VAT News November 2016

Welcome to our latest VAT Newsletter. Please click on the links below to read the articles.

The Autumn  Statement 

This brought some unwlecome news on the Flat Rate Scheme for some small service businesses.  Read more.

VAT case update

In a case of interest to charities, a Cathedral has sucessfully argue that in could claim VAT based on the ‘Sveda’ EU decision. Read more.

The Upper Tribunal has confirmed that the wholly owned subsidiary of a charity is not a non-profit making body and is not therefore entitled to exemption for its services. Read more.

HMRC news 

HMRC have clarified their policy on VAT incurred prior to registration. Read more.

Contact us if you have any question on the above on 020  8492 1901

Durham Cathedral and VAT recovery – implications

Since the ECJ judgment in ‘Sveda’ UAB (C-126/14), we have been waiting for a UK case which applied its principles. Sveda generated a lot of interest because it implied that granting free admission to a building, museum or attraction may not necessarily require a restriction on input tax recovery. The First-Tier Tribunal (FTT) has recently considered Sveda in a case concerning whether VAT incurred on a maintaining a bridge giving access to Durham Cathedral had a direct and immediate link to all the Appellant’s activities, both business and non-business, and was therefore partly recoverable.

The Appellant is representative member of a VAT group which operates the cathedral. Its business activities include operating a café and gift shop on the site, and charging for admission to concerts. There is no charge for access to the Cathedral, and religious activities on the site were agreed by both parties to be non-business. Thus, it was common ground that the Appellant had a mixture of taxable and exempt business activities. The Cathedral, under an agreement between HMRC and the Churches Main Committee about the percentage spilt between religious activities and business activities is entitled to treat 65% of VAT that relates to both business and non-business as recoverable subject to any partial exemption calculation. Under this agreement, the maintenance of the bridge was agreed to be non-business, but following the Sveda judgment the Appellant sought to recover a proportion of the VAT on the basis that the bridge enabled visitors to visit its shop and cafe/restaurant, and attend concerts, in the same way that the recreational path in Sveda enabled people to visit its shop and cafe.

HMRC argued that there was insufficient link to the activities apparently partly on grounds of physical distance. The FTT held that the cost of maintaining and repairing the bridge had a direct and immediate link to all the Appellant’s activities and Sveda was authority for that conclusion.  It was not possible to argue that the bridge had a direct and immediate link only to non-business activity, and therefore the agreed business/non-business split should apply, followed by the taxable/exempt partial exemption calculation.

Why it matters

Sveda was not concerned with apportionment of VAT – the VAT incurred on the project in that case was apparently either recoverable or not. But in the present case, the Appellant appears to have been committed to the business/non-business restriction by agreement with HMRC. Whether, without that agreement, it might have been possible to argue for only a taxable/exempt partial exemption restriction is something that may be teased out in future litigation. However, Sveda was used here to defeat HMRC’s argument that there was no link at all to business activities.

Autumn Statement – VAT

The following VAT meaures were announced in the Autumn Statement

VAT Flat Rate Scheme – The government will introduce a new 16.5% rate from 1 April 2017 for businesses with limited costs, such as many labour-only businesses to prevent perceived abuse of the scheme. Guidance in Notice 733 which has the force of law, published today, will introduce anti-forestalling provisions.

From 1 April 2017, FRS businesses will have to determine whether they meet the definition of a ‘limited cost trader’.  A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:

  • less than 2% of their VAT inclusive turnover in a prescribed accounting period
  • greater than 2% of their VAT inclusive turnover but less than £1000 per annum

if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1000).

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

  • capital expenditure
  • food or drink for consumption by the flat rate business or its employees
  • vehicles, vehicle parts and fuel (except where the business is one that carries out transport services – for example a taxi business – and uses its own or a leased vehicle to carry out those services)

These exclusions are designed to prevent traders buying either low value everyday items or one-off purchases in order to inflate their costs beyond 2%.

Anti-forestalling provisions in the Flat Rate Scheme Notice 733 was provided on 23 November 2016 and is designed to prevent any business defined as a limited cost trader from continuing to use a lower flat rate beyond 1 April 2017. Draft secondary legislation will be published on 5 December 2016 and businesses will have 8 weeks to comment. HMRC will introduce an online tool that will help determine whether businesses should use the new rate.

Unfortunately as well as tackling the abuse, this measure will affect many legitimate small businesses who have low spend on goods, and mean that the benefits of the FRS will be reduced.

Tackling exploitation of the VAT relief on adapted cars for wheelchair users – The government will clarify the application of the VAT zero-rating for adapted motor vehicles to prevent stop abuse of this legislation, while continuing to provide help for disabled wheelchair users.

VAT grouping  – the government is to consult on the provisions relating to VAT grouping.

Retail Export Scheme – the government is to provide funding with a view to digitising the scheme fully the to reduce the administrative burden to travellers.

Tax simplification –the government has asked the Office of Tax Simplifcatrion to carry out reviews on aspects of the VAT system.

Other measures already announced

Strengthening tax avoidance sanctions and deterrents – as signalled at Budget 2016 the government will introduce a new penalty for any person who has’ enabled’ another person or business to use a tax avoidance arrangement that is later defeated by HMRC. This new regime will reflect an extensive consultation and input from stakeholders and details will be published in draft legislation shortly. The government will also remove the defence of having relied on non-independent advice as taking ‘reasonable care’ when considering penalties for any person or business that uses such arrangements.

Implementation of the Fulfilment House Due Diligence Scheme – as announced at Budget 2016, the government will legislate in Finance Bill 2017 to introduce a new Fulfilment House Due Diligence Scheme in 2018. This will ensure that fulfilment houses are required to assist in prevention of VAT abuse by some overseas businesses selling goods via online marketplaces. The scheme will open for registration in April 2018.

Updating the VAT Avoidance Disclosure Regime – as announced at Budget 2016 and following consultation, legislation will be introduced in Finance Bill 2017 to strengthen the regime for disclosure of avoidance of indirect tax including VAT. Provision will be made to make scheme promoters primarily responsible for disclosing schemes to HMRC and the scope of the regime will be extended to include all indirect taxes. This will have effect from 1 September 2017.

Penalty for participating in VAT fraud – as announced at Budget 2016 and following consultation, the government will legislate in Finance Bill 2017 to introduce a new and more effective penalty for participating in VAT fraud. It will be applied to businesses and company officers when they knew or should have known that their transactions were connected with VAT fraud. The penalty will improve the application of penalties to those facilitating orchestrated VAT fraud. The new penalty will be a fixed rate penalty of 30% for participants in VAT fraud. This will be implemented following Royal Assent of the Finance Bill 2017.

VAT Exemption – what is a non-profit making body?

Certain supplies of sporting, education and cultural services are exempt when provided by a non-profit making body – usually defined as “eligible bodies”. A recent case highlights the importance of ensuring the legal structure is right before assuming exemption will apply.

St Andrew’s College is a boarding school and a registered charity, which owned two subsidiary companies with which it was registered in a VAT group. The companies provided facilities for playing sport and the VAT group intended that these services should be exempt.  HMRC challenged the intended treatment on the basis that the subsidiaries did not qualify as “eligible bodies” under VAT Act 1994, Schedule 9, Group 10 (which provides exemption for sport, sports competitions, and physical education). It was agreed that all the other criteria were met, so the case turned on the definition of an “eligible body”.  There was no dispute that the College, as an educational charity, was itself an eligible body. But the subsidiaries were considered as ordinary companies limited by shares. That meant that even though as the representative member of the VAT group, the College was treated as making all supplies made by the subsidiaries, and although their profits were covenanted up to the College this was insufficient to meet the test for exemption.

In order to be regarded as an eligible body the subsidiaries were required to be non-profit making bodies.  What was relevant was whether the subsidiaries were restricted in their ability to distribute profits   The UT formed the view that there was no specific restriction and the deeds of covenant did not, of themselves, establish that the subsidiaries could make distributions only to non-profit making bodies. Consequently, the subsidiaries failed to qualify for exemption and the UT found that the First Tier Tribunal had correctly held that output tax was due on the subsidiaries income.

Why it matters

This case highlights the importance of putting in place the correct legal structure to reflect the intention of the supplier.  In this case, it would have been relatively simple to arrange matters to ensure the relevant distribution restrictions were in place. 

 

HMRC clarify their position on VAT incurred pre-registration

In Brief 16/2016 HMRC have clarified their position on claims for VAT incurred on assets used by a business prior to VAT registration.  Previously, in some circumstances, HMRC sought to disallow an element of such input tax.

HMRC now accept that VAT incurred on fixed assets purchased within four years of a business’s effective date of registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. This statement now brings the VAT treatment into line with what many VAT advisers always thought the position to be, and in line with the policy that HMRC had applied until recently – although in the Brief HMRC state that there has been no policy change.

The rules are that services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction on VAT recovery if a business is partly exempt. For goods purchased within four years of EDR and are still on hand at the time of EDR, VAT may be recovered in full (again subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.