Issue 14

In this issue:

Business Briefs and Updates on HMRC Policy

• Revenue & Customs Brief 50/07
• Revenue & Customs Brief 55/07
• Sale of a Business as a Transfer of a Going Concern (TOGC)
• The Recast VAT Directive

Local Authority Issues

• Dual Use Agreements
• Capital contributions in respect of dual use arrangements
• Audit of Education Authorities by HMRC
• Partial Exemption Review
• Latest moves on Car Parking

Recent VAT Cases

• Compound interest
• Residential caravan parks

Business Briefs and Updates on HMRC Policy:

Revenue & Customs Brief 50/07

HMRC has recently won a case at the Court of Session, which confirms their policy that an all-inclusive membership/ use of facilities scheme is a single supply of the right to use the facilities.

The case considered by the Court of Session was The Highland Council (ScotCS CSIH 36), which upheld a decision of the VAT & Duties Tribunal ([2006] UKVAT V19542).  The Tribunal decided that the supply was "a single supply of a right to exercise and enjoy the use of the Council's facilities as and when and to whatever extent the purchaser required”.  It went on to say "the exercise of that right, given that there may be various tax treatments or various services, being a matter for the customer cannot be pre-determined and since it could not be known what the purchaser would do with his card to attempt to dissect the transaction into unrealistic or at best speculative components would not reflect reality and so would be an error".

The Court of Session agreed with the Tribunal’s decision, stating that “the transaction … is properly characterised as the provision of a contractual right to use the appellants’ facilities, for a fixed period, as described in the application form, at the point of payment”.

Unfortunately, this latest “spin” by HMRC on the CPP argument is being used to their advantage.

Following the case, HMRC restate that the fee paid cannot be apportioned between supplies merely because one or more of them would be at a different VAT rate if charged for separately.

They will only accept that different VAT rates apply if there are separate charges for individual supplies of facilities.  Therefore, the standard rated supplies (such as jacuzzis, steam rooms and saunas) should be provided for a separate charge to the exempt supplies in order to obtain the correct VAT liability.  However, that is not the same situation as an all-inclusive fee enabling use of a variety of facilities over a period, even where there is a right to use services that would – individually - be predominantly exempt.

Customs state that the VAT liability depends on the nature of the supply, which has to be decided at the time the all-inclusive fee is paid. At that time, there is only one supply; there is no basis for identifying separate ones because the leisure centre cannot know which the subscriber will use and how often.

Therefore, where other councils or leisure trusts are operating schemes similar to those made by The Highland Council, these are to be treated as a single standard-rated supply.

However, HMRC accept that, where a scheme offers facilities or activities that would all - if supplied individually - be exempt, the supply of the package is also exempt. This is because the liability can be pre-determined at the time of supply.

Nor does the Court’s decision affect membership schemes. Thus there is no impact on the extra-statutory concession for apportioning membership subscriptions to sports clubs run by non-profit making bodies.

Revenue & Customs Business Brief 55/07

Following a review of the home computing initiative (HCI) the direct tax exemption was withdrawn with effect from 6th April 2006.  Consequently HMRC have reviewed the position and have set out their new policy relating to the VAT treatment of computers made available by employers to their employees under HCI.  

Previously, although there would be private use of the computer, HMRC allowed full VAT recovery as long as there was some business use.  Now, as a consequence of withdrawal of the HCI tax exemption and with effect from 13th August 2007, full VAT recovery without adjustment for private use has been withdrawn.  In future an apportionment for private use must be made, unless it can be demonstrated that the home computer is necessary for the employee to carry out the duties of their employment.  Although the amount of VAT at risk may not be large this will clearly be an issue that VAT officers will be looking for in forthcoming inspections.

Sale of a Business as a Transfer of a Going Concern (TOGC)

As announced in the Budget, an amendment has been made from 1 September 2007, that where a business is sold as a transfer of a going concern, it is the seller who will retain all business records and make them available to the buyer in the future (should this be needed).  HMRC will also disclose information to the buyer about the business should it be required for the buyer to comply with his duties under the VAT Act.

The Recast VAT Directive

The new principal VAT Directive, Council Directive 2006/112/EC repeals the First and Sixth VAT Directives and has been effective since 1st January 2007.  It consolidates the two previous Directives and their subsequent amendments which have made them difficult to read and cross reference.  Care has been taken in drafting the new Directive to ensure that the wording used across languages is consistent.

Local Authority Issues:

a) Dual Use Agreements

Customs consider that Dual use agreements, where re-charges take place between a supplying local authority and a using local authority, can be treated as non business provided they are not in competition with the private sector.  The parties can charge VAT on the use of the facilities if both parties agree.  

Although Customs realise that such recharges may sometimes include an element to cover heating and lighting costs, which are deemed to be goods for VAT purposes, they are prepared to accept that in this circumstance they also fall within their Statement of Practice regarding supplies between local authorities.

Customs interpretation of the law is that significant distortions of competition must be assessed on a national basis.  After due consideration, they can see no significant distortions relating to dual use of leisure centres arising where the supplying local authority simply re-charges the cost of making the centre’s facilities available to the using local authority.

They would, however, take a different view if the supplying authority included an element of profit in its re-charge and would question whether a charge based on per head cost can ever be a re-charge. Nonetheless, they are prepared to discuss these issues and are happy to consider other circumstances where re-charging may take place.

For completeness, they would not accept that barter situations where, for example, a local authority provides use of a swimming pool in return for a service of a business nature, such as, decorating services, falls within the scope of the business brief.

 
b) Capital contributions in respect of dual use arrangements

Where the supply of services falls to be treated as non business then capital contributions by one authority towards the securing of the arrangements will also be considered to be non business. This treatment relies upon the capital contribution not securing for the donor any financial interest in the joint use facility other than the wider community use in accordance with dual use arrangement. In cases of doubt the lead council should refer the project to HMRC to ensure the application of these principles is appropriate.

c) Audit of Education Authorities by HMRC

Readers will wish to know that Customs have expressed concern over the general accounting standards in schools and capital accounting in VA schools and are therefore undertaking an exercise to understand the complex transactions and processes involved in LEA schools and to ensure compliance.  This is another indicator of Customs taking action to identify VAT errors and losses (and therefore assessments) within the Public Sector, which they view as a high risk sector.   

d) Partial Exemption Review

As somewhat of a balance to the item above, we were interested to note that Customs have begun a review on how the 5% deminimis impacts smaller authorities.  We trust this will be with a view to assist in some way, as many smaller authorities are finding it increasingly difficult to remain within the deminimis limit year on year.  We await with interest the results of this review.

e) Latest moves on Car Parking

Recently Customs have been writing to local authorities who have submitted voluntary disclosures for overpaid VAT on off street parking, informing them that they do not intend to pay and that those authorities should lodge an appeal with the VAT Tribunal.  Customs say that they have found significant errors in some claims and they are seeking to regularise the position, such that unless an authority can ensure there is a special legal regime under which they operate their car parks and provide supporting documentation, they cannot place their claim behind the IOW case. 

Those authority’s who have taken the step of not paying across the VAT and have therefore received assessments from Customs, have already had to make such appeals and therefore as a result of these recent letters from Customs, most if not all authorities will now have an appeal lodged with the Tribunal!         

Recent VAT Cases:

a) Compound Interest

The House of Lords has delivered its decision in the case of Sempra Metals allowing the award of compound interest where tax had been mistakenly overpaid by way of the incorrect implementation of EU legislation into UK law.  The case is a direct tax case, but the same principles could be transposed across into indirect tax and therefore we expect there to be a number of cases regarding VAT overpayments. 

One such Tribunal case (Constantgreen) found in favour of the taxpayer in their claim for interest to be paid on the basis of the rate charged on their overdraft facility (base plus 2.75 percent).  Although Customs were maintaining their view that simple statutory interest should be paid (base plus 1 percent), the Tribunal acknowledged that this was not appropriate and awarded the higher amount.  But the Tribunal did not consider the issue of compound interest.

b) Residential caravan parks

HMRC have just won a significant victory relating to VAT treatment of the supply of concrete “pitches” for residential caravans.  There was a restriction on occupancy so that during the whole of February the home owners could not live on site. HMRC argued that this meant the pitch supply was of a seasonal pitch and standard rated, the business argued exemption. The Tribunal initially agreed with the taxpayer but the High Court overruled in favour of HMRC.

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