Making Tax Digital for VAT – just over a year away

The first stage of Making Tax Digital (MTD) will apply to all VAT registered businesses who are over the VAT turnover threshold (£85,000 until March 2020) from the first VAT return which starts after 1 April 2019. HMRC have now published the draft regulations, an Explanatory Note, a new Draft VAT Notice and an Addendum document outlining ‘user journeys’. All the documents can be accessed via Gov.uk here

The draft regulations provide that VAT registered businesses (including charities) must keep an electronic account of information specified in the amended regulations, and must use an approved form of software to prepare and render VAT returns.

The main and important news is that information transfer between internal interfaces and with HMRC must be digital (and via third party software) where the records are part of the Making Tax Digital for Business (MTDfB) journey, but adjustments (such as partial exemption) will still apparently be able to be calculated separately and manually – i.e. this step is not part of the ‘MTDfB journey’. It is noted that the information to be recorded also includes a requirement to separately identify the value of income into standard rated, reduced rated, zero-rated, exempt or outside the scope outputs. HMRC plans a “soft landing” in the first year to allow organisations to transition to the new rules.

These proposals (particularly re digital links) appear to be slightly different from those outlined by HMRC when last they met with tax representative organisations outlined here.

The draft regulations provide for exemptions from the digital requirements based on turnover, inability to use electronic systems for religious or practical reasons, and for businesses subject to insolvency. Exempted businesses may opt for the obligations in the regulations to apply to them if they so wish. The amended regulations also provide rules for how business records should be preserved.

Pilot scheme

Businesses can sign up to take part in a MTD pilot exercise from 1 April 2018. The benefit of taking part in the pilot will be being ahead of the game, getting access to support, being kept up to date on how the system is developing, an opportunity to influence the look and feel of the final version, and feedback on how you are getting on with the submissions. There is more information on the pilot here but please contact us if you need more help.

Membership Subscriptions and VAT – the Harley Davidson case

Membership subscriptions are always an area of contention for charities. Some charities benefit from a VAT Extra Statutory Concession for non-profit membership bodies under which HMRC allow subscriptions to be apportioned to reflect the underlying VAT treatment of the specific benefits. This is useful where the benefits include printed material which is generically zero rated, and which allows for a reduction in VAT charged on the subscription. Alternatively where the benefits would otherwise be exempt, it increases VAT recovery on costs.

HMRC have recently argued that this concession only applies to formal membership bodies whose members are able to vote (e.g. at AGMs) and cannot apply to ‘friends’ and ‘patron’ schemes. In addition, HMRC have also tended in recent years to argue that ‘membership’ is a single supply which is essentially standard rated, unless the predominant benefit is printed matter. The 2015 Serpentine Gallery tribunal decision supported HMRC’s view; the tribunal asserting that supporters were not members, and that the ‘basket of supplies’ they received was a single (or ‘composite’) standard rated supply of ‘association’ with the Gallery.

But with the Harley Davidson tribunal case there is now some more encouraging news for charities who operate membership schemes without that level of member involvement, and whose use of the ESC might therefore have been challenged. Harley Davidson won on the basis that the package of benefits arising from payment of its membership fee could be treated as a multiple (or ‘mixed’) supply where every element is afforded its own VAT treatment. The case considered whether under VAT law, not concession, their membership subscription was apportionable to reflect different liabilities such as printed magazines. The tribunal found as a fact that it was apportionable.

This is an important case, and we await news of whether HMRC will appeal. It is possible that they will not, hoping that this will mean that they can argue Harley was decided on its facts. Many charities operating membership schemes may however be closer to the Harley fact pattern than to Serpentine. Unless HMRC appeals successfully, it may be easier for charities to argue that they need not rely on the ESC (and thus do not need voting members) as the supply can be apportioned as a matter of VAT law. We await further developments, but in the meantime please get in touch if you wish to discuss your circumstances.