal was thus dismissed. The whole of the shop was used for the whole of the Chairman felt that there was some question business, and 'zoning' was not an appropriate as to whether the appeal was, in fact, measure. Most of the floor space was used in against HMRC's rejection of the the provision of mixed supplies. A segregated reconstructed accounts, and some doubt as method based on floor-space was distortive. to whether the jurisdiction of the Tribunal The Tribunal said that an override notice did not covered such a question. However, for the require a business to cease using the current avoidance of doubt, he gave it as his opinion method, but did require an additional calculation that it had been reasonable of HMRC to (for the difference between the amount reject the reconstructed accounts given the recoverable under the method and the amount circumstances above. Therefore, the appeal properly recoverable). It is incorrect to assert was also dismissed on those grounds. that HMRC should have told the taxpayer what method would be appropriate (such an Alan Thornhill t/a ‘Motormill’ (VTD 20,858) indication would have amounted to a direction, and was not a course open to them). TRIBUNAL SAYS HMRC WAS Vision Express UK Ltd (VTD 20,870) RIGHT TO ISSUE A SPECIAL METHOD OVERRIDE NOTICE TRIBUNAL SAYS LOFT CONVERSION COMPANY WAS ACTING AS A The appellant, a High Street optician chain, appealed against an override notice issued PRINCIPAL FOR VAT PURPOSES by HMRC in respect of previously agreed This case involves the supply of loft partial exemption special method, and a conversions, and whether the appellant and a resultant assessment for approx £400k for connected company were supplying the VAT overclaimed. Regulation 102 gives conversions as principal, or acting as agents on HMRC the power to direct or agree a special behalf of a number of other businesses, method that is a fair and reasonable including a second connected business and two reflection of the use of costs. Para 3 says other companies. The appellant argued that that the method will continue in use until output tax was only due on its project HMRC approve or direct its termination. management services, and not the full HMRC did not terminate the appellant’s consideration paid by customers. The second method, but served an override notice. connected business, which provided inspection
and design services, was run by the owner of The appellant claimed that the notice failed the appellant, and the two further companies because it did not indicate what it must have were run by his daughter and his ex-wife. By done in order to comply with it. The Tribunal looking at the facts, the Tribunal found that, at dismissed the appeal, finding that the no stage were customers aware of the separate wording of the override notice served in companies, and that if things went wrong, accordance with regulation 102 was not clients would seek redress from the appellant. ambiguous. Regulation 102B is clear on The Chairman highlighted a number of clauses what a trader has to do to comply with the within the contract between the appellant and law, just not how to comply. HMRC are not their customers which were inconsistent with required to instruct the taxpayer on how to agency treatment. The appeal was dismissed. comply with the law. A1 Lofts Ltd & A1 Loft Conversions Ltd VTD (20,888) Page 11
VAT Voice – January/February 2009 VAT Tips
RESIDENTIAL CARE HOMES – TOLLEY’S VAT CONFERENCE APPLY FOR A VAT REFUND NOW! We are pleased to announce details
of another forthcoming Tolley’s Historically, care services supplied in residential care homes VAT conference entitled ‘The were always treated as being exempt from VAT. Howe ver, Future of VAT,’ which will take several years ago, this treatment was challenged by the place in Central London on Tuesday Kingscrest Care Group, who wanted to register for VAT in 21 April 2009. The event will examine the principles of EU order to reclaim substantial amounts of VAT incurre d on Law that underpin the VAT system, and focus on several capital expenditure costs. The challenge ended up in the recent significant developments in case law on abusive European Court , which ruled in Kingcrest’s favour by practices. This highly practical conference will tackle some stating that UK law did not exempt care provided in of the most frequently encountered issues under EU law. residential homes that were not registered for the provision of nursing care. Some of the topics that will be covered are: • Input tax deduction – is the UK’s approach consistent As such, residential homes can now choose to retrospectively with the EU’s approach? register for VAT (it is not compulsory). HMRC changed the • Using EU law remedies in tax cases law with effect from 21.3.02, so that all residential care was • The EU Commission’s view on future EU law exempt from VAT. However, the opportunity remains for a developments VAT reclaim from the start of trading right up to 21.3.02. • VAT case law update – how will the outcomes of recent This could be all the way back to the start of VAT on 1.4.73 cases impact on future VAT planning? if trading began before then. The VAT registration would be • in the name of the legal entity owning the business, (e.g. sole Tax planning and the anti-avoidance problem trader, partnership, or limited company), and would cover all the business activities. If more than one qualifying home is VAT Voice readers are eligible for a 10% discount to reduce operated by the business, one VAT registration would cover the price from £699.00 to £629.10 (plus VAT). You just need them all). Homes that have been sold before or after 21.3.02 to mention ‘VAT Voice’ at the time of booking. can also apply for registration under these provisions. For more information or to register: Homes can reclaim the VAT incurred on normal running Call: 020 7347 3574 costs, and any capital expenditure, including building work. Email: [email protected] Unfortunately, nursing homes do not qualify under this Online: www.conferencesandtraining.com ruling, but homes providing both residential and nursing care could also benefit from the ruling provided the nursing beds VAT Solutions (UK) Ltd is a leading firm of independent are no more than 50% of all beds. However, full recovery of Chartered Tax Advisers specialising in VAT. We provide VAT on the expenditure of the business is unlikely in these advice and assistance on all VAT matters, and also advise on Customs Duty, Excise Duty, Intrastat, Clima te Change particular cases, as some restriction would have to be made Levy, Aggregates Levy, and Landfill Tax. to take account of the VAT exempt nursing care. Our experienced consultants are ex -Officers of HMRC that In practice, not every residential care home which contacts us were previously employed by ‘Big Four’ accountancy firms. finds that they have a potential refund – some find that they If you have a query about this leaflet or VAT in general , please contac t Steve Allen or Andrew Needham at either would owe VAT to HMRC if they registered! A lot depends of our offices listed below: on the levels of capital expenditure and the percentage of
occupants whose fees are paid by local authorities. Warrington Office Runcorn Office In summary, if you own, or used to own, a residential care home where there is some capital expenditure and a good 1 Dundonald Avenue 31 Bisham Park ratio of council-funded occupants, you may well be entitled Stockton Heath Sandymoor to a VAT refund (some have been six-figure amounts). Warrington Runcorn WA4 6JT WA7 1XH Please contact us if you think you may be an eligible care Tel: 01925 212244 Tel: 01928 571207 home. We operate on a no-win-no-fee basis, with the agreed Fax :01925 212255 Fax: 01928 571202 fee only being due once a refund is received. We would advise in advance, however that the claim process itself is E-mail: [email protected] inherently very labour-intensive, and can take up to six [email protected] months or more to complete. Website: www.vatsolutions -uk.com
This newsletter is a general guide. It is not a substitute for professional advice, which takes account of your specific circumstances, and any changes in law and HMRC policy. No responsibility can be accepted by the company for any loss incurred as a result of persons acting or refraining from acting on the basis of this newsletter. Please also remember that VAT Voice is covered by copyright, and should not be repro duced or photocopied without our permission. Page 12