Fraudulent credit card payments are consideration for VAT supplies – Dixons Retail ECJ VAT Decision
The European Court of Justice (CJEU) has released its decision in the case of Dixons Retail plc. (C-494/12). The Court considered the scenario where someone purchases goods with a stolen credit card, with the fraud being discovered after the goods have been handed over. Under current practice if someone shoplifts goods there is no supply for VAT purposes as no payment has been made. However where payment is made, albeit with a stolen card, a supply is deemed to have been made, as a payment is received by the retailer from the credit card company in the value of the transaction in question. Dixons questioned this – if the payment was not consideration for a supply but rather compensation of some sort, no VAT would be due.
The Court held that Dixons was making a supply of goods to the customer, regardless of whether it later transpired that the purchase was made using a fraudulent credit card. Further, the Court held that the payment received was consideration as there was a direct link between the sale of the goods and the payment made. It did not matter that the payment was funded by the card provider, rather than the individual who used the fraudulent card.
As there was a supply of goods for consideration the payment received by Dixons from the card provider included an element of VAT.
This means that the existing practice of accounting for VAT on the payment received from the credit card company and retained by the retailer will continue.
There still remains an opportunity for retailers to consider whether a business is making all appropriate adjustments when calculating its daily gross takings on which VAT will be accounted for. Should you wish to discuss DGT adjustments, either under your bespoke retail scheme, or under one of the standard retail schemes, please contact Sean McGinness on 01962 735 350.
We met with the HMRC Travel Policy and Treasury team yesterday to discuss the outcome of the recent ECJ case on the Tour Operators’ Margin Scheme (TOMS). The main focus was the impact that the case has on the UK’s VAT Transport Company arrangement and the basis of the UK TOMS calculation. The following is a high level summary of the outcome:
Impact – It was acknowledged that further to the decision, the wholesale of travel products should fall within TOMS when supplied by a UK business. This is not in line with the current UK VAT legislation. The inclusion of such supplies would effectively make Transport Company redundant as its supplies would also fall within TOMS. We were able to share with HMRC and Treasury our belief that the majority of UK based tour operators use this arrangement and therefore the impact is wide and significant in monetary terms for the businesses in question.
Timing – Due to the fact that the UK was not part of the original infraction proceedings and was therefore not party to the ECJ case, the UK falls outside of the normal legal framework for infraction proceedings, whereby there is a strict timetable for implementing a decision. There is therefore no indication that HMRC will be forced by The Commission to make changes overnight. Although this is the case, as an ECJ decision is binding on all Member States, HMRC will be required to review the judgement and act in accordance with the decision. HMRC appreciate that it is a travel industry norm to agree brochure prices in advance and any lead in time to changes should ideally reflect this.
Info Gathering – HMRC are meeting with more advisors and businesses in the next couple of weeks to determine the impact that the changes will have on the tourism industry in the UK with the aim of releasing some guidance to businesses before Christmas.
Alternatives? – It is difficult to see what alternative models could be applied in order for the industry to retain zero rating apart from the obvious ‘Offshoring’ structures. However, we have raised one alternative model with HMRC which we believe is commercially workable and they are considering it. We will keep you updated on the progress in this area.
Calculation – The basis of the TOMS calculation was also discussed. HMRC agree that a move to a transaction by transaction calculation basis as prescribed by the ECJ decision would be difficult for the industry to comply with. It was acknowledged that this point was only raised in the Spanish decision and that the European VAT Directive does not currently specify how Member States should calculate the VAT due under TOMS.
We have agreed to continue providing HMRC and Treasury with relevant information from businesses regarding the impact so if you have any feedback regarding the case and its impact on your business we would welcome any comments or questions you may have so that we can feed these back to HMRC. In the meantime, if you would like to discuss the case in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email firstname.lastname@example.org.
Further to our news item “The CJEU case on the tour operators’ margin scheme” published on 14th October 2013 we are due to meet with the HMRC Policy Team who are responsible for Travel and Tourism on the 14th November 2013. The purpose of the meeting is to discuss the impact that the case will have on the UK travel industry with particular reference to how the inclusion of wholesalers in the Tour Operators Margin Scheme (‘TOMS’) will impact on the UK HMRC sanctioned Transport Company arrangement. We will also be raising the concerns that we have regarding the possibility of moving to a transaction by transaction calculation basis for those operating under the scheme.
We are currently collecting feedback from the industry and would welcome any comments or questions you may have so that we can feed these back to HMRC. If you would like to contribute or if you would like to discuss the impact of the case in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email email@example.com.
The decision of the CJEU in The European Commission v The Kingdom of Spain (supported by Czech Republic, French Republic, Republic of Poland, Portuguese Republic, Republic of Finland) (C-189/11) was published last month. This case concerned the varying interpretations of articles 306–310 of the VAT Directive 2006/112/EC, the special scheme for travel agents, and primarily focused on the question of whether the tour operators’ margin scheme (TOMS) should be used to tax wholesale or only retail travel transactions where the supplier is acting as principal in selling travel arrangements.
What is the case about?
There has been a difference in approach to this principle by the Member States, leading to an uneven playing field, with some, including the UK and Germany, taking the view that wholesale transactions should be taxed under the normal VAT rules, whilst others took the view that the margin scheme should be used to tax both wholesale and retail transactions.
The case also considered the following subsidiary issues:
- whether it is possible for suppliers to provide business customers purchasing travel for own use, rather than resale, with a VAT invoice in some form to enable VAT recovery; and
- whether the margin scheme calculation can consolidate transactions or whether it must be done on a transaction by transaction basis.
What was decided?
On the main issue, the court decided that both wholesale and retail transactions should be subject to TOMS. The judge dismissed submissions regarding the relevance of the words ‘traveller’ and ‘customer’ in different language versions of the directive, making the logical point that, of all the parties in the supply chain for the sale of a travel package consisting of various elements, the wholesaler is the party dealing with the greatest number of constituent elements and VAT jurisdictions and rates. Therefore, the margin scheme, in blocking input tax recovery and requiring VAT to be paid only on the profit margin in the location the business is established, appears to offer the most pragmatic approach to the otherwise complex compliance burden a wholesaler would face.
In respect of the subsidiary issues that were considered, important points emerge. First, it should be feasible for businesses purchasing travel arrangements for in-house use to recover VAT. It remains to be seen how this will be achieved, but for UK businesses in this market it offers a quasi-return to the previous position where the supplier could opt out of TOMS and provide a tax invoice under the normal VAT rules.
Second, it was determined that the TOMS calculation should not be carried out across a long period, with transactions being consolidated to calculate the margin. The court decided that the legislation only envisages global calculations for specific sectors, e.g. second hand goods, and therefore it is necessary to do a margin scheme calculation for each transaction.
Was the decision a surprise?
The potentially wide-reaching impact of the decision for UK travel businesses will have come as a surprise to many. The decision itself appears logical in the main, although it remains to be seen how some of the subsidiary aspects will be implemented in practice.
What is the impact?
The key decision on the fact that wholesale transactions should be subject to TOMS will be far reaching in the UK.
If a wholesaler had registered for VAT in other locations in the EU, as a result of the normal VAT rules applying to his transactions as opposed to TOMS, the decision is good news from the perspective of the VAT compliance burden, although the significant changes needed to accounting systems could counterbalance this to an extent. If the business did not VAT register elsewhere due to the arbitrage (some Member States would not allow non-established wholesalers to VAT register on the basis they viewed wholesale transactions as being subject to TOMS, taxed in the place of establishment), the decision will create an additional bottom line cost.
By far the biggest impact would be if the decision brings to an end the effectiveness of the UK’s so-called ‘transport company’ arrangements, a unique VAT mitigation structure used by the majority of UK established retail tour operators to reduce the amount of VAT due on the sale of a travel package. This HMRC sanctioned structure (HMRC Information Sheet 02/96) allowed businesses to purchase the passenger transport element of this package through a separate but connected company. This company (a wholesaler) then marked up and sold on the passenger transport to the tour operator at the zero rate of VAT, meaning the tour operator’s margin, and thus the VAT due, was significantly reduced. This change will have a significant impact on the bottom line of many UK travel businesses.
Businesses will likely welcome any possibility of recovering VAT on travel arrangements they purchase, depending on how this element of the decision is implemented. The frustration will lie in the need to effectively move back to where we were a few years ago before the TOMS opt-out was removed.
With respect to how the TOMS calculation is done, for many businesses it will be extremely difficult to do a margin scheme calculation on a transaction by transaction basis, particularly for those where block bookings with transport providers and hotels are made.
HMRC’s reaction to this decision is keenly awaited.
This article appeared in Tax Journal on 11th October 2013.
If you want to find out more regarding the case or if you want to arrange a meeting to discuss your business model then please do not hesitate to contact Julie Park on 01962 735 350 or via email at firstname.lastname@example.org
The VAT scheme that allows listed places of worship to claim back the VAT on the cost of repair work is to be extended with effect from 1 October 2013.
Full details on how the changes will apply are not expected to be available until 1 October, but are reported to include administrative simplifications and additional eligible works to increase VAT recovery in certain areas, including works to pipe organs, turret clocks, bells and bell ropes, and most significantly, professional services directly connected with any eligible expenditure. The inclusion of professional services is a welcome revision as VAT recovery on such costs was previously blocked as not being eligible expenditure.
As the changes take effect from 1 October 2013, it is anticipated that new eligible items will only be included where the work is undertaken on or after 1 October 2013, and we would expect detailed information to include commentary on VAT invoicing.
This is an important and welcome change for listed places of worship, and should be taken into account when considering fund-raising and grant funding applications.
Those involved with current and planned repair works are advised to review their current plans to consider the VAT impact.
For more information on how the VAT changes affect your listed place of worship contact Karen Mulcahy on 01962 735 350 or via email at Karen.email@example.com
Today saw the release of a landmark European VAT case which will change the way in which travel businesses in many EU Member States account for VAT, potentially increasing the cost of travel in some cases.
The case focused on the special VAT scheme for tour operators (TOMS), questioning whether it should apply in both a retail and a wholesale environment. An inconsistent approach is taken by the different Member States currently.
The ECJ has confirmed that wholesale travel transactions should fall within TOMS. This will mean that EU travel wholesalers will have to account for VAT from the profit margin on sales of EU travel in the country in which they are established.
Previously, wholesalers in EU Member States applying normal VAT rules to wholesaling were effectively able to sell the flight or passenger transport element of an EU package without VAT. Going forward this will change, with VAT being due from the whole margin. Clearly, once the new VAT rules are rolled out, this will have an impact on the profitability of travel supply chains, potentially impacting pricing ultimately.
The impact of the decision from a UK perspective could be considerable. UK travel businesses who currently use the HMRC sanctioned trader to trader (wholesale) option (commonly referred to as ’The VAT Transport Company Scheme’) will no longer benefit from the passenger transport element being VAT free. This is because supplies between Transport Company (a wholesaler) and its tour operator will now be subject to TOMS, rendering the arrangement ineffective.
For some tour operators the increased VAT cost could be enough to make the business unviable. Where this is the case tour operators will be forced to review their business to determine if they can adopt an alternative model such as relocating the business to a non-EU location (this can take on many forms to suit the commercial circumstances of the business in question, but key is real substance existing overseas). Non EU tour operators selling EU holidays are not currently required to account for any VAT on sales. Alternatively the business may prefer to continue operating in the UK but under a disclosed agency model or potentially the alternative ‘Agency Option’ which facilitates the use of net rates.
As with all decisions there will be a lead in time for the Member States to enact the changes, and at this early stage it is unclear as to what the precise impact will be for the UK. Therefore, whilst it is business as usual for now from a VAT accounting perspective, those wanting to make a fundamental change will need to put the wheels in motion as soon as possible given the complexity associated with changes to business models.
If you want to find out more regarding the case or if you want to arrange a meeting to discuss your business model then please do not hesitate to contact Julie Park on 01962 735 350 or via email at firstname.lastname@example.org
Various language versions of the decisions were released this morning. We are working our way through these to understand the full ramifications.
Our initial review suggests that TOMS should apply to wholesale transactions. This could have serious implications for UK tour operators using the transport company arrangement.
For some tour operators the increased VAT cost could be enough to render the business unviable. Where this is the case tour operators will be forced to review their business to determine if they can adopt an alternative model such as relocating the business to a non-EU location (this can take on many forms to suit the commercial circumstances of the business in question but key is real substance existing overseas). Non EU tour operators selling EU holidays are not currently required to account for any VAT on sales. Alternatively the business may prefer to continue operating in the UK but under a disclosed agency model or potentially the alternative ‘Agency Option’ which facilitates the use of net rates.
We will be providing more narrative on the decisions shortly. However, if you do have any questions or would like to discuss the implications in more detail please contact Martyne Pearson on 01962 735 350 or via email at email@example.com
On the 26th September 2013 the ECJ will release its decision on whether the wholesale of travel arrangements should fall within the VAT Tour Operators Margin Scheme (‘TOMS’). The case has essentially come about due to the continued inconsistency of VAT treatment applied by different EU Member States to the sale of wholesale and retail travel arrangements. UK established travel businesses currently exclude wholesale transactions from TOMS and the ‘normal’ VAT rules apply. For example, the supply of passenger transport will be subject to VAT in the country in which the transportation takes place and the supply of hotel accommodation will be subject to VAT in the country in which the hotel is located.
As a result of the inconsistencies, non-taxation can arise where:
- the wholesaler is established in a country that excludes these sales from TOMS; and
- the travel arrangements in question take place in a country that applies TOMS.
In this example no VAT would be due in either location.
Before the summer the AG gave his opinion that retail AND wholesale travel sales fall within TOMS.
Should the ECJ decision follow the AG opinion this would mean that all Member States would be required to change their local legislation to include wholesale supplies in TOMS. As a result any VAT due will be accounted for and collected in the country in which the travel business has established his business. Therefore there should be no risk of non-taxation.
Critically for UK established travel businesses however such an outcome would significantly increase the cost of VAT to the business. This is due to the fact that most UK based travel businesses who account for UK VAT under TOMS make use of the approved HMRC Transport Company Scheme. This is a concession which allows those operating the scheme to enter into a wholesale arrangement with a group company to buy passenger transport at an inflated mark-up. This results in no UK VAT being due under TOMS in respect of the passenger transport. This arrangement is unique to the UK and is hugely beneficial to those applying it.
Should the ECJ determine that wholesale supplies fall within TOMS, the HMRC sanctioned Transport Company Scheme will no longer provide the desired VAT benefit, leaving many UK travel businesses with a significantly larger VAT bill going forward, unless use if made of alternative arrangements such as business migration outside the EU and disclosed agency models.
If you want to find out more regarding the case or if you want to arrange a meeting to discuss your business model then please do not hesitate to contact Julie Park on 01962 735 350 or via email at firstname.lastname@example.org.
First published in Travel Weekly on 24th September.
In the current economic climate, there is an increasing number of pubs being converted to residential accommodation. If carefully managed, conversion works can qualify for the reduced rate of VAT of 5%. However, if the developer then goes on to sell the dwelling(s) and part of that space was previously used for residential purposes e.g. as staff living accommodation, input VAT recovery is usually blocked. Whilst the input VAT can be minimised to 5%, this still creates a VAT cost.
HMRC’s position was challenged in the recent case of Alexandra Countryside Investments Limited. The appellant converted a pub into two semi-detached houses. The company claimed input tax in relation to the conversion, on the grounds that the sale of the houses would be zero-rated. HMRC denied the input tax arguing that the sale of the houses would instead be exempt as before conversion the pub included a manager’s flat (parts of which were incorporated into both the semi-detached houses). In HMRC’s view, this prevented the sale of the houses from being zero-rated and meant the related VAT was irrecoverable.
However, the Tribunal found in favour of the taxpayer, concluding that previously residential elements could be used in the conversion where additional dwellings are created. This meant that contrary to HMRC’s guidance, the sale could be zero-rated and the related input VAT recoverable. Whilst a Tribunal does not set a legal precedent and HMRC could still appeal the decision, if you are carrying out similar conversions, you may wish to consider putting in a protective claim for input VAT recovery. Please let us know if you would like to discuss this possibility.
Another interesting point brought out by the Alexandra case highlighted HMRC’s formal review of the matter which was prepared by an HMRC Higher Officer. Apart from the preamble and the standard onward appeal rights, the letter consisted of just two sentences. The Tribunal commented that “…this review in effect says nothing other than “we are right and you are wrong”. We feel that taxpayer confidence in the statutory system of HMRC internal reviews – most of which, in our experience, are conscientiously and carefully drafted – requires better performance than in the current case…”.
In light of the above and the current trend we are seeing for similarly short responses received from HMRC, if you require any assistance with correspondence with HMRC, please call Sarah Shears on 01962 735350 or email@example.com
Revenue & Customs Brief 22/12 issued last week clarifies the current policy on the place of supply of services rules connected to land following recent decisions at EU level. The brief is aimed at businesses that make or receive the following services:
- Supply or purchase of exhibition stands;
- The storage of goods for overseas customers; and
- The provision of access to airport lounges.
The clarifications aim to confirm the treatment applicable since the rules changed on 1 January 2010/ 1 January 2011 (dependant on the service). The HMRC guidance comes about due to the inconsistent treatment applied by Member States in respect of these supplies which in some cases had lead to double taxation.
What are the changes?
1. Stand Space – With regard to the supply of stand space at exhibitions and conferences, the current policy applied is that the supply of specific stand space will continue to be treated as a land related supply. Therefore, the place of supply for VAT purposes will be the place where the land is located. However, where the stand space is provided with accompanying services as a package, this will no longer be treated as a land related supply. Instead, the services will fall under the general business to business rule and will be subject to VAT in the country in which the recipient of the service belongs. This will now mean that exhibition or conference providers supplying a package of services will no longer be required to charge UK VAT on these supplies.
2. Storage of Goods – Previously, it has been HMRC’s policy that all supplies of storage space are land related supplies. HMRC has now confirmed that where the supplier grants an exclusive right to use a specific area of a UK warehouse or storage area, then this will continue to be treated as a land related supply. However, where the supplier agrees to store goods but does not grant an exclusive right to a specific area, this will not be seen to be a land related supply and will be treated as falling within the general place of supply rule. This now means that where the supplier provides such a service to a non-UK business customer who uses the services for business purposes, the place of supply will be in the country in which the customer belongs.
3. Airport Lounges – HMRC have not previously considered the supply of access to airport lounges as land related supplies. However, their policy change now means that such services will be land related and VAT will therefore be due, if applicable in the country in which the lounge is located.
When do the changes take effect?
The change in policy comes into effect from the date of the brief. However, HMRC has agreed that where businesses have been applying the VAT treatment in accordance with it’s own earlier policy, they may continue to apply the treatment for a transitional period of up to three months. However, businesses who wish to adopt the new treatment can do so with effect from the current date.
Can I make a historic adjustment?
HMRC state that adjustments to earlier period can also be made provided that the customer has not already recovered the VAT and any VAT repaid by HMRC is refunded to the customer.
What does this really mean for me?
Although the changes aim to simplify the treatment of such services cross border and allow non-UK businesses an easier method by which to recover the VAT on their own VAT return, the changes do bring with them added complication and some additional administrative burden. Examples of which include having to obtain EU VAT numbers and complete EC services lists for those supplying exhibition space and storing goods on behalf of non-UK business customers. They also bring about added complication for those supplying access to airport lounges as local VAT registrations may well be required when supplying on a wholesale basis.
Businesses supplying such services will now need to review their existing position and determine how they should accounting for VAT and whether there is scope to submit a claim for earlier VAT return periods. We have significant experience of advising clients on these issues, so if you have any questions please call, Martyne Pearson on 01962 735350