News and Updates
This newsletter is a summary of important recent developments in the fields of VAT, other taxes, financial reporting and coronavirus measures. 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.
Although the Upper Tribunal has ruled that supplies of digital newspapers are zero-rated, HMRC announced in Brief 1 (2020) that they do not accept the decision. HMRC have received permission to appeal to the Court of Appeal. Taxpayers making claims for repayment of overcharged VAT will have their claims rejected and held on file pending a decision by the Court of Appeal.
But see also my notes in Brief 3 below.
Drugs and medicines prescribed by an appropriate practitioner and dispensed by a registered pharmacist are zero-rated. Prescriptions from health professionals from the EEA and Switzerland currently do not fall within the zero rate when dispensed by UK pharmacies.
There appears to be a small error in Brief 2 (2020), which runs “Note (2B) to Group 7 of Schedule 8 to the VAT Act 1994 defines an appropriate practitioner by reference to a list.” The reference to Group 7 should read Group 12. In any case, the list is to be expanded to include suitable qualified EEA professionals.
Brief 1 above was issued on 19 February and was followed by an announcement in the Budget that electronic publications would be zero-rated from 1 December 2020. Owing to the coronavirus outbreak, zero-rating of electronic publications will take effect from 1 May 2020.
A temporary zero rate applies to supplies of personal protective equipment which are recommended for use by Public Health England in its guidance dated 24 April 2020 entitled ‘Guidance, COVID-19 personal protective equipment (PPE)’. The zero rate applies to such supplies between 1 May and 31 July 2020. The list of items covered includes disposable gloves and aprons, surgical masks and filtering face piece respirators.
Supplies of goods in connection with medical or surgical treatment in hospitals or state-regulated institutions, and goods supplied in connection with welfare services remain exempt from VAT with no input tax recovery.
The European Commission has issued Notice REV2 on the withdrawal of the UK from the EU. Until the end of the transition period (31 December 2020), EU law applies in its entirety to the UK. In the meantime, it is hoped that a trade agreement will be negotiated. The Notice only relates to goods and not to services.
After the end of the transition period, in the absence of a trade agreement, supplies of goods between the UK and the EU will be subject to the rules for imports and exports. VAT will be due on imports, and exports from the EU will as now be exempt from VAT if the supplier can prove that the goods have left the EU.
There will be transitional arrangements covering goods where the transport starts before 31 December 2020 but the goods arrive at the border after that date. The transaction will continue to be treated as an intra-EU sale and acquisition.
Refunds of VAT incurred in the UK by an EU business before 31 December 2020 will still be available on the same terms which currently apply, provided that the application is submitted by 31 March 2021. The same will apply to VAT incurred in the EU by a UK business.
David Moulsdale – circular rule for disapplication provisions
The appellant leased a property to Optical Express who made exempt supplies and was a connected party, so the option to tax was disapplied. However, he later sold the property to an unconnected party (Cumbernauld) who was not VAT-registered, and it was not suggested that this transfer was a transfer of a going concern (it might have been if Cumbernauld had been VAT-registered).
The disapplication provisions apply where the land in question is subject to the capital goods scheme or is expected to become so, in relation to the grantor or the transferee. The capital goods scheme applies when a property has been bought or refurbished for more than £250,000 and has the effect that the acquirer must review the use of the property annually for the next
ten years, adjusting the initial input tax recovery if the extent to which the property is being used to make taxable supplies has changed.
When the appellant leased the property to Optical Express, he had paid £1.1 million for it, which brought it within the capital goods scheme and triggered the disapplication provisions. The ten-year period had expired in the meantime. But the sale to Cumbernauld was also for
£1.1 million, which brought the property back into the capital goods scheme, not for the appellant himself but for Cumbernauld.
There is something of a circular argument here:
If the appellant charged VAT, the capital goods scheme test would be met, because Cumbernauld would be incurring VAT-bearing expenditure of at least £250,000, and the option would be disapplied.
If the option were disapplied, VAT would not be chargeable, and the capital goods scheme test would not be met.
But if the capital goods scheme test were not met, VAT would be chargeable, which takes us back to point 1, and so on, ad infinitum.
HMRC’s guidance VATLP23500 addresses this issue and takes the view that the option is not disapplied in these circumstances. The FTT in this case agreed that if the option were disapplied, this would facilitate avoidance – Cumbernauld, not being VAT-registered, would not bear any irrecoverable input tax, which would be contrary to the purpose of the legislation.
The UT agreed. The purpose of the legislation must be considered: if there is no intention or expectation that works would be carried out resulting in a capital item then the rules are not engaged. The supply the appellant to Cumbernauld was taxable.
San Domenico Vetraria – staff secondments subject to VAT
Avir seconded a manager to its subsidiary and recharged the manager’s salary. The subsidiary recovered input tax and this was challenged by the Italian tax authorities on the grounds that there was no mark up on the salary and therefore no supply. The ECJ held that there was a charge in return for the manager’s services and therefore a supply.
Volkswagen Financial Services (UK) Ltd – sales of repossessed HP cars not covered by margin scheme
If a car is sold under a hire purchase agreement, there is a supply of goods at the start of the agreement, and VAT is accounted for on the full price. If the car is repossessed, is there a supply by the customer back to the finance house? The UT thought not. Where there is a hostile termination, VWFS sells the vehicle and the net amount of the sale proceeds will be set off against the amounts still owed by the customer. Those sale proceeds will result in a decrease in the consideration for the supply of the vehicle to the customer and VWFS can accordingly claim a downward adjustment to its VAT account under Regulation 38. If an agreement is terminated early and there is an amount which is not paid by the customer, the finance house can reclaim the VAT on the outstanding amount via the bad debt relief provisions.
Gray and Farrar International LLP – dating services were not taxed as consultancy
The appellant ran a matchmaking business. The issue was whether its services fell within Art 59(c) of the EU VAT Directive: if they did, and were supplied to private individuals outside the EU, they would be treated as consultancy services and would be outside the scope of VAT. If they were not consultancy services, they would be taxed where the supplier belonged, which in this case was the UK.
HMRC’s view was that the advice given by the appellant to customers was not wholly specialist and expert, and was in fact no more than could have been given by a concerned friend. The Tribunal judges were not in agreement on this point: one said that the supply consisted of the provision of information and expert advice, while another said that the service provided in effect a form of ready made confidante for the client with whom he or she could discuss a relationship and his or her hopes and concerns for it or for other relationships. Therefore the decision had to go to the casting vote of the Chairman, who decided that the services were not those of consultancy.
The case highlights the dangers of simply regarding any service as that of consultancy. Further analysis of what the service comprises is needed. The judgement referred to the ECJ case Linthorst, which decided that vets were not consultants because vets habitually did more than give advice.
Marlow Rowing Club – charity had a reasonable excuse for not issuing a certificate
A charity (Marlow) issued a certificate in respect of a supply to the charity of construction services. The purpose of the issue of the certificate was to demonstrate that the clubhouse would be used for a “relevant charitable purpose”, enabling the supply to be zero-rated. As a result of the judgement in Longridge on the Thames, the supply could not be zero-rated because the activity for which the clubhouse was to be used was a business activity. At the time when the
certificate was issued, the final result of the Longridge case was not known, and with this in mind Marlow argued that it had a reasonable excuse for issuing the certificate. The FTT held that Marlow should have sought clarification from HMRC and dismissed Marlow’s argument that it had not been careless in issuing an incorrect certificate.
The UT has reversed the FTT’s decision, holding that Marlow acted reasonably in seeking advice from VAT specialist accountants and counsel with specific expertise in relation to charity VAT on the state of the law following the judgement in Longridge. It also acted reasonably in relying on that advice in the way it did.
Kaplan – cost sharing exemption does not apply across borders
The cost sharing exemption applies when a number of entities, all of whom make exempt supplies, form a separate entity to supply services to them all. Those services are exempt if certain conditions are met. This arrangement might be used in the case of medical practices who want to supply staff to each other – this would normally be a taxable supply, and the VAT would be irrecoverable as medical practices make exempt supplies.
Kaplan and its subsidiaries supply educational services. Its costs, which include commission paid to agents, normally bear VAT which is irrecoverable because its supplies are exempt. However, in 2014 Kaplan incorporated an entity in Hong Kong which was set up as a cost sharing group. The agents’ commission was routed through this new entity, which recharged those costs as exempt.
This might have worked had the new entity been incorporated in the UK. But the Advocate General of the ECJ has concluded that the cost sharing provisions of the EU VAT Directive do not apply to entities outside the EU.
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.
I will be conducting a day’s VAT training for a client in early June via Zoom. For the time being, virtual training using this or similar methods may be the only realistic way forward.
From 6 April 2020, a UK resident individual disposing of UK residential property must file a UK land return within 30 days of the completion date. An estimate of the capital gains tax must be paid within the same timescale. When the self assessment tax return is filed by 31 January following the tax year, the payment made within 30 days of disposal will be treated as a payment on account and offset against the actual capital gains tax.
Properties covered by principal private residence relief throughout the period of ownership do not trigger a requirement for a land return.
Also, no return is required where the disposal produces a loss or where the gain is covered by previous capital losses or is below the taxpayer’s annual exempt amount.
Property not qualifying in full for principal private residence relief may trigger a requirement to file a return. The general rule is that a property with grounds of up to half a hectare or where the grounds are bigger than is necessary for the reasonable enjoyment of the dwelling having regard to its size and character (see Longson v Baker, commented on by HMRC in CG64819) does not attract full private residence relief.
The early signs are that estate agents and solicitors are placing the ball firmly in the owner’s court with regard to responsibility for filing returns.
As a result of the coronavirus crisis, companies may need to make adjustments to their annual financial statements. Under FRS 102.32.2(b), information indicative of conditions that arose after the balance sheet date should be disclosed where material. These are non-adjusting post balance sheet events and they do not affect the measurement of balance sheet items, only their disclosure.
Adjusting events are defined in FRS 102.32.2(a) as those which provide evidence of conditions that existed at the balance sheet date.
There is a general consensus that COVID-19 is a non-adjusting event for December 2019 year ends. For accounting years ending in 2020, greater judgement is needed.
An entity that has close ties with areas severely affected by COVID-19 or is in other ways adversely affected, such as entities in the tourism industry may need to consider additional disclosures of material uncertainties which may affect its ability to continue operating ass a going concern. It may be necessary to consider whether the going concern basis of accounts preparation is appropriate. FRS 102.3.9 states “when an entity does not prepare financial statements on a going concern basis, it shall disclose that facet, together with the basis on which it prepared the financial statements.” FRS 102 does not explain, however, on what basis the entity should prepare the accounts if the going concern basis is inappropriate. Normally the “break up” basis would not be consistent with the principles of FRS 102.
Assets might have to be written down to net realisable value; provisions might have to be made for onerous contracts, or for closure costs which were committed to at the balance sheet date.
There follows a summary of some measures taken to assist businesses affected by the COVID-19 virus.
Grants under the SEISS are available to self-employed individuals or partnerships who:
traded in the tax year 2018/19 and submitted their 2018/19 self-assessment tax return on or before 23 April 2020;
traded in the tax year 2019/20;
intend to continue trading in the tax year 2020/21; and
carry on a trade which has been adversely affected by coronavirus.
“Adversely affected” may mean being unable to work because the taxpayer is shielding, self-isolating, on sick leave or has caring responsibilities. It may also include a temporary cessation of trading because there are fewer or no customers. There is no link between the amount of the grant and the financial loss, but the taxpayer should keep evidence of the impact on trade.
Limited companies and trusts cannot claim, nor can individuals or partnerships with trading profits of more than £50,000. In order to be eligible, 50% of an individual’s earnings must come from self-employment. This will exclude those who have property income greater than self-employed income.
Eligible businesses can claim a grant of up to £2,500 per month, paid out as a single instalment covering three months (March to May) although it may be extended. The grant is calculated as 80% of average trading profits. For a business which has traded in all three tax years from 2016/17 to 2018/19, the profits are averaged over the three years. The grant is subject to income tax.
The SEISS application portal is open to taxpayers on a staged basis from 13 to 18 May. HMRC expects to make payments by 25 May.
The Job Retention Scheme offers grants to employers covering up to 80% of salaries to furloughed staff plus employers’ national insurance and auto-enrolled pension contributions. The maximum grant is the lower of 80% of an employee’s regular wage and £2,500 per month, which gives a cap of £2,500 plus £245 (employers’ NIC) plus £59 (auto-enrolled pension contribution). The Scheme runs from 1 March to 31 October, and employees need to be on the employer’s payroll as of 19 March.
Furloughed employees must not work for the employer during the period of furlough.
There were rumours that the Government would wind its contribution down to 60%, but this has not happened. Instead, there was an announcement on 12 May that furloughed workers would be able to return to work part-time from 1 August with employers asked to pay a percentage towards salaries.
VAT-registered businesses with VAT payments due between 20 March and 30 June 2020 can defer those payments until 31 March 2021. This is automatic. VAT returns must be submitted as normal and repayments will be made where applicable.
Businesses paying VAT by direct debit will need to cancel the direct debit and later reinstate it.
Taxpayers who would normally make a second payment on account in respect of their 2019/20 income tax by 31 July 2020 can choose not to make the payment until 31 January 2021.
A company must normally file its accounts at Companies House within nine months of the balance sheet date. Companies can apply for a three-month extension, and those who do so and cite COVID-19 issues will automatically be granted the extension. It is important to note that companies must actually apply for this extension.
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.
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 May, 2020