News and Updates
This newsletter is a summary of important recent developments in the fields of VAT, other taxes and financial reporting. I hope you find it interesting and useful. If you would like further details on any of the topics covered or assistance on any other matter, please contact me using the details shown at the end of the newsletter.
The UK officially left the EU on 31 January 2020 and has now entered into a transitional period which will last until 31 December 2020. During this time, the UK will remain in the EU VAT territory and EU VAT rules will continue to apply. So sales of goods by UK businesses to business customers in other EU Member States, where the goods are dispatched out of the UK to another Member State, will continue to be zero-rated, and the seller will continue to have a responsibility to complete an EC sales list and an Intrastat declaration. UK businesses selling and dispatching goods to private individuals in other Member States will continue to observe the distance selling rules under which the seller charges UK VAT until sales to private individuals in a given Member State exceed the annual distance selling threshold for that Member State, after which VAT will be chargeable in that Member State. For certain digital services supplied to private individuals in another Member State, a UK business will still have to account for VAT in that Member State, either by registering for VAT there or by operating the “mini one stop shop” system.
All this may change on 1 January 2021 depending on the terms of any trade agreement reached between the UK Government and the EU.
During the transition period, it will still be possible for a UK business to reclaim input tax incurred in another EU Member State, subject to the usual rules. There has been some confusion on this point, not helped by HMRC publishing guidance to the effect that no input tax could be claimed under the EU VAT refund scheme after 31 January 2020. This is incorrect and has now been updated. The guidance now says that the scheme can be used until 31 March 2021. Consequently, any UK business which incurred VAT in another EU Member State in 2019 (for example on subsistence during a business trip, or in the course of buying or importing goods in a Member State and selling them onwards in the same Member State) will have until 30 September 2020 to make the claim for repayment.
My last newsletter gave details of a new domestic reverse charge which was to apply to supplies in the construction sector with effect from 1 October 2019. HMRC has announced that this measure will not now take effect until 1 October 2020.
The Royal Opera House – direct and immediate link between production costs and catering sales (First-tier Tribunal)
Where an organisation makes both taxable and exempt supplies, input tax must as far as possible be attributed to taxable supplies (in which case it is recoverable) or to exempt supplies (not recoverable). This is what happened in Mayflower Theatre Trust, where a theatre had exempt admission fees and taxable programme sales. The Court of Appeal held that payments to production companies were attributable to both taxable and exempt supplies, and consequently the input tax was residual (partly recoverable).
In the case The Royal Opera House, the question was whether input tax on production costs was attributable to exempt admission fees, to taxable catering sales, to taxable sales from the shop or to taxable commercial hire of rooms. The FTT acknowledged that without the opera, the catering sales would not be made. However, this argument (known the “but for” argument – a supply would not have occurred but for another supply) has been rejected in the past, and was in Mayflower, when HMRC had contended that the taxable programme sales would not have occurred but for the exempt admission fees, and therefore all input tax was attributable to the exempt admission. HMRC’s contention in that case was rejected.
Here, it was necessary to establish a direct and immediate link between the costs and the various supplies, and if there were no such link, input tax could not be attributed to that supply. Thus there was a link between the production costs and the catering sales and also sales of the Royal Opera House’s own recordings, but no sufficiently direct link to the shop sales or the hire of rooms. So when calculating the recovery of the input tax, it must be attributed partly to exempt ticket sales and partly to taxable catering sales, giving a pro rata percentage recovery.
Lilias Graham Trust – family assessment centre held to be exempt (First-tier Tribunal)
The Trust operated residential accommodation while children were considered to be at risk. At the FTT, it stated that its objective was to “positively influence the lives of parents and families….. which is achieved by giving parents, and their social worker(s), the necessary tools and information to maintain positive developments once the family returns to their own community.” The Trust’s representative at the FTT was adamant that its service “was not an assessment of families to be included on the Child Protection Register”. This was important because VAT Notice 701/2 exempts “the assessment of families to be included on the at risk register”, and if services were exempt, it could not recover input tax.
HMRC’s position was that the Trust was making exempt supplies of welfare services because its services were directly concerned with the welfare of children. The fact that the services were supplied to a local authority rather than direct to the children did not alter the effect. There
were some differences between EU and UK law which did not affect the overall conclusion, which was that the Trust’s supplies were both closely linked to and directly connected with the protection of children as also to their care. The supply was held to be exempt.
Madinatul Uloom Al Islamaya – economic activity can exist without a profit motive (First-tier Tribunal)
The appellant was a College operating a residential Islamic faith school near Kidderminster. In 2015 it was decided to demolish one wing of the College’s existing buildings and erect a new hall. One of the main aims was to create a space for the annual graduation ceremonies which were hitherto located in a temporary marquee hired and placed in the College grounds. The construction of a new building used by a charity otherwise than in the course of an economic activity is zero-rated. An annexe to an existing building is not included in the definition of a new building, except where the annexe is capable of functioning separately from the existing building and the main access to the existing building and to the annexe must not be via each other (VAT Act 1994 Sch 8 Gp 5 Note 17).
The FTT held that the conditions in Note 17 were met but nevertheless dismissed the appeal because the school was carrying on an economic activity. Its running costs exceeded the fees paid, the balance being met from donations from the wider faith community, but although the fees did not make a profit, it nevertheless charged fees.
Referring to Longridge on the Thames, the FTT said: “Education for a fee is a business activity for VAT purposes. A business activity is possible even in the absence of a profit motive. Activities that do not make a profit, or activities where any profit is only used to further the aims and objectives of the charity can still be business activities.”
Eynsham Cricket Club – pavilion could not be zero-rated (Upper Tribunal)
If a charity commissions a new building, the construction may qualify for zero-rating if the building is used for a relevant charitable purpose, which means that the building must be used by a charity otherwise than in the course of a business or it must be used as a village hall or similarly in providing social or recreational facilities for a local community. Eynsham Cricket Club, which was not VAT-registered, sought to have its new pavilion zero-rated. The UT agreed that the building qualified as a “village hall”, but was the fact that the law (VAT Act 1994 Sch 8 Gp 5 Note 6) required the building to be used by a charity a problem?
Eynsham Cricket Club is a community amateur sports club (CASC), and under section 6 of the Charities Act 2011 a CASC is not a charity, so its appeal failed and the pavilion did not qualify for zero-rating. This was a further blow to the club, whose previous pavilion had been destroyed in a suspected arson attack.
PORR Épitési – bad debt relief claim allowed
The appellant claimed bad debt relief an amount not paid by its customer, Tourist Projects, in respect of the construction of a hotel. Tourist Projects subsequently went into liquidation. The Hungarian authorities rejected the claim on the basis of domestic Hungarian legislation, but the ECJ has allowed it, saying that “Article 90 of the VAT Directive must be interpreted as meaning that a Member State must allow a reduction in the taxable amount for VAT purposes if the taxable person may show that the claim he has on his debtor is definitely irrecoverable.”
From 30 March to 1 April there will be a course at the IBFD: “VAT: Selected Issues” I will be speaking about triangular transactions, groups and promotional activities and will be facilitating a case study towards the end of the course. Other topics covered will include recent ECJ case law, cross-border services, intra-EU supplies of goods and the right to deduct input tax. The course is interactive. I have been one of the speakers since 2013 and attendees always find it useful and interesting, not least because of the opportunity to share their knowledge with others on the course. See https://www.ibfd.org/Training/European-Value-Added-Tax-Selected-Issues-1 .
If you think your staff would benefit from a visit to review any VAT issues you have, or a day’s VAT training, please let me know. I can cover general VAT, VAT on international trade, land and property, and partial exemption.
IFRS 16 took effect for accounting years beginning on or after 1 January 2019. With a few exceptions such as short-term leases and low value assets, leases are now included on the balance sheet as a liability and an associated asset.
Under the old accounting regime, lease payments were accounted for under SSAP21/IAS17 and the tax treatment was that tax allowances were given for depreciation and interest with no capital allowances. SP 3/91 stated that no capital allowances were given as the assets remained the property of the lessor.
Under section 53 Finance Act 2011 the tax treatment was to continue as if no change in accounting standards had taken place. This was known as the “frozen GAAP”. provision. But section 53 was repealed from 1.1.19 (FA 2019). Companies henceforth follow their accounts for tax purposes.
The amounts taken to equity as a result of the transition are to be spread over the remaining life of the leases.
For example, a company has an operating lease and has historically claimed the payments against tax. The lease has five years to run. The company uses the simplified approach rather than full retrospective application (ie it need not assess whether existing contracts contain a lease), and it estimates the depreciated asset value at £225,000 and the lease liability at
£250,000 The double entry is to debit an asset with £225,000 and credit a liability with
£250,000. It must also debit retained earnings with £25,000 (spread for tax purposes over five years).
Individual A owns a property which he moved out of in order to live in his partner’s (individual B’s) house (they are not married nor civil partners, just partners). He continues to own and rent out the property which he used to live in. He and his partner are planning to “upsize” and buy a bigger property jointly. He believes that he will not be liable for the additional 3% stamp duty. His view is that he does not need to own the property they are moving out of,
However, following the link to STLTM09800 there are five conditions, all of which must be met if the old residence is sold on the same day as the new property is purchased. Condition 2 is not met (“In the three year period preceding the purchase of the new property, the purchaser or the purchaser’s spouse or civil partner, must have disposed of a major interest in another
dwelling”) because individual A is the purchaser (albeit jointly) and is not disposing of a major interest in another dwelling (ie he is not selling the freehold).
This might be resolved by B gifting A a share in the property; or by A and B entering into a civil partnership.
The ICAEW has issued a factsheet on accounting for impairment losses, which acts as a timely reminder of the principles involved, some of which are as follows:
Assets should be carried in the balance sheet at no more than their recoverable amount. Recoverable amount is the higher of the asset’s fair value less costs of disposal and its value in use.
Goodwill must be tested at least annually, and not necessarily at the year end, although it must be tested at the same time every year.
If it is not possible to estimate the recoverable amount of an individual asset, an entity applies the requirements in respect of impairment at the level of the cash-generating unit (CGU) to which the asset belongs.
An asset’s CGU is the smallest identifiable group of assets that includes the asset and generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
Value in use is established by estimating future cash inflows and outflows from the use and ultimate disposal of the asset; and applying an appropriate discount rate to those cash flows.
Cash flow projections should be based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining life of the asset, with greater weight being given to external evidence; be based on the most recent approved budgets/forecasts, which should cover a maximum period of five years unless a longer period can be justified; and exclude the effects of any future restructuring to which the entity is not yet committed and the effects of improving or enhancing the asset’s performance.
Cash flows beyond the period covered by the most recent budgets/forecasts should be estimated by extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
This growth rate should not exceed the long-term average growth rate for the products, industries or country or countries in which the entity operates or for the market in which the asset is used, unless a higher rate can be justified.
I am a chartered accountant practising independently in York but with clients across the UK and a few in other countries. I specialise in VAT, and I am available for consultancy work, whether it be an answer to a simple question or a more complex request for advice. I can visit your premises if needed.
Peter Hughes, M.A., F.C.A.
11 Sails Drive,
Heslington,
York
YO10 3LR
Tel 01904 421570;
Mobile: 07801 810694
P.D. Hughes Consultancy Services Ltd
Company No 06841251 (Registered in England & Wales)
peter@pdhughesconsultancy.co.uk
www.pdhughesconsultancy.co.uk
14 February, 2020