PETER HUGHES CHARTERED ACCOUNTANT NEWSLETTER MARCH 2018

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1 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. Amended guidance on grants VAT HMRC GUIDANCE An organisation receiving a grant must establish whether this should be treated as a taxable supply, in which case VAT must be accounted for on the grant. The question here is whether the grant is non-business income (which grants usually are, as the grantor receives no direct benefit in return) or payment for a supply. One interesting case was Bath Festivals Trust Ltd which was heard by a Tribunal in The Trust organised a music festival and was paid by Bath City Council to do so. The Tribunal had to decide whether this was a grant by the Council (which would not be a supply) or a supply of services. The Trust argued that there was a direct link between the services provided and the payment received, as the agreement was reciprocal. The Council was under a statutory duty to develop a community strategy, and the festivals were considered necessary for the local community. The Council monitored the activities of the Trust, not merely ensuring that the payments were spent properly but also that it received the services expected and to the standard required. The Tribunal accepted that there was a supply by the Trust to the Council, noting that the service agreements did not permit the Trust a completely free hand. If the grant is a taxable supply, the recipient s input tax recovery position may be improved. HMRC have issued revised guidance on this subject, and this can be found in the manual VAT Supply and Consideration at VATSC51600 to VATSC Some of the points made are as follows: In deciding whether there is a supply, the recipient must ask whether the grantor receives anything in return for the payment, whether there are any conditions attached, what the payments are used for, whether a third party receives a benefit, and whether there is a contract. There are lists of factors indicating that the grant is outside the scope of VAT (VATSC51820) or that it is payment for a supply (VATSC51840). The former may be the case if funder will not attempt to control how the money is spent beyond seeing that the funds are properly managed; the latter may apply if the funder will attempt to control how the money is spent, maybe imposing specific targets in terms of quantity, quality or timeframes. Whether the payment is described as a grant is not determinative. As always with HMRC guidance, it is not binding; but there are helpful references to a number of relevant court decisions.

2 VAT COURT DECISIONS The following is a selection of significant cases in February. FIRST-TIER TRIBUNAL National Federation of Occupational Pensioners rebates collected on behalf of branches NFOP is a membership organisation which represents the social interests of approximately 83,000 occupational pensioners. Members pay a subscription and in return receive a package which includes free initial advice over the phone on legal, tax, financial and benefit matters, free IT assistance, help in the event of a car accident, a magazine eight times a year, discounts on goods and services, and membership of a local branch giving opportunities for social activities and outings. Branch rebates are then paid to branches. The issue was whether VAT was due on the part of the subscription which was subsequently paid out as a branch rebate. The FTT first asked whether the branches were part of NFOP or were separate and autonomous persons. It was held that they were the latter under Art 9(1) of the EU VAT Directive a taxable person is one who independently carries on an economic activity, and the branches did indeed operate independently, as they had their own officers, held their own meetings and prepared their own accounts. Therefore, provided that it could be proved that NFOP was merely receiving amounts as an agent and passing them on, it would not be liable to account for VAT on the element of the subscription paid on as a branch rebate. However, NFOP could not prove that it was acting as an agent, as it set the full subscription including the rebate, and its Regulations defined the branch rebate as an amount paid to branches from the subscriptions. So the entire subscription was income of NFOP and it was liable for VAT the whole amount. Transpase Ltd insufficient evidence for exports An export of goods cannot be zero-rated unless HMRC s conditions in VAT Notice 703 in relation to evidence of export are met. The conditions have the force of law. Paragraph 6.5 states that evidence must clearly identify the supplier, consignor, customer, goods, an accurate value, the export destination and the mode of transport and route of the export movement. Transpase exported beauty products, clothes and clothing accessories to Nigeria. Its proof of export met the first five conditions above but not the last two. The invoice stated Transport of personal effects to Nigeria but did not state where in Nigeria; the invoice address was probably no more than a contact address. The air waybills did not identify the customer nor did they itemise the goods. Even if it were accepted that the invoice did identify the destination, there

3 was nothing which identified the mode of transport or route of export movement. Zero-rating was denied. In the absence of proper evidence, exporters may have to account for VAT which they may not be able to recover from the customer. UPPER TRIBUNAL Nestlé UK Ltd Nesquik is not zero-rated This was an appeal against a decision in 2016 in which it was held that Chocolate Nesquik qualified for zero-rating because it contains cocoa, but other Nesquik products, such as chocolate and banana, were standard-rated as they were not milk or preparations and extractions thereof. The UT has upheld the decision. Nestlé sought to argue that strawberry and banana Nesquik should be zero-rated on the grounds that they encourage the consumption of milk, but the UT found that the legislation does not state this. Indeed, numerous apparent anomalies within the VAT system, such as the zero-rating of oranges and the standard-rating of orange juice, have arisen because Parliament has chosen to zero rate certain foods, generally because they were everyday foods, tax on which would be particularly sensitive for much of the population, and has chosen not to zero rate others.

4 OTHER TAXES Restriction of corporation tax loss relief With effect from 1 April 2017, companies with profits above 5 million will see their loss relief restricted. The maximum amount of relief from losses brought forward will be 5 million plus 50% of the profits above 5m. For example, a company with profits of 12 million and losses of 11 million brought forward will only be able to claim loss relief of 8.5 million (the 5 million trading deductions allowance plus 50% of the difference between the 12 million profit and this 5m), leaving the remaining losses of 2.5 million to be carried forward. Concern has been expressed at one aspect of the legislation which states that every company must state in its corporation tax return how much of the trading deductions allowance it has used. Under section 269ZB of the Corporation Tax Act 2010, if this amount is not specified in the corporation tax return, the trading deductions allowance will be nil. Companies with profits under 5 million might hitherto have thought themselves not to be affected by the changes; but if a company has profits of 7,000 and losses of 10,000, it will need to state in its return that it has a deductions allowance of 5 million. If it does not, only 3,500 of loss relief will be claimable. This was surely not the intention of the legislation, and the ICAEW is keeping a close eye on this situation. Directors do not necessarily have to submit self assessment tax returns HMRC s guidance Self Assessment tax returns gives a list of those who must complete a tax return. The list includes company directors, with exceptions for directors of non-profit making organisations who receive no pay or benefits. The recent Tribunal case Karen Symes suggests that this is not the legal position. Mrs Symes registered to complete a tax return for 2016/17 but was given a notice to file a return for 2015/16. She had no tax liability for that year, as her only income was in dividends within the basic rate band and a small amount of interest. This was before the change in the taxation of dividends which did not take effect until 2016/17, and she had no tax to pay. She missed the filing deadline and a penalty of 100 was levied. Part of the judgement ran: No one has a statutory obligation to do anything in relation to income tax simply because they are a director of a company which is not a not-for-profit company. Dividends which are not taxed fall within an exception in section 7(6) of the Taxes Management Act 1970, and there is thus no obligation to file a tax return. This is less likely to happen now that the new taxation of dividends regime has taken effect.

5 FINANCIAL REPORTING AND OTHER FRS 102 investment property accounting Amongst the changes to FRS 102 taking effect from 1 January 2019 is a removal of the undue cost or effort exemption for investment properties, with the result that investment properties must normally be measured at fair value. However, for investment properties rented to other group entities, there is a choice between measurement at fair value or cost less depreciation. IFRS amendments to pension scheme accounting IAS 19 (Employee Benefits) contains rules on how a company should account for a defined benefit pension scheme. The IASB has issued amendments which take effect for financial years beginning on or after 1 January It is already the case that if there is a change to the terms of a pension plan (an amendment, a curtailment or a settlement), the defined benefit surplus or deficit must be remeasured. The amendments require a company to use the updated assumptions from this remeasurement to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. Data protection changes The new data protection regime takes effect on 25 May 2018 when the General Data Protection Regulation (GDPR) comes into force. Concern has been raised by businesses which distribute newsletters (such as this one). Under Article 6 of the GDPR, personal data cannot be processed without the consent of the subject. Consent must be freely given, explicit, affirmative, finite and documented, the implication of which is that it is no longer permissible to include an opt out clause at the end of communications: the subject must actively give his or her consent to continue receiving communications. There is a relaxation to this rule within Regulation 22 of the Privacy and Electronic Communications Regulations It applies if the business has obtained the person s details in the course of a sale or negotiations for a sale of a product or service; where the messages are only marketing similar products or services; and where the person is given a simple opportunity to refuse marketing s when his or her details are collected, and if the person does not refuse at this point, he or she is given a simple way to do so in future messages.

6 MY PRACTICE AND CONTACT DETAILS 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 also 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 ; Mobile P.D. Hughes Consultancy Services Ltd Company No (Registered in England & Wales) peter@pdhughesconsultancy.co.uk 9 March, 2018