News and Updates
This newsletter is a summary of important recent developments in the field of VAT. 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 reduced rate of 5% applies to food and non-alcoholic beverages supplied for on-premises consumption; hot takeaway food and hot takeaway non-alcoholic beverages; sleeping accommodation in hotels or similar establishments, holiday accommodation, pitch fees for caravans and tents, and associated facilities; and admission to certain attractions such as theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions, similar cultural events and facilities. Some of these attractions already qualify for the cultural exemption.
The 5% rate applying to the above was originally introduced as a coronavirus measure on 8 July 2020 and has been extended to 30 September 2021. From 1 October 2021 it will be replaced by a rate of 12.5% until 31 March 2022.
Businesses making a mixture of taxable and exempt supplies must usually use the partial exemption standard method to apportion their residual input tax (ie VAT they have paid to suppliers on general overheads and neither attributable to taxable nor exempt supplies). Input tax which is directly attributable to taxable supplies is fully recoverable, while input tax directly attributable to exempt supplies is not recoverable.
The apportionment is carried out by applying a fraction to residual input tax. This fraction is taxable supplies divided by total supplies.
If this fraction does not give a fair recovery of input tax, a business may request the approval of a special method (such as an apportionment based on floor space). A special method may not usually be backdated although it may apply from the beginning of the current partial exemption year.
HMRC have announced that they will consider applications for special methods retrospectively, in other words for a partial exemption year which has already finished. They will only do this if the reason for the application is Covid-related. For example, a partially
exempt business may make supplies from one part of its building which are exempt under the cultural exemption, and supplies from a bookshop in another part which are zero-rated. It may use a special method which is based on the floorspace used by the respective parts of the building. This may no longer give a fair result if the business has temporarily stopped making exempt supplies because of Covid-19; it may therefore wish to ask for a different special method.
Manual window blinds are building materials, but this does not extend to motorised blinds. This is important because the supply of building materials which are incorporated into a dwelling by the builder is zero-rated, while the supply of non-building materials does not qualify for zero-rating.
HMRC accept that Brief 2/11 was wrong as it said that roller blinds are not building materials. This Brief confirms that manual blinds are building materials, but not motorised blinds.
This Brief was issued in the wake of the Upper Tribunal decision in Colchester Institute Corporation, which received public funding to provide education to 16-19 year old students. HMRC were of the view that these monies were not a supply, but Colchester argued that the monies were consideration for a supply. The UT found that the supply of education is exempt, and therefore related input tax cannot be reclaimed. Moreover, a charity in receipt of funding for a supply cannot usually claim zero-rated reliefs on buildings under the “relevant charitable purpose” rules.
In the meantime, HMRC will not impose the UT’s decision on any further education institution. However, institutions can choose to apply the judgement and treat education as exempt, submitting an error correction notice for overpaid or underpaid VAT.
LIFE Services Ltd provided services to individuals under a formal care plan and was paid by the local authority. LIFE was not regulated by the Care Quality Commission. The Court of Appeal held that LIFE was not a state-regulated private welfare institution and therefore could not exempt its services.
The Learning Centre (Romford) was also not a charity or state-regulated welfare institution or agency and could not exempt its services. The appellant contended that the failure of UK law to allow it to exempt its services was a breach of fiscal neutrality, but the Court of Appeal disagreed.
The Brief announced that providers who are not charities must start accounting for VAT on welfare services.
The deadline for EU businesses which incurred UK VAT up to 31 December 2020 expired on 31 March 2021. Non-EU businesses which incurred UK VAT between 1 July 2019 and 30 June 2020 would normally have had to claim a refund by 31 December 2020. Many overseas businesses experienced difficulties in obtaining a certificate of status from their official issuing authorities because of coronavirus, and HMRC extended the deadline to 30 June 2020.
This Brief grants a further extension to the deadline, which now expires on 31 December 2021.
Danske Bank – head office liable for VAT on support given to branch
It has long been accepted that, if a company renders services to an overseas branch, there is no supply and no VAT. This was the decision of the ECJ in 2005, which held in the case FCE Bank that the branch did not act independently of its head office and did not bear any risk arising from the exercise of its activity. Services rendered to a subsidiary or sister company would normally be a supply, but not to a branch.
However, in 2014, the ECJ was faced with Skandia in which Skandia American Corporation Ltd (SAC), based in the USA, purchased IT services and redistributed those services to companies and branches within its accounting group, including its Swedish branch, Skandia Sverige (SS). SS was a member of a VAT group in Sweden. The ECJ ruled that, if a main establishment in a non-EU country provides services to a branch in the EU when that branch belongs to a VAT group, there is a supply of services. There may not be any VAT chargeable (because the supplier and customer are in different countries), but the VAT group to which the branch belongs would have to account for VAT using the reverse charge procedure.
In Danske Bank, a main establishment that belonged to a Danish VAT group provided IT services to its Swedish branch, which was VAT-registered in its own right. In other words, it was the same situation as in Skandia but reversed: this time, it was not the branch but the main establishment which was part of a group. The conclusion was the same: the branch and the main establishment were independent taxable persons and there was a supply.
WHY IT MATTERS: If the receiving party (the branch in the Danske case) accounts for VAT using the reverse charge procedure, it will include output tax on its VAT return, but can only include input tax to the extent that it uses the IT services to make taxable supplies – and in the case of a bank, the IT services are likely to be used to make exempt supplies, meaning that the input tax is much smaller than the output tax.
Eynsham Cricket Club – Community amateur sports club was not a charity
When a charity constructs a new building and certifies that it intends to use it solely for a “relevant charitable purpose” (RCP), the construction work is zero-rated. “RCP” means use by a charity otherwise than in the course or furtherance of a business, or as a village hall or similarly in providing social or recreational facilities for a local community.
A CASC (community amateur sports club) is not a charity. HMRC confirm this in VAT Notice 708. The First-tier Tribunal in the Eynsham case ruled that a CASC could be a charity under the definition in Finance Act 2010. However, under that definition the charity had to be established for charitable purposes only, and the FTT ruled that the cricket club also had a
subsidiary social purpose, which meant that it was not established for charitable purposes only, and the construction of its new pavilion was not for an RCP and could not be zero-rated.
The Court of Appeal has confirmed that there is no indication that the definition in Finance Act 2010 was intended to extend charitable status to CASCs. Consequently, a CASC which is not established for charitable purposes only cannot benefit from zero-rating if it constructs a new building.
WHY IT MATTERS: If a cricket club is a charity (such as nearby Charlbury Cricket Club), it may be able to construct a new pavilion without paying VAT. This does not extend to CASCs.
Lilias Graham Trust – Welfare services were a single exempt supply even though accommodation was included
The supply of welfare services is exempt if it is supplied by a charity, a state-regulated private welfare institution or agency, or a public body.
LGT runs a residential assessment centre where the parenting capabilities of parents who are referred to LGT by local authority social workers are assessed. The social worker refers a family unit where there are concerns over whether the parents can care for the child safely and adequately. The FTT ruled that LGT’s services were exempt, and LGT appealed on the grounds that it made a supply of accommodation as part of the welfare services, this accommodation being essential and not ancillary to the exempt supply of welfare services. LGT argued that the accommodation fell within the exclusion from exemption in VAT Act 1994 Sch 9 Gp 7 Note 7, which has the effect that an exempt supply of welfare does not include a supply of accommodation or catering except where it is ancillary to the provision of care, treatment or instruction. But the Upper Tribunal ruled that this was indeed a single supply of welfare, and allowing the accommodation element to be “carved out” of a single supply would be at odds with EU legislation. LGT had referred to Talacre Beach Caravans, in which the sale of caravans was zero-rated, but the contents of those caravans were standard-rated. But in that case, legislation specifically excluded contents of caravans from zero-rating
WHY IT MATTERS: LGT wanted to improve its input tax recovery, and it would have been in its interests to charge VAT on the supply of accommodation. But the “carve out” in the Talacre case only applies when legislation specifically allows it, which it did not for accommodation when this was an ancillary element of welfare.
SK Telecom – use and enjoyment of mobile phones (ECJ)
SKT, a company based in South Korea, paid Austrian VAT on phone charges levied by an Austrian operator. It passed those charges to its customers, who were South Koreans visiting Austria, and submitted a claim under the 13th Directive (under which a business based outside the EU can reclaim VAT paid in the EU).
A 13th Directive claim is possible only if the claimant has made no supplies of goods or services deemed to have been supplied in the EU Member State from which the VAT is being reclaimed.
Under the EU VAT Directive, Member States are permitted to treat supplies made to persons belonging outside the EU as if those supplies had been in the Member State concerned, provided that the services are used and enjoyed in the Member State. Austria has opted to treat telecommunications services in this way. SKT had made supplies to non-EU nationals which were used and enjoyed in Austria, and those supplies were deemed to have been made in Austria. Therefore its 13th Directive claim was denied.
WHY IT MATTERS: This is an ECJ decision, but under the EU Withdrawal Act a UK court may have regard to any decisions taken by the ECJ following the UK’s departure from the EU. The significance of this decision is that allowing nationals of a third country to use the telephone network of an EU Member State constitutes use and enjoyment, and therefore the override can be triggered. The use and enjoyment override would have effect in the UK if the normal place of supply rules taxed a service outside the UK but the service were used and enjoyed in the UK, or vice versa.
Balhousie Holdings – sale and leaseback of care home does not trigger self-supply
If a building which benefited from zero-rating under the provisions for RRP (relevant residential purpose) or RCP (relevant charitable purpose) is sold within ten years, the person who received the zero-rated supply must account for VAT as if that person had disposed of the building. BH constructed a new care home which qualified as an RRP building and entered into a sale and leaseback agreement. In 2019 the Court of Session ruled that BH was liable for VAT on a self-supply charge.
The Supreme Court has now overturned the Court of Session’s ruling, as BH did not dispose of its entire interest in the property.
WHY IT MATTERS: There is an obvious VAT saving to be gained from entering a sale and leaseback arrangement, although if there were an actual change in use, the self-supply charge would be triggered.
Titanium Ltd – no fixed establishment purely by virtue of property ownership (ECJ)
T, a Jersey company, owned two commercial properties in Austria and leased them to tenants. If T were considered to be established in Austria, it would be liable to charge VAT under Austrian law. If it were deemed to be not established in Austria, the tenants would account for VAT using the reverse charge. Under Art 194 of the EU VAT Directive, an EU Member State may provide that the reverse charge applies if a supply is made by a person who is not established in the Member State. Austrian law reflects this if the customer is a trader.
The ECJ found that, although T owned property in Austria, it did not employ staff and used the services of a local management company to manage the properties. The mere ownership of a property does not constitute a fixed establishment. This was the only question referred to the ECJ, so the conclusion on whether T had to register for and charge Austrian VAT was not dealt with.
WHY IT MATTERS: I have three overseas clients who import and sell goods in the UK and are consequently UK VAT-registered. The question of whether each client has a UK fixed establishment has been discussed. A fixed establishment has been defined by the ECJ (notably in ARO Leasing) as one with the human and technical resources necessary to make and receive supplies on a permanent basis. It is a common question for overseas businesses to have to consider, as it is relevant to whether UK suppliers charge them VAT or require them to apply the reverse charge in their home country.
Could you or your staff benefit from a visit to review any VAT issues, or a day’s VAT training? I have 18 years’ experience of presenting VAT courses, and some of the courses I have delivered are as follows:
Fundamentals of VAT (VAT rates, invoicing, tax points, reclaim of input tax, VAT groups, correction of errors, and penalties)
VAT implications of trading with businesses in other countries
VAT and property
Partial exemption
Brexit
Domestic reverse charge on construction services
I have presented VAT courses in numerous countries including the Netherlands, Malta, Switzerland and Ireland, as well as delivering online training.
My courses are interactive, and I encourage participants to ask questions relating to situations they have encountered in their work.
I qualified as a Chartered Accountant in 1997 with Malthouse & Company, a practice in Liverpool City Centre, and moved on in 1999 to work in property management. In January 2004 I started my own practice, initially in Birkenhead but then in York from 2008.
Many of my clients have been with me since the mid-2000s and value the personal and prompt service I offer, whether they need in house VAT training, a visit to discuss VAT issues or ad hoc advice over the telephone or by email. Any telephone advice I give is followed up within a short time by an emailed summary.
I am a member of the VAT and Duties Subcommittee of the ICAEW Tax Faculty, and I am one of the ICAEW’s representatives on HMRC’s Land and Property Liaison Group
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
22 September, 2021