News and Updates
PETER HUGHES – CHARTERED ACCOUNTANT
This newsletter is a summary of important recent developments in the field 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
VAT returns for VAT-registered businesses with a taxable turnover above the VAT registration threshold (£85,000) must be submitted using Making Tax Digital (MTD) compatible software for periods starting on or after 1 April 2019. There is a six-month deferral period for traders based overseas, although it is not yet clear whether this would apply to an entity which uses a UK agent to submit its returns. VAT divisions and groups also have a six-month deferral period.
It will be common for businesses to prepare their final VAT return figures using a spreadsheet as they do now. The accounting software package will prepare the initial figures, and these will then be imported into a spreadsheet which must be API-enabled to allow the return to be submitted direct to HMRC. This is known as bridging software. HMRC maintain a list of MTD software at https://www.gov.uk/guidance/software-for-sending-income-tax-updates . Some software will have the capacity to submit the return direct to HMRC without the use of a spreadsheet, but it is important to note that it is not the end of spreadsheets. Indeed, some of the software found via the link above consists purely of an API-enabled spreadsheet, so it will still be possible to prepare a VAT return using only a spreadsheet.
By 1 April 2020 HMRC will expect businesses to have digital links between all parts of their software. Therefore it will not be permissible to copy and paste figures from one part of the workings to another. However, there will be a “soft landing” period of one year from 1 April 2019 to put all these links into place.
In my experience, the submission of a business’s own return via MTD is straightforward. However, some agents who submit their clients’ VAT returns are experiencing teething problems in setting up an “agent service account” at HMRC. It is probably better to tackle this before April 2019.
“No deal” Brexit
Businesses that incur VAT in another EU member state may, subject to conditions, reclaim that VAT via HMRC’s portal. HMRC have now announced that, should the UK leave the EU without a deal on 29 March, the portal will close. Businesses which incurred VAT in another EU member state in 2018 should submit their claims as soon as possible. If they do not do so by 29 March, they can only seek a reclaim by using The relevant member state’s existing process for businesses based outside the EU.
HMRC have published some guidance notes “VAT for businesses if there’s no Brexit deal”. The important points are as follows:
• There will still be a VAT system in the UK, with procedures closely aligned with the current system.
• Businesses importing goods into the UK will use “postponed accounting” for import VAT. They will account for VAT on their VAT return rather than paying import VAT when or soon after the goods arrive in the UK. A number of EU member states already use postponed accounting, an example being the Netherlands.
• Currently if a UK business sells and dispatches goods to a consumer in another EU member state, UK VAT must be charged, or if the volume of such sales to consumers
in a particular member state exceeds the “distance selling threshold” in a year, VAT must be charged in that member state. After Brexit with no deal, such sales will be zero-rated exports.
• EC sales lists will no longer be required for sales to EU businesses.
• The main “place of supply” rules for cross-border services will remain unchanged.
• Businesses which sell digital services to consumers in other EU member states are liable for VAT in those member states, although most use the MOSS (mini one-stop shop) system. Businesses which want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU member state. This can only be done after the date the UK leaves the EU.
The ECJ judgement in Air France KLM dealt with the question of no shows. If a customer paid the full price but did not take up the flight, this was seen not as payment for a future transaction which did not take place (in which case there would be no supply and no VAT), but instead as a payment for a right, which was a supply and would be subject to VAT (if flights were not zero-rated).
HMRC’s previous policy was that many payments for services and part payments for goods were outside the scope of VAT if the customer did not use the service or take up the goods.
From 1 March 2019 HMRC policy will be that VAT is due on all retained payments for unused services and uncollected goods. This will in particular apply to hotels which take non-refundable deposits from customers who subsequently cancel.
JDI International Leasing – “but for” argument could not be used (Upper Tribunal)
The following case may be of interest to businesses which are partly exempt – they make both taxable and exempt supplies and have to attribute input tax to taxable supplies (fully recoverable), exempt supplies (not recoverable) or taxable and exempt supplies (apportioned). The case dealt with the question of how to attribute input tax.
JDI acquired a number of highly specialised oilfield drilling tools pursuant to an intra-group reorganisation. The tools were leased to a group company for no consideration. They were used in highly challenging environments, resulting in a need for spare parts which were bought by the group company from JDI. JDI sought to recover input tax incurred on the purchase of the tools on the grounds that there was a direct and immediate link between that purchase and the supply of the spare parts. But the FTT held that JDI was not acting as a taxable person because it used the tools in an uncommercial way by leasing them to the group company without charging a lease rental; this alone would not be a bar to recovery of input tax if there were a direct and immediate link between the sale of the spare parts and the acquisition of the tools, but the FTT held that there was no such link because the market for spare parts was driven by the existence of the tools rather than the entity that owned those tools.
The appeal to the UT involved the “but for” principle. The background to this is that in the case Southern Primary Housing the Court of Appeal held that input tax could not be attributed to a taxable supply purely because the supply could not have been made “but for” the expenditure on which the input tax was incurred. In that case, the appellant acquired land (paying VAT) and intended to develop the land, but instead sold it to a housing association (exempt) and undertook building work (taxable). The High Court thought it relevant that the appellant would not have supplied the development work “but for” its acquisition of the land, but the Court of Appeal, disagreeing, held that this was not the test, and recovery would only be allowed if there were a direct and immediate link, which could only exist if the acquisition cost of the land were a cost component of the development work.
On appeal to the UT, JDI argued that the ECJ in the case Iberdrola Inmobiliaria Real Estate Investments had endorsed the “but for” approach. Therefore it was enough to claim that JDI could not have sold the parts had it not bought the tools. The background to the Iberdrola case was that Iberdrola built a holiday complex and carried out work for the local authority to connect a sewage station to the complex. The work was carried out free of charge. The ECJ held that it was sufficient for the sewage renovations to be essential for the building complex (which gave rise to taxable supplies); as it was essential, input tax could be recovered. But the UT did not agree: a “but for” link did not constitute a direct and immediate link. Art 168 of the EU VAT Directive requires that goods or services on which input tax is incurred
should be used for taxable transactions, which is not the same as a “but for” link. In Iberdrola, the sewage works were used for the holiday complex, and that was sufficient. So a “but for” approach was not sufficient in this case, and the appeal was dismissed.
Jigsaw Medical Services – emergency ambulance services not zero-rated (Upper Tribunal)
In the FTT, Jigsaw was held to be making supplies of transport in ambulances which could be zero-rated (because they were designed or adapted to carry no fewer than ten passengers) or exempt (because it was the transport of sick or injured persons). The Tribunal decided that the supply could therefore be regarded as zero-rated (zero-rating would take precedence over exemption).
There is another aspect to the legislation on which Jigsaw relied. In deciding whether a vehicle is “designed or adapted to carry no fewer than ten passengers” the taxpayer may show that the vehicle is designed, or substantially and permanently adapted, for safe carriage of a person in a wheelchair or two more such persons, and which, if it were not so designed or adapted, would be capable of carrying no fewer than ten persons. The FTT said that the question was “to determine whether or not that vehicle can, without complete rebuilding, be converted into a vehicle capable of carrying ten or more persons”, and they decided that it could.
The UT overturned the decision. The modifications made to allow it to take wheelchairs did not involve taking out seats. All that happened was that restraints were added to make it safe. Had the vehicle previously had the minimum number of seats but then been adapted for wheelchairs, it might have qualified for zero-rating; but that was not the case, and it was exempt, with the consequence that related input tax could not be recovered.
The IBFD runs a twice-yearly course in Amsterdam: “European Value Added Tax – Selected Issues”. The next one will be 6-8 May 2019, when I will be presenting sessions on triangular transactions, VAT grouping, promotional activities and a case study. See: https://www.ibfd.org/Training/European-Value-Added-Tax-Selected-Issues-1
If an individual sells a house which has been his or her only or main residence. no capital gains tax is due. If it has been the main residence for part of the period of ownership, the gain is time apportioned, except that there are certain periods during which the individual is deemed to have occupied the property, notably the last eighteen months of ownership.
In the recent case Yechiel v HMRC it was found that the taxpayer’s occupation of a house did not have the necessary “quality” to be treated as if it was his main residence. Previously, HMRC had asked whether occupancy was “permanent” or “continuous” (Goodwin v Curtis, 1998). In this case, furniture was sparse, although the taxpayer slept in the house every night while admittedly living with his parents and standing up to eat when he was in the house, or eating in the car. The FTT said that occupation should include “living”, evidenced by cooking, and by eating sitting down.
The stamp duty land tax surcharge rules for an additional property can be difficult to navigate. Consider a taxpayer who owns a property abroad where he lives, but then moves to the UK and, having lived in rented accommodation for a few years, buys a property there while continuing to own the overseas property but intending to sell it within three years. He has to pay the 3% surcharge on the purchase of the UK home, but can he reclaim this if he succeeds in selling the overseas property within three years? The SDLT surcharge is potentially refundable if the new property is a replacement for the old. In order for this to apply, the taxpayer must show that the following conditions are met:
1. On the date when home 2 was purchased, he intended it to become his only or main residence.
2. During the three years beginning with the purchase of home 2, he sold home 1.
3. At any time during the three years ending with the date when he bought home 2, home 1 was his only or main residence.
So whether the surcharge is payable will depend on when he vacated the overseas property. If the date of the purchase of home 2 is 1 September 2018, he must have lived in the overseas property as a main residence at some time since 1 September 2015. If he did not, there can be no refund of the surcharge
The Government has issued the draft Accounts and Reports (Amendment) (EU Exit) Regulations 2018. There are various references to the European Economic Area (EEA) in the Companies Act 2006, and these will be replaced with references to UK markets.
One of the effects is that a company which is admitted to trade on an EEA regulated market would nevertheless be allowed to prepare its accounts under the small companies regime subject to meeting the size conditions and as long as it is not admitted to trade on a UK regulated market.
Many intermediate holding companies (those who are both a parent and a subsidiary) are permitted by section 400 take advantage of exemption from preparing consolidated financial statements. Currently their immediate parent must be established under the law of an EEA member state. After Brexit this will only be available if the immediate parent is in the UK. A UK intermediate holding company with an EEA parent should still be able to take advantage of a similar exemption in section 401. Note that there is a difference between sections 400 and 401: the former states that the company must be included in the consolidated accounts of its parents, and the latter states that the company and all of its subsidiary undertakings must be so included.
Companies using IFRS are reminded that IFRS 15 applies for 31 December 2018 year ends onwards. The Sunday Times referred to Talk Talk’s third quarter update and the reference to an IFRS 15 timing adjustment and wondered whether Talk Talk staff speak “some secret lingo”. In fact companies are starting to comment that IFRS 15 has a major effect on long-term contracts, and licences and maintenance of intellectual property. The half year announcements of 55 listed companies suggest that just over half think that IFRS 15 will have a material effect on their accounts. It is already clear that telecoms companies will see a significant impact.
One decision companies will have to make is whether to use full retrospective application , involving the restatement of comparatives, or cumulative catch-up, in which there is an adjustment to retained earnings brought forward but not a full restatement.
The Financial Reporting Council has noted that companies who adopted IFRS 15 early failed to explain the differences from the previous accounting policies adequately, using “vague and boilerplate language
Similarly, IFRS 16 must be adopted for 31 December 201 yea R ends by companies using IFRS. The default position is that a lease which gives the lessee the right to use an asset must place the asset on its balance sheet as well is raising a lease liability. There are exceptions for short term leases.
It has just been reported that Tesco sees a drop of £101m in its profit before tax and a £3.3bn increase in indebtedness. Tesco says that IFRS 16 has no economic impact on the group but ha a significant impact on the way the assets, liabilities and the income statement are presented, as well as the classification of cash flows relating to lease contracts. There is a large impact on the income statement below operating profit.
I am a chartered accountant practising independently in York but with clients across the UK and a few in other countries. My two areas of specialism are VAT and financial reporting, 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.
I offer training courses in VAT and financial reporting, principally on an in-house basis, although I am also available to speak at public events.
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
15 February, 2019