ECJ rules on VAT and handling of credit and debit card payments

The Eurpean Court has delivered its judgments in the “payment handling” cases of National Exhibition Centre Limited  and Bookit Limited .  The cases concerned the VAT treatment of fees charged by the NEC and Bookit and whether they were exempt from VAT as payments for handling debit and credit card payments.  In both cases, the CJEU has decided that the fees charged were not within the scope of the EU law exemption for “…transactions … concerning … payments, transfers …” and it therefore follows that they were subject to VAT at the standard rate.

Bookit is a separate but wholly owned subsidiary of Odeon Cinemas, Bookit charged the custmers a card handling fee for paying by card but it was the Cinemas which supplied the customers with the tickets;   NEC  acted as disclosed agent in selling tickets for third party unconnected promoters and charged a booking fee to customers paying by card.

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VAT and tripartite agreements: the Airtours case

The Supreme Court has released its decision in the Airtours Holidays Transport Limited case. The  Court dismissed Airtours  appeal, by a narrow (3-2) majority, and the fact that this was not a majority decision illustrates what a difficult area of VAT this is.

A tripartite situation arises where C pays A to provide something to B at no cost to B. In this case Airtours was in financial difficulty and a report was commissioned from PwC on its financial health to satisfy its lenders (the “Banks”) that a proposed refinancing was viable.  Airtours paid for the report.  The question was whether the input tax on PwC’s fee was claimable by Airtours or was proper to the Banks – i.e., whether PwC supplied its services to Airtours or the Banks, or both. Read more

VAT treatment of conversions of non-residential buildings into dwellings under permitted development rights

Where an individual planning application is not necessary because statutory planning consent has been granted through permitted development rights, this it makes it difficult for some developers or DIY house builders to meet the conditions for VAT zero-rating or reduced rates in relation to the conversion of certain non-residential buildings into dwellings,which currently require statutory planning consent. Revenue and Customs Brief 9/2016 sets out the evidence that HMRC will still require from developers to demonstrate that the work is lawful, including certain forms of correspondence with the local planning authority.

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.