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.
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.