Issue 12
In this issue:
Business Briefs and Updates on HMRC Policy
Local Authority Issues
Recent VAT Cases
Business Briefs and Updates on HMRC Policy:
Business Brief 08/06: “Beneficial ownership” of land and property
Customs have announced that, following a consultation on the VAT rules regarding the beneficial ownership of land and property found in VAT Act 1994 Schedule 10 Paragraph 8, the Government has decided not to introduce any changes at this time.
Schedule 10, Paragraph 8, VAT Act 1994 was introduced to simplify VAT accounting in cases where legal and beneficial ownership of property was held by different parties. The provision has the effect of treating the beneficial owner as the person making the supply rather than the person who holds legal title and in whose name the grant of the land is made. This means that when a property is sold, there is a supply for VAT purposes from the beneficial owner to the legal owner and from the legal owner to the purchaser. This results in extra administration for those selling property and can lead to errors being made in terms of accounting for VAT at the right time. From HMRC’s view, the provisions could also allow avoidance. As a result of recent litigation involving Abbey National, there was uncertainty about the circumstances in which the provision should be applied.
From the responses to the consultation, HMRC is satisfied that paragraph 8 can be applied in situations where someone, other than the legal owner, is engaged in economic activity in respect of an interest in land. While there remain some concerns about how Schedule 10 paragraph 8 may be interpreted, not least that the provision could be used for tax avoidance, the Government recognises that the proposed amendment of the current provision could result in administrative difficulties for some businesses. Therefore, it sees no reason to make any changes now. However, HMRC will keep the use of the provision under review and if evidence of abuse is found they will take all necessary steps to tackle it, including making proposals for legislative change.
HMRC are satisfied that for VAT purposes, the assignment of a rental stream in a securitisation is not a supply of land and remains unaffected by Schedule 10 paragraph 8.
Business Brief 09/06: Clarification of HMRC's policy following the Court of Appeal's decision in Newnham College
The case concerns whether or not Newnham is in occupation of the college library. If so, their option to tax the library would be disapplied - as such occupation would be for the purpose of making exempt supplies of education - in which case, VAT incurred on rebuilding and refurbishment of the library would be irrecoverable. The Court of Appeal ruled in Newnham's favour.
HMRC contended that Newnham is in occupation of the library through its students’ use of the library and the presence of staff seconded from Newnham to a subsidiary company to run the library. Newnham argued that the term “in occupation” in the anti-avoidance provisions must have the same meaning as the term “licence to occupy” in the exemption provisions. Newnham maintained that it has not been granted a licence to occupy the building and is not therefore in occupation. Accordingly, its option to tax still applies and the VAT incurred on the building works is recoverable.
The Court of Appeal ruled that to be “in occupation” of land requires more than a right to use that land. It requires some degree of control over the use by others (ie some degree of control over what those who are not also “in occupation” of the land can do on the land). The Court of Appeal found that Newnham did not have such a degree of control.
HMRC have been granted leave to appeal the decision to the House of Lords.
Until the House of Lords has given its decision, businesses whose circumstances are identical to Newnham's may continue to apply their option to tax. Where businesses do so, HMRC may issue assessments for the tax it believes is due to protect its position. No action will be taken to enforce payment of such assessments until the final outcome of the Newnham case is known. If the final decision is in HMRC's favour, we will require payment of the assessed tax with interest.
Based on the Court of Appeal decision, businesses that were wrongly denied input tax recovery or have accounted for and paid VAT on similar supplies but now find that the relevant option to tax is disapplied, may submit claims for overpaid tax to their local Business Advice Centre. These will be subject to a three-year limitation period. All adjustments or claims must take into account any overclaimed input tax as well as any overdeclared output tax, and overdeclared output tax will be subject to the unjust enrichment provisions.
Business Brief 12/06: Implications of the Result in Compass Contract Services
As a result of the Court of Appeal judgment in this case, businesses which provide food within restricted access premises, such as secure office buildings, sports stadium, amusement parks and cinemas may now be able to apply for a refund of output tax on supplies previously considered as standard rated catering, which should have been treated as zero-rated cold takeaway.
Following the case HMRC have reconsidered their policy on ‘premises’. The main change is that at restricted access sites a retailer will now be considered to occupy only that unit from which the sales of food have been made rather than the larger overall premises. However, the ‘premises’ also includes any facilities provided to enable the purchasers to consume the food at the unit, such as areas of seating and tables within, and adjacent to, the retail unit, whether owned by the landlord or the retailer, but clearly for the use of the food retailer’s customers.
This means that, unless the retailers supplies of cold food are in the course of catering, the supply of cold food for consumption away from the immediate premises, elsewhere in the restricted access premises, will be zero-rated.
Business Brief 12/06: Mayflower Theatre Trust (MTT)Ltd case – HMRC to appeal
As a result of HMRC’s revised policy on the application of the cultural exemption announced in 2003, many theatres claimed exemption for their supplies of admission. In making claims for output tax previously charged in error, theatres had to also adjust their input tax deduction. This led to disputes over how the costs of staging shows (production costs) are used by theatres; including MTT.
In this case, HMRC maintained that none of the input tax on production costs was deductible because they related solely to supplies of exempt admission. MTT argued that the input tax was partly deductible because the production costs also had a direct and immediate link to taxable supplies such as catering, programme sales and corporate sponsorship.
The Tribunal found that the production costs had a direct and immediate link with exempt admissions and not with any of MTT’s taxable supplies so that the input tax was non-deductible. MTT appealed to the High Court and the case was heard in March 2006.
The High Court did not disturb the Tribunal’s conclusion that production costs related solely to admissions, but disagreed that the input tax was non-deductible. The High Court found that where MTT supply corporate sponsorship packages that include an entitlement to tickets, that is a single taxable supply including what the Court described as “taxable tickets”. It concluded that as production costs related directly and immediately to admissions and some admissions are ‘taxable tickets’ then input tax on production costs is partly deductible.
HMRC is appealing this decision to the Court of Appeal on the grounds that the input tax on production costs relates directly and immediately to MTT’s supplies of exempt admissions only. Although the supplies of corporate sponsorship packages include tickets, the production costs do not relate directly and immediately to these supplies.
In HMRC’s view the High Court decision only affects theatres making supplies of admission which fall within the cultural exemption and taxable corporate sponsorship packages that include a ticket entitlement. It has no wider application.
Theatres that wish to apply the High Court’s decision to input tax incurred in future may do so until the dispute is settled provided they can demonstrate that they make taxable supplies including a tickets element. Where theatres adopt this treatment HMRC may issue assessments to protect its position should the appeal courts ultimately reverse the High Court’s decision. The assessments will not be enforced until the outcome of the MTT case is known, at which time the assessments with interest due will be pursued.
Theatres that wish to apply the High Court decision to input tax previously incurred on production costs may submit claims for under-recovered input tax to their local Business Advice Centre. This will be subject to a three-year limitation period.
Business Brief 15/06: The Reduced Rule for Long Stay Guests in Hotels
Following the recent tribunal case of Afro Caribbean Housing Association, HMRC now accept that the reduced value rule is not limited to a supply to individuals occupying the accommodation. Where local authorities or housing associations contract with hotels to provide accommodation, for homeless people or asylum seekers, for example, they can qualify for the reduced value rule.
This only applies to continued occupation by an individual for over 28 days, not a block booking that covers several individuals using the same accommodation.
Business Brief 18/06: Liability of agents’ credit and debit card handling services
The effect of the end of litigation in these two cases is that debit and credit card handling services provided by agents are VAT exempt where a key identified component is present in the service.
Claims held pending the outcome of these cases will now be reviewed for payment and any assessments raised by HMRC for underdeclared tax will be withdrawn where appropriate.
The Bookit case concerned the supply of Odeon cinema tickets. Customers wishing to purchase cinema tickets remotely, eg by phone or Internet, were redirected to Odeon’s agent, Bookit, who charged the customer an additional fee over and above the price of the ticket for their service. Bookit contended this fee was for credit or debit card handling services and was VAT-exempt as a transaction concerning payments or transfers.
The Tribunal found that Bookit was providing a taxable card handling service to the customer in return for the additional fee. The High Court, in overturning the Tribunal’s decision, found that Bookit was carrying out an exempt card handling service.
The Court of Appeal, in upholding the High Court judgment, found that the supply by Bookit to the customer included the following components:
- obtaining the card information with the necessary security information from the customer
- transmitting that information to the card issuers
- receiving the authorisation codes from the card issuers and
- transmitting the card information with the necessary security information and the card issuers’ authorisation codes to Girobank.
The Court found that the Tribunal had been correct in finding components (i) to (iii) to be taxable, but because the fourth component was part of Bookit’s service to the customer, and had the effect that funds were transferred to its account with Girobank, exemption was available to Bookit.
The SEC case concerned the supply of tickets to events held in the Scottish Exhibition and Conference Centre in Glasgow. SEC acted as agent of the promoter in the selling of tickets and charged an additional fee to customers on tickets that were paid for by credit and debit card. SEC contended this fee was for card handling services and was VAT exempt.
The Tribunal found in HMRC’s favour, stating that SEC was providing a single taxable booking service, with the taxable card handling service representing an ancillary aspect enhancing the main service. The Court of Session overturned the Tribunal decision, finding that SEC was carrying out an exempt card handling service. The Court based its judgment on the decision of the Court of Appeal in Bookit and on an assumption of similar facts. HMRC do not therefore draw a distinction between the two judgments.
The judgments have provided further guidance on when a service of credit or debit card handling by an agent is VAT-exempt. If an agent, acting for the supplier of the goods or services, makes a charge to the customer over and above the price of the actual goods or services, for a separately identifiable service of handling payment by credit or debit card, and that service includes the fourth component listed above, then the additional charge will be exempt under item 1, Group 5 of Schedule 9 to the VAT Act 1994. However, where an agent provides some or all of the first three components without providing the fourth, the charge is taxable at the standard rate of VAT.
Charges levied on the cardholder for payment by credit and debit card in any other circumstances will not fall within the exemption for financial services and the normal VAT treatment will apply.
The judgments do not alter the general principle that the taxable amount for a supply of goods or services includes all payments which the supplier requires the customer to make as a condition of receiving the supply. If, for example, a supplier of goods or services requires a customer to pay an additional charge, above that of the price of the actual goods or services, for payment by credit or debit card, that charge is further consideration for the purchase of those goods or services and VAT is payable on that amount in accordance with the VAT treatment of the goods or services.
Information on making claims or adjustments.
Agents supplying card handling services that meet the criteria set out above, and who have been treating the charge as taxable at the standard rate, should exempt such services from the date of this Business Brief. Conversely, agents supplying card handling services that do not meet the criteria set out above, and have been treating those services as exempt, should now charge tax.
Business Brief 21/06: Revised VAT registration form – VAT 1
A new VAT 1 form was introduced on the 1 December 2006. The new form looks much clearer than the old and attempts to deal with TOGC, voluntary and compulsory registrations in a much clearer manner and now requires the date of birth of the signatory! The new form may now be downloaded from HMRC’s website (under VAT, then click on forms). HMRC will continue to accept the old forms until 31 March 2007.
Local Authority Issues:
a) EC Proposals to Review Article 4(5)
The European Commission has made proposals to re-shape the Sixth Directive for ‘public body’ activities. A number of options have been identified all of which will have an impact on the VAT treatment of local authority activities and possible funding regimes. A consultation paper should be issued in the near future providing opportunity for comment by Local Authorities and HMRC.
We will keep our readers informed of progress.
b) Extended Schools /Building Schools for the Future
Another initiative which could cause VAT recovery problems or issues during Customs VAT visits.
It concerns the position of VAT recovery on refurbishment works to voluntary aided schools procured conventionally, and whether grants provided by DfES can legally be paid to local authorities.
If so then the local authority can contract for the works and secure VAT recovery. This would create a level playing field with PFI procurement; with PFI there is a supply of services to the local authority.
We would advise those responsible for VAT accounting to find out if their authority is involved in this area. Whilst the current programme applies to secondary level education, a new programme for the primary sector is on the horizon.
c) Provision of Laptop computers to school pupils
HMRC have issued a guidance note in a letter dated 4th December, which reiterated the principle that to qualify as closely related to education the goods and services must be in regular classroom use. That the article involved is essential for the delivery of education must be demonstrable. A formal confirmation of the headmaster should be acceptable for this purpose.
The guidance can also apply to other situations e.g. the supply of musical instruments for tuition at home by peripatetic music teachers who are employed and supplied by the local authority; provided the education is supplied within the remit of the LEA, VAT recovery is acceptable.
d) Reclassification of Welfare Services
HMRC have confirmed previous guidance issued in July 2006 regarding crèche facilities and playgroups as non-business as long as they are eligible for exemption. HMRC Internal Guidance notes to officers will be amended to reflect this.
e) Service Charges
An option to tax can be a useful tool to safeguard VAT recovery on property costs. However one of the downsides can be that VAT has to be charged on charges made to tenants who may not be able to recover this VAT and may even be grant subsidized by the same Council that is charging the VAT (resulting in the Council paying the VAT it has charged). One way to avoid this may be not to make a service charge but reduce the grant accordingly.
HMRC’s general rule on service charges by landlords on non-domestic property is that they follow the VAT liability of the main supply of accommodation and therefore are exempt or, if an option to tax has been exercised, standard rated. Another problem can therefore occur for Local Authorities when leasing at a peppercorn as a property related service charge can negate the non-business status resulting in an exempt supply being made, unless an option to tax is exercised.
Some charges for specific services e.g. insurance, gas, electricity etc can be dealt with as disbursements if the relevant conditions can be met (VAT Notice 742 para 11.7 provides further detail).
f) Opportunities to make claims for VAT
Following the results in Fleming and Conde Nast cases there is the opportunity to make late claims for VAT to HMRC.
See Business Brief 13/06 for further details. In essence those with claims that were made and either rejected or still pending before May 1997, can now make a fresh claim. However as HMRC are looking to appeal further in these cases, each claimant must sign an undertaking that if HMRC are successful in their litigation, the amount claimed will be repaid to them plus interest. If you wish to discuss your particular circumstances and whether such a claim is possible please talk to one of our team.
Recent VAT Cases:
a) Riverside Housing Association
The recent High Court case explored whether Riverside Housing’s construction of the headquarters could be zero rated under Item 2, Group 5 or Schedule 8.
The claim had been originally dismissed due to the Association using the building in the course or furtherance of business, even though Riverside was run for philanthropic reasons and is a registered charity; it was deemed that the letting of property is an economic activity regardless of who is the landlord.
The High Court upheld the tribunal’s decision.
b) Charity Zero-Rating and Amateur Sports Clubs
This amateur sports club had recently had constructed a new toilet block to include a disabled toilet as required by the Disability Discrimination Act 2004. The club felt that the works relating to the disabled toilet should be zero-rated under Group 12, Sch 8, VAT Act 1994, as under other areas of taxation it enjoyed the same benefits as charities therefore they felt they were subject to anomalous tax treatment.
HMRC understood that the appellant was entitled to tax treatment as though it were a charity in other areas of taxation; however it was quick to point out that those tax treatments were similar to those of a charity but did not actually treat the appellant as a charity. Therefore there was actually no anomaly.
Appeal dismissed.
For further information regarding any of these articles or any other VAT issue, please phone us on 01962 735350 or e-mail us at: vat@thevatconsultancy.com
|
