News and Updates
PETER HUGHES – CHARTERED ACCOUNTANT
NEWSLETTER, JANUARY 2023
If a charity commissions or purchases a new building, it may benefit from zero-rating. It will have to certify that the building will be used for a “relevant charitable purpose” (RCP). RCP means use by a charity otherwise than in the course or furtherance of a business.
There are other reasons why it is important to distinguish between business and non-business use. If a supplier of electricity or gas supplies to premises partly for qualifying use and partly for non-qualifying use, it should charge its customer VAT at the relevant rate on the supplies it makes. “Qualifying use” includes use by a charity for non-business purposes. If 60% or more of the fuel or power is for qualifying use, the supplier should treat the whole supply as for qualifying use and charge VAT at the reduced rate.
Input tax cannot generally be recovered on expenditure which is not for the purposes of a business; nor is output tax normally due if there is no business activity (see Lord Fisher, a 1981 case in which a landowner organised private shoots on his land and asked participants to contribute to the costs; the High Court held that this was not a business activity).
HMRC previously accepted that where a charity supplies nursery and crèche facilities for a consideration that is fixed at a level designed to only cover its costs, this is not a business activity for business purposes. This was based on the courts’ decisions in Yarburgh Children’s Trust and St Paul’s Community Project.
In the light of recent cases such as Longridge on the Thames (a charity which organised water-based courses), HMRC will no longer apply the business test based on the six indicators from Lord Fisher (one of which is that an activity is predominately concerned with the making of taxable supplies for a consideration) in determining whether an activity is business. Instead, HMRC have outlined two tests for whether an activity is a business:
The old “predominant concern” test is no longer a factor.
HMRC have announced that children’s face masks qualify for zero-rating under the usual provisions for children’s clothes. Face masks are considered to be items of clothing, and if they are specifically designed and held out for sale to young children (under the age of 14) in accordance with VAT Notice 714, their sale is zero-rated.
Haymarket Media Group – sale of studios not a transfer of a going concern
Haymarket had planning permission to demolish Teddington TV studios and build dwellings on the site of the former studios. It agreed to sell the freehold to Pinenorth Properties, but it initially leased a building on the site to Pinenorth’s advisers and therefore claimed that the sale of the site was the transfer of a property letting business.
The FTT rejected the transfer of going concern (TOGC) treatment, as the grant of a short-term lease to a business which was advising Pinenorth did not constitute a property letting business. The actual purpose of granting the lease was to secure TOGC treatment. The buyer of the site would have been able to recover VAT had it been charged, but the VAT would have increased the stamp duty land tax, and therefore it needed to minimise the VAT payable.
WHY IT MATTERS: A TOGC is not a supply and is outside the scope of VAT. It has been shown before, notably in Royal College of Paediatrics, that a contrived transaction to secure TOGC treatment, where an illusion of a continuing business is artificially created, will result in the transaction not being treated as a TOGC (see HMRC’s views at VTOGC3450).
Sofology & DFS – attribution of input tax
Input tax can be recovered if there is a direct and immediate link to a supply.
Sofology and DFS paid Google every time a customer looking to buy a sofa clicked on a result and was directed to their website. When customers bought a sofa, insurance could be purchased to provide accidental damage cover. The FTT concluded that the taxpayers incurred the Google costs to promote the sale of sofas, which might in turn lead to the purchase of insurance
The direct and immediate link was to the taxable sale of the sofas, and the VAT on the Google costs was fully recoverable.
WHY IT MATTERS: This case has echoes of the 2021 Royal Opera House case, where 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.
In Royal Opera House, the input tax was treated as residual (as it was attributable to various different supplies), whereas in Sofology & DFS it was wholly attributable to a taxable supply, with the FTT concentrating on the economic ties between the costs and the supplies.
Hedge Fund Investment Management – input tax recoverable by trader who intended to make taxable supplies
HFIM was set up to provide fund management, research and introductory services but delayed doing so until litigation against it had been resolved. The litigation was resolved in its favour, but by that time five years had elapsed and it had made no supplies.
The FTT considered that the detailed and professional prospectus was convincing evidence of an intention to manage funds. However, there remained the question of whether, and to what extent, there was a direct link between the expenditure and the intended supplies, and the FTT directed HMRC to review the recoverability of input tax on the basis that HFIM intended to make taxable supplies.
WHY IT MATTERS: With input tax, intention to make taxable supplies is key. This was shown in the case Beaverbank Properties, who entered into negotiations to purchase a property but planning permission was turned down. Beaverbank had incurred professional fees and sought to recover the input tax on the grounds that it would have opted the site had planning permission been granted. The Tribunal found in Beaverbank’s favour because the input tax was attributable to intended taxable supplies and was therefore recoverable.
Import One Stop Shop
If a non-EU trader sells goods in consignments not exceeding EUR 150, and these are dispatched from outside the EU to a location within the EU, the trader can register for the import one stop shop scheme (IOSS) via the portal of any EU member state. Having obtained an IOSS VAT registration number, the trader will need to provide it to the person declaring the goods at the EU border, show on the invoice the price paid by the buyer in euros, submit a monthly IOSS VAT return via the IOSS portal of the country where the trader is registered for IOSS VAT, and make a monthly payment which is based on the VAT rates in the country in which the trader imports and sells the goods.
There is a weakness inherent in this system. If the EU member state of importation is unable to validate IOSS numbers in customs declarations, there will be double payment of VAT: once via IOSS and once under the normal rules for import VAT.
The EU VAT Committee has published guidelines for a temporary solution. If the EU trader can show that it has been charged import VAT, a credit could be included on the IOSS return. Further action may be needed in the future, as the views of the VAT Committee are not binding.
Making Tax Digital
Making Tax Digital (MTD) is the new method of submitting VAT returns via API-enabled software and using digital links. HMRC explain digital links in VAT Notice 700/22: “Once data has been entered into software that you use to keep and maintain your electronic account, any further transfer, recapture or modification of that data must be done using digital links. Each piece of software must be digitally linked to other pieces of software, to create the digital journey.”
Initially it was the case that small businesses with turnover below £85,000 were exempt from the requirement to file MTD returns, but since 1 November 2022 this has come to an end and all VAT-registered businesses must use MTD. A taxpayer who tries to use the old (pre-MTD) system to submit its VAT returns will find that they are rejected.
Could you or your staff benefit from a visit to review any VAT issues, or a day’s VAT training? I have 19 years’ experience of presenting VAT courses, and some of the courses I have delivered are as follows:
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
5 January, 2023