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

There has been increased debate over the last few years on the question of which transaction in an intra Community supply chain for goods can be zero rated (or exempt in EU terms).  This was considered in cases such as Emag and Eurotyre and the key observation to take from these cases is that the rules are different within the EU – in an EU chain transaction (ie more than 3 parties), some Member States don’t care who arranges the transport in determining whether the zero rate applies, whilst others do.  The plot has now thickened with the Advocate General’s (AG’s) opinion in the Vogtlaendische Strassen-Tief-und Roherleitungsbau GmbH (VSTR) case – not the final ECJ decision but an important step in the legal process.   The AG in this case appears to be suggesting that, in a scenario where EU supplier in Member State 1 physically ships goods to final customer in Member State 2, but actually sells them to a non EU business (not VAT registered or established in the EU), who onsells to final customer, there is no requirement for the supplier to charge VAT to the non EU business, even though the latter is not EU VAT registered.   This begs a number of questions, not least of which the fact the value of the ‘despatch’ to final customer will not equate to the value of the acquisition in the final country as the mark up from the non EU party will be missing.  The EU VAT system in this area relies on the 2 sides of such transactions matching to ensure fiscal neutrality and in the absence of a ‘triangulation flag’ on the relevant reports, there is no way of readily identifying the reason for the discrepancy.  Of more immediate concern/interest to businesses is the fact that the opinion would appear to give non EU businesses caught up in EU supply chains a much easier time than EU businesses in terms of VAT compliance obligations.  The opinion is not saying that the non EU business is not required to VAT register but it is widely acknowledged that the awareness of this registration obligation often only arises when an EU VAT cost from the supplier is incurred.  This leads non EU businesses to VAT register to recover the VAT and to comply with the rules.  Without this ‘nudge’  the question arises as to whether there will be an increase in non compliance with the VAT registration rules.  VAT registered businesses selling goods cross border within the EU face a significant compliance burden in meeting the VAT and statistical reporting requirements for such transactions – far greater than the burden for imports and exports.  It remains to be seen as to whether the ECJ will follow the AG’s opinion but regardless of the outcome here, it is clear that there is now a significant difference in treatment within the EU with regular challenges to the previous status quo.  If you would like to discuss this in more detail, please call Julie Park on 01962 735 350.

HMRC have now extended the consultation period from 4 May 2012 to 18 May 2012.  This is good news for those interested parties who wish to make a response to the Government’s proposals to withdraw the zero rate from approved alterations to listed buildings.  It is still short of the 12-week consultation period that the Government aims for, and we understand that this is so that the measure can be introduced in this year’s Finance Act, which we anticipate will receive Royal Assent in the middle of July 2012, during the summer recess.

 ‘Binding Contracts’

The document issued by HMRC includes an extension for the zero rate where a binding contract was entered into prior to Budget Day (21 March 2012).  Where a binding contract had been entered into (duly signed by both parties), the zero rate for approved alterations can be extended to 20 March 2013.  This appears to be a woefully inadequate period of time for the completion of works for a large number of projects which are already in progress, and takes no account of projects in progress where there is no formal written contract in place, which is often the case with works to domestic properties. It could therefore be difficult for a contractor to provide evidence to support the zero rate beyond 30 September 2012. 

Contractors should bear in mind that contracts can be written, verbal or implied, and whilst hindsight cannot change what has gone before, any correspondence relating to the commencement of works should be useful in supporting an argument that there is sufficient ‘proof’ of entering into a contract prior to 21 March 2012.  A JCT (Joint Contracts Tribunal) contract should, in any case, be an acceptable binding contract for the purpose of these requirements.

If you would like to hear full details on the Governments proposals, you can listen to a recording of our webinar on the matter by clicking here.  The VAT Consultancy will be drafting a response to the consultation and we welcome any comments you may have. These should be emailed to karen.mulcahy@thevatconsultancy.com.

The Upper Tier Tribunal has released its decision in the Medhotels appeal – the original tribunal decision has been overturned, with the taxpayer succeeding at appeal.  One critical point of note emerging in the decision was the finding that the contractual arrangements in place cannot be ignored unless they are found to be a sham.  Any slight deviations in practice to the way in which the arrangements were supposed to work (including in this case some hotels invoicing the incorrect party) can be overlooked and are overridden by the form of the contracts.  This is a useful principle to have established although the question of what is slight/minor by way of deviation is rather subjective.  

The key point overlooked or not touched upon is the fact that there is still VAT leakage in the supply chain, albeit not UK VAT.  The decision appears to have dismissed or skirted around the possibility of Medhotels being seen to be acting as an undisclosed as opposed to disclosed agent although reference is made to ‘sales and sub-sales’.  Undisclosed agency arrangements arise when the ‘agent’ wants to minimise his risk as is the case here, but the details of the principal’s transaction with the agent is not revealed to the customer.  In the case of Medhotels, the customer does not know the value of this transaction and instead only aware of the single price they pay the agent for the accommodation (the cost plus undisclosed mark up).  

From a VAT perspective (in the UK and elsewhere) it is accepted that such scenarios should generally be treated as buy/sell transactions which would mean Medhotels would be required to account for VAT under TOMS, even though still legally regarded as an agent (of the ‘undisclosed’ variety).  Even if it is accepted that Medhotels is a disclosed agent, travel businesses with similar revenue models would be required to VAT register in each of the countries in which they are selling hotel accommodation (EU and many other countries worldwide with similar rules), to account for VAT from the mark up made.  This puts such businesses in a bad position from a compliance perspective, facing the burden TOMS was designed to avoid.  In addition, given the UK still has a relatively low VAT rate, accounting for UK VAT under TOMS on B2C mark up revenue could be more cost effective than accounting for VAT from the mark up in countries with rates in excess of 20%.  It is questionable as to whether the reduced rates applying to hotel accommodation in many Member States would also apply to fees/mark ups charged for arranging such accommodation. 

Whilst the decision appears a good one for Medhotels, similar businesses should tread carefully and consider the overseas as well as UK VAT cost when designing their business model. 

For further information on this or other VAT issues in the travel sector, please contact Julie Park on 01962 735 350 or julie.park@thevatconsultancy.com

We were interested, yet not surprised to read in the Daily Telegraph last week about traders being “deliberately overtaxed”.

The issue has been highlighted in a recent employment tribunal where a tax inspector told how businessmen were deliberately overtaxed so that colleagues would look  as if they had solved cases and deserved performance related pay.

Using public interest disclosure legislation, the inspector claimed that colleagues “conspired not to carry out their legal duty to correctly assess a trader on his trading profits”, thus working against the Civil Service Code of conduct.

From our own experiences of working for HMRC, we have always been aware that this ”yield” was used as a performance indicator, so our advice would always be check, check & check again you are not being overcharged tax otherwise the taxman could be getting an extra bonus!

The June Newsletter is now available on our website. In this issue:

• Budget June 2010 – what will it hold in store for VAT?
• Our survey said… – what do you think will happen to the rate of VAT? Take part in our quick survey and you could win a bottle of champagne
• Even more ways to talk to us – join us on Facebook, Twitter and LinkedIn
• HMRC News round-up
• News from the Tribunals
• Jobs for the month

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