Indirect Tax Conference Public Sector Breakout. Mark Dyer Ben Powell Nick Comer 14 November 2014

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1 Indirect Tax Conference Public Sector Breakout Mark Dyer Ben Powell Nick Comer 14 November 2014

2 Agenda Supplies of Staff Partial Exemption and economic use Longridge on the Thames Compliance Trends 2

3 Case Study Supplies of Staff 3

4 Supplies of Staff the problem A local authority is required to transfer its children's services activity into an independent trust; Staff currently employed by the Council will be TUPE d to the trust; Supplies of welfare services to be made by the trust to the Council will be (largely) exempt from VAT; VAT incurred on costs in the hands of the trust will be (largely) irrecoverable; and 60% of the staffing budget is spent on agency social workers. 4

5 Supplies of Staff the Trust s problem Property occupation costs broadly VAT neutral Bought in Costs: IT, Facilities, Agency Staff, Expenses + 3m of VAT 60m TUPE staff costs broadly VAT neutral Subcontracted welfare costs broadly VAT neutral

6 Supplies of Staff the solution? Prior to 1 April 2009 the Staff Hire Concession allowed employment bureaux to charge VAT only on their commission (i.e. not on wage related elements) Present Position VAT charged on most supplies of staff from 1 April 2009 Likely VAT charged prior to 1 April 2009 Large irrecoverable VAT costs for charities 6

7 Supplies of Staff the solution? Reed Employment Limited: First Tier Tribunal decision Was Reed making supplies of introductory services in return for commission or of temporary staff in return for the whole payment received from the client? The Tribunal found that: temporary workers were not obliged (either contractually or in practice) to perform services for Reed or to perform services for the client under the direction of Reed as a result of this, Reed did not exercise control over the temps and could not therefore cede that control to its clients. Reed supplied introductory services and ancillary services - The consideration for these services was the commission element of the charge only 7

8 Supplies of Staff the solution? HMRC view HMRC won on the other two points, so the question was would they cross-appeal the point that they lost they did not. HMRC subsequently issued a Business Brief in August No wider impact and no precedent - the Tribunal hearing was a First Tier tribunal decision, relates only to the parties in question. Deloitte view There are significant uncertainties about whether HMRC s position is legally correct. Opportunity for the Trust to approach temporary staff providers to request that the provider submits a claim to HMRC for over-paid VAT. 8

9 Supplies of Staff the solution? Further litigation The Test Case Deloitte is taking a test case which is listed for hearing in May 2015 This case concerns the introduction of temporary workers to clients to carry out various assignments. The issue is whether the supplies made by the appellant to their clients are services of introducing temporary workers (which is the appellant s case) as opposed to supplies of staff hire (which is HMRC s case). The appellant s case is that HMRC must repay overpaid output tax because it has been paying VAT on the full amount received from clients and not just the commission element. The appellant s position is that it should have paid VAT only on the commission that it received for the introduction of temporary workers. 9

10 Partial Exemption The economic use argument 10

11 Partial Exemption a quick recap Business incurs VAT Local Authority incurs VAT Business Mixed Nonbus Business Mixed Nonbus Taxable Mixed Exempt Taxable Mixed Exempt 11

12 Partial Exemption and economic use VAT Incurred on costs direct and immediate link VAT recovered

13 Partial Exemption and economic use Case Study: Local Authority commissions a Charitable Trust to operate its Leisure and Cultural Service, including Libraries, Tourist Information, Museums and Open Spaces. SLA Grant Funding Budget 13

14 Partial Exemption and economic use Cost of managing the Leisure and Culture Service Expenditure of grant funding Taxable supply under the SLA Non-business use of the VAT incurred

15 Partial Exemption and economic use Direct and Immediate Revenue & Customs Brief 32/14 published 25 September Policy announcement post CoA decision in BAA. No change in HMRC policy, however a series of updated guidance regarding VAT recovery by holding companies. Not immediately apparent that this will impact the public sector, but HMRC s view is that: Costs will have a direct and immediate link to taxable supplies if they are: Used, or intended to be used, in the making of those taxable supplies Cost components of the price of the taxable supplies 15

16 Partial Exemption and economic use Summary HMRC actively looking at partial exemption and the impact of recent case law on direct and immediate link and economic use ; In particular, where the costs of an activity are being subsidised. In our view, they have some challenges: UK VAT law silent on cost component Combined methods allow VAT attributable to non-business to be included in the partial exemption method Client Event in planning 16

17 Longridge on the Thames Economic Activity 17

18 Longridge on the Thames The case Longridge on the Thames ( Longridge ) is a charity that provides boating and other water based activities to young people on the River Thames. Longridge s income from these activities is generated from fees charged to the attendees and is also substantially subsidised by donations. Longridge relies on a large body of volunteers in order to undertake these activities. The issue under dispute was whether the construction costs of a training centre were eligible for zero-rating by virtue of the building being designed or intended for use solely for a relevant charitable purpose. HMRC originally challenged zero-rating on the basis that Longridge was charging for these courses and was therefore undertaking an economic activity. 18

19 Longridge on the Thames The Decisions The F-tT concluded that the consideration charged for the courses was not substantial enough for this to constitute an economic activity for VAT purposes as the intrinsic nature of the Appellant s [Longridge] activity or enterprise is not that of a business, even though it is making supplies for a consideration. As a result, the F-tT concluded that Longridge was entitled to VAT zero-rating on its construction costs. The Upper Tribunal agreed with the F-tT decision focusing on the need to look at the totality of the observable terms and features of the activities carried out by Longridge at the site. (Decision 11/11/14) 19

20 Longridge on the Thames Implications? Fact specific decision, but Provides further guidance on the business v non-business question Availability of VAT reliefs Classification of income Potential impact on partial exemption? HMRC appeal? 20

21 Compliance Trends Open Discussion

22 Compliance Trends How do you do it? 22

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