VAT: A new reverse charge for building and construction services

The Government has published a final version of the draft legislation, in the form of a statutory instrument, which will introduce a VAT domestic reverse charge (DRC) for building and construction services with effect from 1 October 2019. A tax information and impact note has also been published. Read more here. If you supply or buy building services (see Type of Work Affected below) your VAT accounting will be affected by this measure.

The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. The domestic reverse charge will only affect supplies at the standard or reduced (not zero) rates where payments are required to be reported through the Construction Industry Scheme (CIS). Under the DRC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.

The DRC only applies to other construction businesses which then use them to make a further supply of building services, and not to ‘end users’ End users are those who receive building and construction services for their own use and do not supply those services on along with other building and construction services e.g. private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.

Type of work affected

Despite the rather misleading reference to ’construction’ the DRC will, in fact, apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.

Excluded works

Some works will not be covered and invoicing for these will not change. These include

  • professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
  • drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
  • manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
  • signwriting and erecting, installing and repairing signboards and advertisements
  • the installation of seating, blinds and shutters or the installation of security.

Mixed supplies

The DRC is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.

In addition, if there has already been a DRC supply on a construction site, if both parties agree, any subsequent supplies on that site between the same parties can be treated as DRC supplies. HMRC say this should reduce doubt and speed up the decision making process for both parties.

If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, HMRC state that it is recommended that the DRC should apply.

Issues to consider and preparation

The idea of having draft legislation and guidance out now is to allow businesses a long lead in which to make the necessary changes to systems, prior to implementation on 1 October 2019. Both suppliers and customers will need to ensure that VAT accounting systems under the Making Tax Digital proposals can cope. This is a period in which businesses will also be coping with or preparing for Brexit. At present there is little information on what neds to be done in relation to projects that are in progress when the measure comes in, but it is likely that services with a tax point date after 1 October 2019 will be accounted for under the new rules – so projects which span that date will have two different VAT accounting treatments.

Suppliers in the building trades

One of the main concerns is the burden for suppliers will be identifying customers who are liable for the RC – i.e. checking VAT registration numbers and obtaining evidence that a customer is an ‘end user’ or not, so that VAT, if due, is invoiced correctly. Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly. Traders accustomed to using VAT on sales in their cash flow projections will also need to adjust.

Suppliers will be required to issue DRC invoices which clearly state that the supply is subject to DRC and to provide a breakdown of the value of work at different VAT rates, to allow the customer to account for VAT correctly.

Recipients of reverse charge services

All VAT registered recipients of sub-contracted services will need to ensure they apply the DRC correctly. Output VAT wrongly applied on an invoice by a supplier can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the DRC could lead to error penalties.

The HMRC guidance states that “it will be up to the end user to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be in a written form that is clearly understood and can be retained for future reference.”

More controversially, the guidance also says, “if the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge”. We are not convinced this is legally correct, but it will be in the interests of all end users to ensure that the DRC position is clear. It will be necessary for recipients to have a means of identifying DRC invoices in their accounting systems so that the right output tax is declared to HMRC. Input tax on the DRC will be subject to the same rules as now- i.e. it will only be deductible if it relates to the recipient’s taxable business activities. Charities and other not for profit organisations should be particularly aware of this.

CIOT and ICAEW issue BREXIT Factsheets

The Chartered Institute of Taxation (CIOT) and the Institute of Chartered Accountants in England and Wales (ICAEW) have issued the first in a series of fact-sheets on the impact of the UK’s withdrawal from The European Union. The main purpose of the first fact-sheet is to outline the purpose and effect of The Taxation (Cross-border Trade) Act 2018, which received Royal Assent on 13 September 2018.

The VAT registration limit – up or down?

Since the publication of the Office of Tax Simplification’s report earlier this month there has been a lot of speculation as to what the Chancellor might do about the VAT registration threshold in this week’s budget.

The suggestion has been that the threshold could be dropped to around the higher tax rate limit of c£43,000, or even to the national average wage, i.e. £26,000 a year, but at the moment we don’t know for certain if the government will implement this, or when it could happen. The average threshold in Europe is around £20k. The idea of lowering the threshold, especially to the lower of those two options, has been met with a lot of anger in the small business community.

What are the issues?

Well, there is a lot of evidence that the current £85k limit is a barrier to growth. This is because the limit causes a ‘cliff edge’ effect where a small business approaching the limit needs a lot more turnover to compensate for suddenly having to add 20% to all its income. So many businesses decide to ensure they stay just short of the threshold by various means, for example by closing for a month each year. That causes ‘bunching’ of business around the threshold and prevents business expansion that might lead to job creation.  Plus, some businesses split themselves artificially into separate operations simply to avoid the limit (“disaggregation”) – with a lower limit there will be much less incentive to do this.

Who might be affected?

On the other hand, lowering the limit substantially would affect hundreds of thousands of self-employed small business owners such as plumbers, gardeners, decorators and similar, who are not planning any whizzy entrepreneurial growth but who are just making a living outside of traditional employment. These businesses already have limited income and will be affected by having to add 20% to their charges – and will have very few costs to offset as input tax. Their customers will be members of the public with no ability to deduct the VAT.

There will be a number of hurdles: –

  • The UK has had a high threshold for a long time and HMRC has not to date had to deal with thousands of small businesses;
  • HMRC guidance has been criticised in the OTS report – it will need to be helpful to a lot of businesses new to VAT;
  • If the lower threshold also brings businesses into Making Tax Digital that will be a big change on top of the requirement to register;
  • The biggest impact will be on businesses which deal direct with the public;
  • For small charities the effect could be very difficult unless the Government also raises the de minimis limit for exempt  activities;
  • Prices will go up, with a possible effect on sales – some businesses may fold.

The OTS suggested some ways in which these effects could be lessened. There could be for example a lower rate for labour intensive service businesses or a change to the VAT Flat Rates, or a tapering requirement to register (though that might make things more complex, not simpler).

We can only guess what is coming. But the in the context of recent press reports on how far richer people seem to be engaged in various off-shore tax planning schemes to avoid paying VAT, the political backlash might not be “Paradise” for the Chancellor.

 

January Newsletter

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

VAT Case Update
Recently cases have been heard on the following issues:

  • whether services are ‘closely related’ to education Read more
  • whether income from finance actvities are ‘incidental’ Read more

The EU Commission has issued a document on its proposed digital single market strategy for SMEs which, despite Brexit may affect UK businesses with cross border trade in the EU Read more

The Office of Tax Simplification has issued its terms of reference for its review of UK VAT  Read More

 

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

VAT News October 2016

Welcome to the October issue of our VAT Newsletter.

Upper Tribunal rules market pitches are taxable

The Upper Tribunal has overturned the decision of the First tribunal and decided that the sale of spaces at craft fairs is taxable at the standard rate. Kati Zombory-Moldovan t/a Craft Carnival organised craft and garden fairs. Spaces were sold to businesses and individuals involved in various crafts to enable them to sell their products at a fair to which the general public were admitted on payment of an entrance charge. The taxpayer accounted for VAT on the admission fees paid by the public but not on the supply of spaces to stallholders which she treated as an exempt supply of land. HMRC considered that the supplies to stallholders were not capable of falling within the land exemption, and should be treated as a composite supply of taxable services comprising the organisation of a craft fair, the purpose of which was to provide the stallholders with an opportunity to trade.

The taxpayer contended that only the right to use an allocated space was supplied to the stallholder and, as this met the EU law criteria of “leasing or letting of immoveable property”, it was an exempt supply. The starting point is that a supply of land is exempt from VAT. But there are many exceptions in the VAT legislation – for example, charges for hotel accommodation and car parking are standard rated. In some cases, supplies are subject to VAT because the customer is deemed to be getting more than just a supply of land in return for his payment.

HMRC contended that there were services provided that went beyond the right to use the particular space. The taxpayer further submitted that if that was the case  the stall itself  remained exempt either because there was a single supply of the stall which predominated, to which the other elements were ancillary, or because there were a number of essential elements making a composite whole, the essential feature of which was the right to use land.

The Upper Tribunal has held that it would be artificial to attempt to split what was provided to a stallholder into more than one supply. Regarding whether the single supply was exempt, the Upper Tribunal drew a distinction between informal car boot sales where buyers and sellers turn up on the day without booking in advance, and the kind of fairs that the taxpayer organises.

The UTT considered that the taxpayer was going beyond the relatively passive function of granting an exempt interest over land. It was providing the stallholder with a licence, not only for the use of a plot of land for a particular period, but for the use of a stall or pitch “at the event specified”. Based on a review of the contractual arrangements, the UTT concluded that the taxpayer traded on its reputation as a long-standing organiser of successful trade shows and had significant responsibilities beyond the bare provision of an appropriately-sized plot. The UTT therefore considered that the taxpayer’s supplies to stallholders did not fall within the land exemption.

Why it matters: This case illustrates the difficulties in deciding whether granting a right to use space is taxable or exempt. This decision might appear to go against HMRC’s own advice in VAT Notice 742, para 2.6. which says the exemption for the supply of land is available for “granting traders a pitch in a market or at a car boot sale.” The key point in both the Craft Carnival and International Antiques cases is that HMRC argued the fair organiser was supplying a lot more than a pitch to exhibitors and therefore paragraph 2.6 was not relevant. Businesses making supplies to stallholders at exhibitions and events may wish to review the VAT treatment of their charges to stallholders following this latest decision. Cases such as this and International Antiques and Collectors Fairs Ltd indicate that, as far as trade fairs are concerned, the dividing line between exempt supplies of land and taxable supplies of exhibition services has to be determined by how much the supplier’s activity goes beyond merely providing the space for the exhibitor to display. In both cases, the tribunals have emphasised the fact that the taxpayers held themselves out as experienced organisers of successful trading events, and this emphasis on the organisational aspects of their activities was sufficient to take them beyond the passive activity of granting someone exclusive permission to occupy a specified area for a specified time.

Members of VAT groups – which entity is entitled to make a   claim for overpaid VAT?

The Upper Tribunal (UTT) has released its decision in the joined cases of Lloyds Banking Group plc, Standard Chartered PLC, MG Rover Group Ltd and BMW (UK) Holdings Limited. The cases at the First Tier Tribunal (FTT) level had resulted in diametrically opposite judgments. In MG Rover the FTT had held that it was the generating taxpayer who was entitled to make the claim. By contrast the Standard Chartered FTT held that it was the representative member of the VAT group which was so entitled. The UTT has held that the right to make a VAT repayment claim belongs to the representative member of the VAT group even after the ‘real world supplier’ leaves the VAT group , and any resolution of how the members of a group deal with that repayment is a private law matter.

Why it matters: Since the litigation concerning repayment of overpeaid VAT was settled in the Fleming case, many taxpayers have made claims, which have been complicated by disputes over which entity was entitled to the repayment. This is a complex area and taxpayers may wish to review the position following the Upper Tribunal decision, particularly as other litigation on this topic is ongoing.

 HMRC can deregister UK VAT representatives of non-EU businesses

HMRC can require a non-EU established taxpayer to appoint a UK established VAT representative who is jointly and severally liable for the taxpayer’s obligations and liabilities under that Act. With effect from 7 November 2016, HMRC will be able to refuse to register a person as a VAT representative and cancel the existing registration of a VAT representative if they are satisfied that the representative is not a fit and proper person to act in that capacity.

VAT Newsletter September 2016

It’s been an eventful summer and one of the busiest we’ve known. Here’s our latest VAT Newsletter with some of the latest developments.

In the Courts – a surprise opinion on cultural services

The Advocate General’s Opinion has been published in the case of British Film Institute (C-592/15). The case was referred from the UK Court of Appeal. The C of A asked whether the cultural services exemption under Article 13A(1)(n) of the Sixth Directive (now Article 132(1)(n) of the VAT Directive) has direct effect in the UK, so as to exempt BFI’s supplies (admission to showings of films), in the absence of any domestic implementing legislation. The referral also asked whether any discretion is given to Member States to discriminate between cultural services in their application of the exemption. This is because in the UK exemption is restricted to admission to

  • a museum, gallery, art exhibition or zoo; or
  • a theatrical, musical or choreographic performance of a cultural nature.

HMRC say this prevents admission to film screenings being exempt, but the UK Courts so far have disagreed.  However  the Advocate General’s opinion is that Member States do have discretion to decide which cultural services are exempt from VAT. Therefore in his opinion the only issue is whether not applying exemption to BFI’s film admissions is contrary to the EU principle of equal treatment in relation to supplies by other operators, which the AG says is for the UK courts to decide. If followed by the ECJ this would mean that the BFI case would have to come back to the UK courts  to decide whether BFI was being denied equal treatment.

Why it matters

This opinion will be of interest to any eligible bodies which supply cultural services, but have been denied exemption by HMRC on the grounds that the services in question are not listed in UK law. There are number of UK cases backed up behind BFI. This is not the final decision,  and AGOs are not necessarily followed by the European Court.  If you have any questions about how this case affects you, please get in touch.

 Can a wall be a dwelling?

A development company acquired a domestic property with a view to developing a large house on the site on a speculative basis. The property was semi-detached, and the company planned to demolish the existing property, make good the gable end of the remaining house to leave a gap between it and the new house. It then planned to build the new house and a new boundary wall between the two properties. Planning permission was received for these works on 30 November 2011. The foundations of the new house were dug but before the new house was built the company sold the land to a new buyer who intended to build a different house which required new planning permission. The company was obliged to obtain planning permission and build a perimeter wall as part of the deal.

On the basis that the sale of the property constituted a zero rated supply, the Appellant claimed the input VAT incurred on the property. However, HMRC considered that the building of the wall was part of the demolition of the existing property and not part of the construction of a new dwelling, so that the sale had constituted an exempt supply of land and the input VAT could not be recovered.

The Tribunal agreed with the company that the construction of the wall was not preparatory work; it was the first stage in the construction of a domestic building. The Tribunal considered that ‘dwelling’ can be interpreted to mean a house together with other buildings on site which are integral to the property as a whole, and therefore the wall was a building that was part of a dwelling being constructed. In principle therefore, the company was a ‘person constructing a building designed as a dwelling’ and sale could have been zero-rated. However, unfortunately the planning permission conditions were not satisfied on the date of the sale, and therefore the sale was exempt and the input tax incurred on the site was irrecoverable.

Why it matters

The case illustrates the need for the planning permission to be in place at the time of the sale of construction projects. It is also interesting because the tribunal was prepared to accept that the construction of a substantial garden wall above ground level can constitute the construction of a ‘building’, which in turn can, along with other buildings including the house, constitute a “dwelling” for VAT purposes.

News

Making Tax Digital – major consultation on reform of tax reporting

HMRC issued a number of consultation documents in August concerning its ‘Making Tax Digital’ (MTD) initiative. MTD is a programme which is intended to create a single digital tax system, to be used by almost all taxpayers by 2020. The MTD implementation for VAT is expected to be effective from 1 April 2019. Consultation responses are required by 7 November 2016 and we would urge all businesses to read and respond to the consultation.

In summary, MTD means most businesses will have to use systems or apps which are compatible with HMRC’s tax systems (Corporation Tax, Income Tax, NICs and VAT) and which will regularly update the taxpayer’s digital tax account (at least quarterly), bringing taxpayers closer to ‘real time’ updating of their tax accounts.

There are six separate consultation documents, all of which are available on the www.gov.uk website along with Making Tax Digital for Business – An overview for small businesses, the self-employed and smaller landlords, a simplified single consultation document for the smaller business.

MTD will be the default method by which businesses manage their tax affairs. All businesses with Income Tax, National Insurance, VAT or Corporation Tax obligations will be within scope of these requirements unless they have been explicitly exempted. The consultation documents include proposals which will have a significant impact on VAT reporting.

The ‘Bringing business tax into the digital age’ paper outlines how MTD will be delivered through digital tools, and there are VAT aspects to be considered by all VAT registered businesses. They will have to select software and apps which are compatible with the MTD HMRC systems.

Charities and MTD

In that paper HMRC are seeking views on whether charities should be exempted from the requirements of MTD. The vast majority of charities do not incur a direct tax liability on an annual basis. However, many charities interact with HMRC on a quarterly basis because they are VAT registered. HMRC considers that due to their unique tax status charities should be exempted from the digital update requirements and for them it will be a voluntary process. This will be a very welcome exemption as anyone who reads our updates will know VAT for charities is complex. It seems unlikely, particularly in the short time frame, that there will be many suppliers willing to invest the considerable effort it would take to design software or apps that could cope with partial exemption and business and non-business issues many charities face.

HMRC are also consulting on whether charity trading subsidiaries should be exempted from the requirements of MTD and are keen to receive submissions on whether this group should also be exempted.

Overseas businesses selling goods in the UK via on-line marketplaces
HMRC has published new guidance aimed at offshore businesses selling goods to UK customers via on-line marketplaces.  The guidance reflects the measures announced in the last Budget which are aimed at improving UK VAT compliance by offshore sellers selling through digital marketplaces.  Under the new regime, an on-line marketplace operator, or an agent or representative of the overseas seller, can be held jointly and severally liable for any UK VAT that the offshore seller fails to pay.

 

VAT Newsletter June 2016

Well it’s been a tumultuous time to say the least since the last Newsletter. We shared our thoughts on VAT and the referendum result last week here. The only thing that’s clear is that things are going to be very uncertain for a while yet. In the meantime, there’s no change to UK VAT – or rather only the sort of challenges and opportunities that VAT has always brought with it.

What constitutes a donation for VAT purposes?

Friends of the Earth sought to claim input tax on the cost of training street fundraisers whose role was to sign up members of the public to make regular direct debit payments to the charity. Those who signed up to regular payments exceeding £3 per month received  ‘Earthmatters’ magazine and a variety of other benefits, including discounts and a track from the charity’s music site.

The question before the Tribunal was whether the £3 payment was given ‘for’ the benefits, or whether the £3 was a donation with the benefits being freely given by the charity. The charity argued that the £3 was payment for the taxable supply of the benefits, albeit that the supply was wholly or overwhelmingly zero-rated (the supply of printed matter).  If the £3 was a donation and outside the scope of VAT, no VAT could be claimed on the fundraising costs.

The Tribunal looked at the facts and decided that the monthly payment was not paid ‘for’ the magazine and the benefits, instead the payment was a donation or gift to the charity. There was insufficient evidence to show that a supporter was made aware when signing up of any benefits that were on offer. Instead the magazine was mentioned in the welcome letter and direct debit confirmation that was sent out after the supporter signed up. It made no difference that the charity would only send the magazine if someone paid the minimum sum of £3 – it was still a donation. The Tribunal therefore did not need to go on to decide whether the supply would have been wholly or mainly zero-rated.

Why it matters

This case demonstrates the uncertainty over the distinction between taxable supplies and donations, and that every case is decided on its own facts. Had the charity ensured that its marketing material and the documents completed by the street  fund raisers made it clear to supporters that they were paying to subscribe to a magazine and other benefits, then the Tribunal may have reached the conclusion that the £3 payment was ‘for’ the benefits and not a donation. The charity is considering whether to appeal.

School holidays not exempt welfare

A company operated camps on school premises during school holidays for 3-17yr olds in which the children could take part in activities such as sport, singing and dancing, painting and drawing. The company sought to argue that its services were exempt from VAT on the basis that the camps constituted welfare services. The camps were registered with Ofsted and it was accepted that the company was a ‘state regulated private welfare institution or agency’.

The Principal VAT Directive exempts ‘the supply of services and goods closely linked to the protection of children and young persons…’ , HMRC accepted that there was some care provided to the children, but took the view that the company’s primary aim was to offer sport and activities, and hence the exemption did not apply.

The Tribunal considered that the company was making a single supply of services. It had to decide whether the camps provided care and protection to children or the provision of various activity based courses. It looked at the company’s website which set out the nature of the services provided at the camps and noted that the company recruited ‘excellent coaches’ to deliver structured sport, art and fun activities to groups of children. It therefore concluded on balance that the single supply was the provision of the various activities rather than the care or protection of children.

Why it matters

The exemption for welfare services has been the subject of many appeals over the years and this case highlights the difficulty in establishing whether it will apply when there are a range of services/activities on offer. In this case, HMRC had conceded that there was an element of care and protection to the youngest children, but that was not sufficient for the Tribunal to find that the predominant supply was exempt.

VAT recovery not restricted by sale at less than cost

A Dutch local authority constructed two buildings for multipurpose use and recovered the  VAT on the costs. It sold the buildings to a foundation for around 10%of the cost price, which in turn allowed free use of part of the buildings to institutions providing education. The other parts were leased to third parties in return for consideration- these supplies were exempt. The Dutch tax authority sought to restrict input tax recovery.

The CJEU was asked to consider whether the taxpayer was entitled to full recovery of VAT on the cost of constructing the buildings or only in proportion to the part that was used by the foundation for economic purposes. It decided that although the taxpayer sold the buildings for less than it cost to construct them, it made a taxable supply and could reclaim all of its input tax. It also made no difference what the purchaser used the buildings for.

Why it matters

This case reinforces the point that the right to input tax recovery does not depend on whether there is any profit made by the taxable person making the supply. As long as there is a consideration received for a taxable supply and it is not ‘purely symbolic’, input tax can be reclaimed. Nor does the VAT Directive impose any conditions concerning the use by the taxable person’s customer, as that would mean that the taxpayer would suffer restricted deduction if making supplies to private individuals or non-taxable persons.

What is a dwelling?

The First Tier Tribunal has held that a property converted from a commercial building into domestic property for multiple occupation can constitute a ‘dwelling’ for the purposes of Grp 5 Sch 8 VAT Act 1994. In this case, a company purchased a commercial property and registered for VAT on the basis that it was going to convert it for sale, into a single residential property. After HMRC queried input tax recovery the company then advised HMRC that the property was to be sold as a single residential property, but with multiple occupancy and some shared facilities. Although none of the ten rooms had washbasins, four were en-suite and there were two bathrooms for the six remaining occupants. The property was centrally heated by a single boiler and heating and other utility costs were to be included in an all-inclusive sum paid by each occupant. There was a communal kitchen for the use of all residents although there was nothing to prevent them from cooking in their individual rooms. The property had a front and rear entrance/exit and each room could be locked with its own key. HMRC then sought to argue that the sale was excluded from zero-rating and was exempt, (with the result that no VAT could be reclaimed on the redevelopment). This HMRC said was because the ten occupational units in the property did not constitute ‘self-contained accommodation’. The Tribunal held however that the property as a whole constituted ‘self-contained accommodation’ so that the first grant of a major interest in the whole property was zero rated.

Why it matters

VAT legislation does not provide any general definition of a ‘dwelling’; the word seems simply to mean a place where someone dwells and which they treat as home. In practice the definition creates some confusion. This appeal was only concerned with the condition as to whether  a property with multiple occupancy consists of ‘self-contained accommodation’ and therefore potentially benefit from zero-rating. The tribunal held that although there was no express mention of multiple occupancy dwellings in the relevant part of the legislation, it did not specifically rule them out. The purpose of the legislation was to zero rate the creation of new homes where none had existed before, and therefore, applying a purposive construction to the legislation, the tribunal held a property with multiple occupancy could be a dwelling within the zero rating provisions.

VAT Newsletter April/May 2016

Brexit – what happens to VAT if the UK votes to leave the EU?

A vote in favor of exit from the EU would trigger a period of negotiation about exit terms, which would be likely to take several months at least. EU laws and treaty obligations would continue to have effect until agreement was reached. This could be for two years in the absence of agreement or longer if there is an agreement to extend the negotiation period.

Therefore, in practice, a vote in favor of Brexit is unlikely to result in any immediate changes to indirect tax law, practices and policy, but in the long term, changes would be likely to VAT, Customs Duty and Excise Duty. If there is a vote in favor of Brexit, EU law considerations might have less impact, though taxpayers will still be able to rely on the “direct effect” of EU law until the secession process is complete, and potentially afterwards in relation to “pre‑secession” transactions.

VAT could be materially affected by secession from the EU. Freed from the need to comply with EU VAT law, it is possible that the UK would decide on a wholesale review of the scope and coverage of VAT. In theory, the UK could even replace it altogether, possibly with a goods and services tax, a sales tax of some kind or even something like the UK’s old purchase tax – collected at the wholesale stage. However given the global trend towards VAT as the indirect tax system of choice, such a radical change seems unlikely and so VAT in some form is likely to stay with us even if the UK leaves the EU.

With effect from the date of secession, taxpayers will no longer be able to rely on the “direct effect” of EU laws and the EU approach to the interpretation of UK VAT law may be less widely applied. The UK courts would revert to interpreting UK VAT provisions and might have little regard to decisions emerging from the European Court though UK VAT law will still have its roots in EU law, and that makes it unlikely that future CJEU case law will simply be ignored by the courts and tribunals when applying UK provisions.

After Brexit the UK would no longer have to comply with EU VAT law (on rates of VAT, scope of exemptions, zero‑rating, etc.) and so the UK would have more flexibility in those areas. Future governments could consider such changes as the restoration of zero‑rating for domestic fuel and power and reinstatement of the VAT relief for energy saving products (changes which were enforced on the UK by the EU commission), or the widening of exemptions.

For businesses, the practicalities of cross‑border transactions may change following secession. Invoicing and reporting processes could be revised for cross‑border supplies and certain sectors may see major changes – for example businesses in the travel sector may no longer be required to account for VAT under the Tour Operators Margin Scheme. Suppliers of B2C e‑services to the remaining EU countries will have to consider the impact on their VAT accounting under the VAT Mini One Stop Shop.
It is likely that even after secession there would be disputes between taxpayers and HMRC over transactions that predate Brexit and in those cases EU law would still be in point (with the potential for the Tribunals and courts to need to refer questions to the CJEU).

Upper Tribunal confirms principles for recovery of VAT on overhead costs

A farming company bought (and paid VAT on) tradeable Single Farm Payment Entitlement units, which entitled the company, subject to fulfilment of conditions, to benefits under the EU Single Farm Payment scheme. HMRC refused the company’s claim to recover the £1,054,852.28 of VAT incurred, arguing that it related to the “non-business” receipt of the EU payments or, alternatively, that the cost of the units was not reflected in the price of the various farm products, etc., sold by the company and was not therefore a “cost component” of its taxable supplies. HMRC sought to argue that the units had been acquired for the non-business purpose of obtaining SFPs and so no right of deduction arose. The Taxpayer argued that the receipt of SFP income was not an end in itself but a means of fund raising for the company’s taxable business. Farmers who bought SFP Units all intended to use the SFP income to fund their businesses. The FTT rejected HMRC’s contentions and HMRC’s appeal was rejected by the Upper Tribunal which decided that there was ample evidence to justify the FTT’s finding that the acquisition of the units, and the income stream that resulted from that, was not a separate activity and so was part of the farming business, and allowed the business to recover the VAT.

Why it matters
The key question is whether costs which are incurred for business purposes have any direct and immediate link to an exempt supply. If yes then the link between taxable supplies is broken, but if not, the cost is either directly attributable to a taxable activity and VAT is fully deductible, or it is an overhead cost and, as such, is directly and immediately linked to the whole of the business’s activities. It is not appropriate in that case to look for the activity to which the expense is most closely related.

Partial recovery will be available according to the business’s overall mixture of taxable and exempt activities except where the business has, in addition to taxable and exempt business activities, any ongoing non-economic (non-business) activity.

European Commission’s Action Plan on VAT

The European Commission has published its Action Plan on VAT, setting out its thinking on the future development of the EU VAT system. The plan includes proposals to tackle fraud, initially by information exchange, and sharing of good practice by Member States. In the very long term the EU envisages a system where suppliers making intra-EU sales will be required to charge and account for VAT at the VAT rate due in the destination country, with the VAT accounting being based on a variant of the current “Mini One-Stop Shop” (MOSS) for e-services. The plan also sets out options for relaxing the restrictions on the use of reduced rates. It aims to initiate political discussions on the issue, with a view to making formal legislative proposals in 2017 but this seems very ambitious. The Commission also expects to progress its “digital single market” plans with legislative proposals intended to simplify cross-border trade, especially for SMEs, by extending use of the MOSS to B2C supplies of goods; introducing an additional, EU wide VAT/MOSS registration threshold for cross-border trade, to avoid the need for very small businesses to register and account for VAT; and the abolition of the current “low value imports” regime, under which many low value consignments enter the EU VAT and Duty free.

FTT suggests that partial exemption method carries over on VAT grouping

The First-Tier Tribunal has decided that an appeal by Dynamic People Ltd against HMRC’s refusal of a proposed partial exemption (PE) method was based on a misunderstanding and that it had no jurisdiction to consider it. Before it was VAT grouped, the company had an approved PE method based on floor space and when it joined the VAT group, it applied to use a method that was broadly based on the old approved method. HMRC declined to approve the method and the company appealed. The Tribunal took the view that as the old method had not been formally revoked, its use carried over to the VAT group, and hence that there was no need for a new method, so the whole basis for the appeal was flawed. HMRC’s presenting officer was unable to explain why a new method was needed.

Why it matters
This is an odd case and it is not clear the Tribunal is correct. When a new VAT group is created this creates a new “taxable person” distinct from the previous registered person. That is why HMRC usually insist on a new method for the group, to reflect the new combined activities of the companies within the group. However, even if the Tribunal was not technically correct, if they consider that the old method was not appropriate for the group it seems that all HMRC have to do is issue a direction that the current method is not fair and reasonable and then the parties will be able to seek to agree a new method.