The following is a brief outline of recent changes announced by HMRC, recent cases from the Courts & VAT Tribunals and other updates on VAT issues of particular interest to Local Authorities. We trust you will find it informative. If you have any queries regarding any of the following or wish to discuss any issue please do not hesitate to contact a member of our Public Sector Team whose details appear below.
HMRC Brief 21/10 -Tour Operators’ Margin Scheme and the treatment of ‘hotel billback’ transactions
Prior to 1 Jan 2010, booking agents supplying hotel accommodation on to business customers could opt out of TOMS and therefore charge VAT on their supply of accommodation and commission which in turn would potentially be recoverable by their business customers.
However, since 1 Jan 2010 such supplies would be within TOMS unless the booking agent is acting as a disclosed agent.
This Brief sets out the documentation which HMRC require if a booking agent is claiming to be a disclosed agent in order to avoid being brought within TOMS.
Refer to later case on Secret Hotels2 Ltd which highlights HMRC’s view on documentation.
HMRC Brief 26/10 and 32/10 (see also VAT Info Sheet 13/10)
The purpose of these Briefs was to remind charities of the withdrawal of the ‘charitable buildings’ concession (ESC 3.29) on 1 July 2010.
To be eligible to use the concession the necessary RCP certificate needs to have been issued before 1 July 2010.
The Info Sheet provides detail on what HMRC will deem to be a ‘fair and reasonable’ method under the new criteria of ‘solely’ being used for an eligible purpose, now being 95%. HMRC confirm that the methods stipulated under ESC 3.29 (time, headcount and floor space) can still be used where appropriate without further reference being made for clearance from HMRC.
Interestingly though, where a part of a building is concerned, the Info Sheet confirms that claimants are no longer restricted to using a time-based method but can use any method providing it is fair and reasonable, which is certainly a welcome change.
HMRC Brief 33/10
This Brief extends the guidance in respect of the impact of the withdrawal of the ESC concession 3.29. The previous Briefs and Info Sheet focussed on the impact of obtaining the zero-rate on a new build of either a relevant charitable or relevant residential building. This Brief confirms the de-minimis allowed by the ESC in relation to disapplying an option to tax can also still be applied using the new 95% rules:
- where a building or part of a building (other than used as an office) will be used by a charity solely for a relevant charitable purpose (paragraph 7 of Schedule 10 to the VAT Act 1994 refers)
- where a grant is made in a building or part of a building designed solely for a relevant residential purpose (paragraph 5 of Schedule 10 to the VAT Act 1994 refers)
- where a grant in a building or part of a building is made to a person who intends to use the building solely for a relevant residential purpose (paragraph 6 of Schedule 10 to the VAT Act 1994 refers)
Voluntary Disclosures – update
As you are aware, the VAT system allows taxpayers to make corrections to their VAT return if an error made on previous returns is below specified limits. These limits are £10,000, or 1% of turnover in Box 6 when less than £5m, with an upper limit of £50,000.
Errors exceeding these amounts require a written disclosure to be made, which will attract default interest and potentially penalties under the new penalty regime.
Our advice previously was that if the error is of a value that allows the return to be amended this should nevertheless be disclosed to HMRC in order to mitigate the exposure to penalties. Indeed, HMRC’s policy is that to gain a reduction in any penalty, an unprompted disclosure must be made and the ‘mere’ adjustment of your VAT return does not qualify as such a disclosure. The new form VAT 652 now has a ‘tick box’ to allow you to show that the amount being disclosed has already been adjusted through the VAT return.
Recent discussions with HMRC have highlighted that it has been common, since the introduction of this form, for the relevant box to be left unticked by accident and therefore an assessment requiring payment has been raised by HMRC where the taxpayer has actually adjusted the amounts on their VAT return. There have also been instances where the opposite scenario has occurred and HMRC have found that no adjustment has actually been made by the taxpayer. Therefore, care needs to be taken in dealing with any disclosure.
Change in the Standard Rate to 20% – easy maths!
The VAT rate will rise to 20% on 4 January 2011 and therefore you will have to charge VAT at this rate on sales of standard rated goods and services you make on or after this date.
The rule surrounding tax points and anti-forestalling are already published and are in essence the same as those rules published when the rate reverted to 17.5% from 15%.
The normal tax point rules will apply in order to decide whether 17.5% or 20% should be charged, although there is optional change of rate rules that you can apply where you provide goods or perform services before 4th January 2011 and raise a VAT invoice and, in some cases, receive payment after the rate change. So, for example, if you raise a VAT invoice after 4th January 2011, for goods you provided, or services that you completed before 4th January 2011, you can, if you wish, apply the 17.5% rate.
However, there are also anti-forestalling measures which can apply in the following circumstances;
If you are invoicing for a supply spanning the 4th January 2011 then you may have to invoice at the higher VAT rate if the customer is not entitled to recover all of the VAT on the supply; and at least one of the relevant conditions below is met:
- Condition A – the supplier and the customer are connected with each other at any time during the period from the date of the supply to the date of the VAT change.
- Condition B – the value of the supply is more than £100,000.
- Condition C – the supplier or a person connected with him finances a prepayment by the customer.
- Condition D – the supplier raises a VAT invoice where payment is not due until at least six months from the date of the invoice.
Local Authority Specific Issues
Education Exemption – Ultimately using funds from Learning Skills Council (LSC)
With the dissolution of the LSC, its function in relation to education and training for those over compulsory school age are redistributed, between local education authorities (LEA), the new Young People’s Learning Agency for England (YPLA) and the new Chief Executive of Skills Funding. Broadly, sixth form colleges are to be within the remit of the YPLA and local education authorities. Therefore, the nature of the agreement between the LEA and YPLA will determine the VAT treatment. If there is consideration for a supply, that supply will be VAT exempt if it falls within the revised description in Schedule 9, Group 6, item 5A.
Flood Relief Grants – HMRC has confirmed when a Council can recover the VAT on agreed works. Effectively, VAT is recoverable by the Council unless it permits the homeowners/community groups to choose and contract/ commission the work directly with contractors.
Community Infrastructure Levy – confirmation that contributions payable under a CIL will be treated as outside the scope of VAT.
VAT Recovery on ICT Equipment at VA Schools – according to HMRC’s guidance the recovery by a Council is allowable where ‘own funds’ are used. Clarification of ‘own funds’ has now been sought by members of the CIPFA VAT Committee. Differing treatments are taking place throughout the country and therefore HMRC have requested details for further discussion.
Isle of Wight Case – latest round
The ECJ had referred this case back to the UK Tribunals after ruling that a ‘distortion of competition’ should be considered in light of the supply and not restricted to a local market in particular. The UK Tribunal has now agreed that both parties should determine which further evidence should be submitted to prove or disprove the fact that not charging VAT will lead to a significant distortion. The Tribunal specifically rejected HMRC’s objections to the admission of this further evidence. Encouraging news on the matter…..and some commentators believe that the Councils will now win the case. The full hearing is likely to take place early in 2011.
On the 29th July the ECJ handed down their judgement on the AstraZeneca case. The case revolves around their flexible remuneration scheme which many large employers offer, namely in this case focussing on the supply of discounted retail vouchers. Initially AZ did not reclaim the VAT it was charged on the vouchers and nor did it account for output VAT on the supply of the vouchers to its staff. Later they decided the input tax should be deducted as a business overhead but still no output tax should be due.
HMRC raised objections to this treatment and eventually the ECJ were asked for comment effectively on whether the supply of vouchers in lieu of salary would constitute a supply of services by AZ?
The ECJ ruled that the vouchers were a supply of services (stating such points as the direct link between the salary sacrifice and the provision of the vouchers would be seen as ‘payment’ etc).
The issue now is how the UK authorities will apply this ruling?
Grimsby College Enterprises Limited
Enterprises Ltd is a wholly owned subsidiary of the Institution which was the freeholder of the site. HMRC disallowed input tax recovery by the wholly owned subsidiary in connection with the construction of a new engineering centre within the main campus.
A lease was then provided by the Institution to the Company for the land. The Company then entered into an agreement for the Institution to use the equipment in the building. The Company’s argument was that this was not a licence to occupy but was a use of facilities and thus taxable (allowing all input VAT paid on the purchase of equipment by the Company to be recovered).
The Tribunal Judge stated that he could see the equipment was clearly important, to the extent that some courses could not be taught without it, but effectively a teaching facility had been constructed to teach courses and because of the nature of those courses (i.e. engineering) the equipment was therefore required. The Judge therefore concluded the grant was actually a licence to occupy the building and the equipment was ancillary to this as opposed to the other way around.
Age Concern Leicestershire and Rutland
This case concerned the supplies by Age Concern to the local councils and PCTs. Age Concern had been treating their supplies as standard rated services to the Councils’ and PCTs’ under service level agreements. However HMRC maintained the supplies were actually made to the elderly persons of the particular Council in question and therefore constituted exempt welfare services.
It was held that HMRC were correct. The legislation does not require a contractual relationship between Age Concern and the elderly recipients for the services still to constitute ‘welfare services’ (indeed it was pointed out that the Council would neither have such a contract).
Age Concern secondly looked at trying to split the SLA contract up into various parts, but the Tribunal rejected such splitting as artificial under the Card Protection Plan principles stating ‘although the services are many and varied they naturally fall together in one package and it would be utterly artificial and impractical to try and separate individual services out’.
The appeal was accordingly dismissed.
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