Welcome to the February 2016 Newsletter in its new format on our revamped website.
This month we look at cases on VAT claims and the pitfalls of incorrect issue of certificates for VAT reliefs.
Upper Tribunal clarifies the basis for valid VAT refund claims
The Upper Tribunal has decided two cases which (at least until we hear whether there will be appeals) provide guidance on how claims for overpaid VAT repayment are to be made. Vodafone Group Services Limited sought a refund of £4.2 million which it claimed was overpaid due to participation in the ‘Nectar points’ scheme. After making the initial claim, Vodafone became aware of other errors that affected the original claim, and HMRC accepted that these were overpayments. However, HMRC argued that these were new claims and were out of time and that the reasons for them could not be substituted for the original “Nectar points” claim rationale. Vodafone appealed and the First Tier Tribunal ruled that the precise amount of a claim was the numeric amount claimed, but that the reasoning for it was a separate matter. So while the amount claimed could not be increased, the FTT said replacing one set of reasons with another, without altering the amount of the claim, was permitted. However the Upper Tribunal decided that the reasons behind a refund claim were an integral part of it, and that the errors discovered by Vodafone after the initial “Nectar points” claim was made could not be subsumed in it. It followed that as the additional errors gave rise to separate claims, (which Vodafone acknowledged were thus out of time) that could not be used to “validate” the sum at stake in the “Nectar points” claim.
In Bratt Auto Services Limited and Bratt Auto Contracts Limited, two companies made retrospective claims for refunds of overpaid VAT. Whilst the overall amount of the claims was set out, they had not allocated amounts to VAT accounting periods. In the First-tier Tribunal it was held that insofar as an amount was stated, it referred to a documentary basis and set out a method by which it was computed, there was a valid claim. But the Upper Tribunal went on to rule that because the total sum claimed was not allocated to the VAT accounting periods involved, this meant that it could not be valid, and HMRC’s appeal was allowed.
Why it matters
These two cases show that in order to secure repayment of overpaid VAT it is necessary not only to make the claim within the time limits, but also to be precise on the rationale for the claim and to allocate the amount to particular VAT periods by reference to the best available information, even if that means allocating by averaging, for example by spreading an annual figure over the VAT returns rendered in the year.
Beware of issuing incorrect VAT relief certificates
It seems that HMRC are paying much closer attention to the issue of VAT certificates for certain VAT reliefs enjoyed by charities. Charities of course pay VAT on most standard-rated goods and services they buy from VAT-registered businesses, but in certain circumstances charities are entitled to receive supplies at the reduced rate (5%) or the zero rate on some goods and services. To get the VAT relief charities must give the supplier evidence that they are a charity and a written declaration or ‘certificate’ confirming that the supply concerned is eligible for the relief.
Two of the most significant reliefs for charities are the zero-rating for the supply of construction of new buildings and the 5% relief for fuel and power.
In law, zero-rating does not apply for the construction of charity buildings until the certificate has been issued. If you are obtaining building work, the certificate confirms to the contractor that you intend to use the building, or the part of the building, on which you are seeking zero-rating solely for “relevant charitable purposes” (which means for non-business use as defined in VAT terms). Solely in this context means for 95% or more. The certificate for fuel and power confirms to the power supplier that the premises supplied are being used as residential accommodation (e.g. a children’s home or care home for the elderly), or for charitable non-business activities (e.g. free day-care for the disabled) or small-scale use (up to 1,000 kilowatt hours of electricity a month or a delivery of 2,300 litres of gas oil).
If an incorrect certificate is issued to obtain relief from VAT as a zero-rated supply or on fuel and power at 5%, the issuer of the incorrect certificate will be liable to a civil penalty. It is not enough simply to certify that the building is being used by a charity. Therefore it is important that the charity takes steps to ensure that the use of a particular building (or ‘premises’ which can be more than one building in the case of fuel and power) qualifies for the relief before issuing a certificate.
The civil penalty or incorrect issue of a certificate is different from most other VAT civil penalties because it is charged at 100% of the tax that would have been due if the certificate had not been issued i.e. it effectively provides for the recovery of an amount equal to the tax from the issuer.
The certification rules are intended to put the onus on the user of the building/premises to demonstrate that zero-rating or reduced-rating applies, but they don’t relieve the contractor/supplier of responsibility for an error, nor protect him from the normal penalty and interest regime if he incorrectly does not charge VAT. HMRC say that building contractors and fuel companies must take “all reasonable steps” to check the validity of the certificate. Clearly it is sensible for contractors and fuel suppliers to check the intended use of the building and, they may if need be, discuss the matter with HMRC themselves.
We have heard recent instances of HMRC visiting charities specifically to check the validity of certificates, and cases where fuel suppliers have been asked to demonstrate how they have checked that a certificate is valid. For example in cases where buildings have mixed use that will involve the certificate issuer being able to demonstrate that the 95% non-business use limit is satisfied (for construction services) and having available the calculations that have been undertaken to determine the intended use of the building. It is therefore important for charities to carry out this process before issuing a certificate.