HMRC TO TAKE NEXT STEP IN INTRODUCING THE EU COST-SHARING EXEMPTION IN THE UK

Transcription

1 VAT Voice The bi-monthly newsletter of VAT Advisers Limited January/February 2011 Inside this issue 1. Latest VAT news 2. In focus 3. VAT cases 4. VAT Tips HMRC POINTS OUT THAT IT DOES NOT USE THE FASTER PAYMENT SERVICE HMRC recently updated its existing webpage entitled How to pay VAT, to include a paragraph stating that it does not operate the Faster Payment System method of electronic payment now available from banks. As such, when making an electronic payment to HMRC, taxpayers should ensure it is made within the timescales detailed for each payment method listed on the webpage. A warning is added saying that a default surcharge penalty for late payment may be incurred if the payment does not reach HMRC by the due date. The page can be accessed via the following link: nghmrc/vat.htm#a HMRC TO TAKE NEXT STEP IN INTRODUCING THE EU COST-SHARING EXEMPTION IN THE UK In both the March and June 2010 Budgets, HMRC affirmed its intention to implement the EU cost-sharing exemption in the UK. It is an exemption from VAT which is provided for in EU law, and applies where shared costs are recharged between partnered entities. If the exemption is applied in the UK (it is already in place in several other Member States), it would remove the irrecoverable VAT cost that otherwise arises on recharges of costs when organisations such as charities and housing associations share back-office expenses. Typical examples of these shared expenses would be costs relating to staff, HR, and IT expenses. Under the terms of the exemption, interested parties must come together to form a cost-sharing group ( CSG ) which is able to meet the following conditions: an independent group must be formed; the group members must carry out exempt or non- business activities; the value of group charges for services must equal their cost; the services must be "directly necessary to the members exempt or non-business activity the services supplied by the group must not cause a distortion of competition HMRC has advised that, prior to implementation, there would be a consultation process with interested parties. This consultation is expected to be announced shortly, although the current expectation is that an implementation of the exemption will not now occur before the end of We would recommend those organisations interested in adopting the exemption to consider taking part in the consultation, as this could have a significant bearing on how HMRC subsequently operates the exemption in the UK. It is worth noting that where a Member State has not yet implemented the exemption, the EU law can still be relied upon. This means that, in theory, interested parties can choose to adopt the exemption ahead of HMRC s implementation. However, given that other Member States put slightly different interpretations on the criteria for exemption, and that HMRC may well do the same, it would be wise to write to HMRC in advance and seek formal approval that the exemption can be applied. Page 1

2 Latest VAT News REVENUE & CUSTOMS BRIEF 47/10 VAT: secondary legislation to implement the VAT Technical Directive Further to the Budget announcement in June 2010, HMRC have issued draft legislation concerning proposed changes to the Capital Goods Scheme ( CGS ) that are required by new EU law. In addition to these required changes, HMRC intends to make other CGS changes intended to simplify or update the current rules. The draft legislation will be exposed for four weeks to enable businesses to consider them and submit comment to HMRC. HMRC will also regularise an existing Extra Statutory Concession ( ESC ) linked to the option to tax, and reaffirm an area of policy that has been the subject of litigation. The Brief explains that the new EU Technical Directive requires all Member States to introduce an adjustment mechanism to the CGS from 1 January 2011, to take account of changes in use of certain assets when VAT recovery is restricted only to the business use of the assets (excluding private use by the taxpayer or the taxpayer s staff). Accordingly, HMRC intends to widen the scope of the CGS so that it not only caters for changes between taxable and exempt business use, but also for changes between business and non-business use of assets. This will mean businesses will only have to carry out one adjustment mechanism rather than two. Under the proposed changes, ships and aircraft costing 50,000 or more will be included in the CGS to ensure that taxpayers are able to adjust VAT recovery if use changes. Where these assets cost less than 50,000, they will not have the burden of undertaking any adjustments. While making the proposed changes, HMRC will take forward the final phase of its 3-year programme of partial exemption and simplification proposals, on which business has been consulted. The key simplification measures proposed are: give taxpayers the choice of seeking approval for a combined method for dealing with taxable, exempt, and nonbusiness activities. Currently, taxpayers can only apply for a special method to deal with taxable and exempt business activities. This option would simplify the VAT deduction process, and complement the required Technical Directive changes; reduce the administrative burden on taxpayers whose use of an asset changes only slightly the draft legislation will allow for insignificant CGS adjustments to be disregarded, whether they are in favour of HMRC or the taxpayer. In April 2009, HMRC announced that it would be reviewing the concession which allows VAT recovery under a CGS-type calculation by a person who was not registered for VAT at the time they acquired a CGS asset. The draft legislation covers this ESC, which will be withdrawn on the day the legislation takes effect. The ESC links to the option to tax and is referred to in paragraph 9.4 of Notice 742A. In addition to the above, the draft legislation clarifies that the representative member of a VAT group is the owner for VAT purposes of all CGS items owned by companies while they are in the group. It also clarifies who the owner is where there is a transfer of a going concern ( TOGC ) and other cases where there is a transfer without a VAT supply. HMRC says there is no change to its policy in these areas, and that the new legislation is merely putting these matters beyond doubt. Page 2

3 Latest VAT News (continued 1) REVENUE & CUSTOMS BRIEF 48/10 Intrastat thresholds from 1 January 2011 The Brief advises that the Intrastat thresholds will remain unchanged in 2011 from those set on 1 January 2010, and explains how this will affect businesses trading with other EU Member States. 1. Exemption thresholds: the exemption threshold for dispatches remains at 250,000 the exemption threshold for arrivals remains at 600, Delivery terms threshold: the delivery terms threshold remains at 16,000,000 The Brief reminds businesses that where their annual intra-eu trade in goods is above the specified exemption thresholds they are required to provide monthly statistical returns (Intrastat Supplementary Declarations). REVENUE & CUSTOMS BRIEF 49/10 VAT: proposals to simplify the change in use provisions This Brief announces a 4-week consultation on proposed changes to simplify the change in use provisions for new buildings which are intended to be used solely for a relevant charitable purpose, and that intention changes within ten years. The provisions claw back VAT which was relieved on the original acquisition or construction. HMRC acknowledge the current provisions are complex. Current legislation has two adjustment mechanisms, each with its own separate rules. Under the proposals, this will be replaced by a single adjustment mechanism. This will be based upon: the amount of VAT that would have been chargeable on the original supply (or supplies) had the building in question not been eligible for the zero rate The proportion of the building that is affected by the change in use The number of complete years the building has been used solely for a qualifying purpose prior to change in use The consultation closes on 3 January REVENUE & CUSTOMS BRIEF 50/10 VAT: proposed changes to the option to tax for supplies of land and buildings (antiavoidance rule). The introduction of a new 2% occupation rule HMRC have also announced a 4- week consultation on proposed changes to the option to tax provisions. The changes involve the introduction of a new 2% occupation rule for supplies of land and buildings. Currently, the anti-avoidance provisions in Schedule 10 VATA 1994 disapply an option to tax where the grantor is a developer of the land, and the grantor or development financier intend or expect that the land will become exempt land. The proposed changes make further amendments to the second part of this test, and the definition of exempt land. According to HMRC, the current rule still causes minor occupation by the grantor (or connected party) to disapply an option despite there being no deliberate attempt to avoid tax. In order to address this concern, the changes introduce a new 2% occupation rule for grantors. The current 10% rule will still apply for development financiers (or a person connected). The consultation closes on 3 January REVENUE & CUSTOMS BRIEF 51/10 VAT: change in treatment of business samples An announcement of a policy change by HMRC, following the ECJ s recent decision in the EMI case (C-581/08). Page 3

4 Latest VAT News (continued 2) The Brief confirms a change in the treatment of product samples that are given away by VAT-registered businesses. The change removes the UK's restriction of allowing only one sample to be supplied to one person free of VAT. The Brief points out that, as the ECJ agreed with UK legislation with regard to business gifts (as opposed to samples), the policy concerning these remain unchanged. In the EMI case, the Court defined a sample as being: a specimen of a product which is intended to promote the sales of that product and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions HMRC states it will now apply this definition, and accepts that where businesses provide samples (as defined above) of their products free of charge to individuals for marketing purposes, none of the samples are liable to VAT. The Finance Bill 2011 will contain a clause to remove the restriction that only one 'sample' of each product supplied to another person can be disregarded for VAT purposes. The new treatment has both immediate and retrospective effect, and means that some samples, treated as taxable supplies under UK law, should not have been taxed to begin with. Consequently, there is a right to recover this overpaid VAT, but any such claims will be subject to the normal four-year time capping limit and unjust enrichment provisions. The Brief also warns that there can be direct tax implications when amounts of overdeclared output tax are repaid to businesses. REVENUE & CUSTOMS BRIEF 52/10 Changes to VAT in January 2011 The Brief is a reminder of two significant VAT changes taking place in January These two changes are as follows: 1. Change of standard rate of VAT to 20% From 4 January 2011, the standard rate of VAT increases from 17.5% to 20%. The rate change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or reduced-rated. Similarly, there are no changes to the VAT exemptions. Payments on Account The rate change means that there will be consequential changes to the VAT Payment on Account (POA) thresholds. The POA entry and exit thresholds will go up from 1.6m and 2m to 1.8m and 2.3m. The thresholds will change on 1 June 2011 for quarterly reviews and on 1 December 2011 for annual reviews. What to do when the VAT rate changes For any sales of standard-rated goods or services made on or after 4 January 2011, VAT is chargeable at the 20% rate. The special arrangements granted to businesses trading on 31 December 2009 will not apply to this rate change. Cash businesses which use the VAT fraction to calculate their VAT must use the new VAT fraction of 1/6 on standard-rated sales from 4 January For businesses which issue VAT invoices, the normal rule is that the new 20% rate must be used for all VAT invoices issued on or after 4 January, which are issued within 14 days (or longer period where agreed with HMRC) of providing the goods or services. Supplies spanning the rate change Where goods or services are supplied before 4 January 2011, but a VAT invoice is not issued until on or after that date, suppliers can still choose to charge VAT at 17.5%. For continuous supplies of services where a contract started before 4 January, suppliers can also choose to charge 17.5% VAT on services performed before 4 January, and 20% on the value of services performed on or after that date. Page 4

5 Latest VAT News (continued 3) 2. Changes to the place of supply rules for cultural, artistic, sporting, scientific, educational, entertainment or similar activities supplied to B2B customers From 1 January 2011, as part of the changes to the cross-border VAT rules, most business to business (B2B) supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services will be taxed where the customer is established, under the new B2B general rule. However, supplies of admission to cultural, artistic, sporting, scientific, educational and entertainment events, and services ancillary to admissions (such as cloakrooms) will remain taxable where the event takes place. Business to consumer supplies (B2C) will be unaffected. Admission will cover any payment that gives the right to attend an event, even if it is covered by a season ticket or subscription. This includes payment to attend conferences, exhibitions, and seminars, even if they are of an educational nature. In-house events will fall within this rule, as well as those open to the general public. REVENUE & CUSTOMS BRIEF 53/10 VAT: changes to Lennartz Accounting, the Capital Goods Scheme and legislation for an Extra Statutory Concession to be withdrawn The Brief confirms the introduction of new legislation from 1 January 2011 to implement the EU VAT Technical Directive. The Brief also follows on from R&CB 47/10, which announced a 4-week exposure on draft legislation concerning proposed changes to the Capital Goods scheme ( CGS ). The Brief says all responses were considered carefully and, as a result of the feedback, one aspect of the proposed simplification measures which HMRC had expected to be widely welcomed (legislation enabling minor CGS adjustments to be disregarded) has now been removed. Other minor changes to the draft legislation have been made as a result of comments. The Brief also confirms the 1 January 2011 withdrawal of the Extra Statutory Concession which allows VAT recovery under a CGS-type calculation by a person that was not VAT registered when a CGS asset was acquired. Taxpayers who registered for VAT before the withdrawal date will still be able to rely on the concession, whilst those registering for VAT on or after it will be able to recover VAT under the revised CGS legislation. The final part of the Brief concerns Lennartz Accounting, and states that it is now available only in very limited circumstances where, for assets other than land property, ships and aircraft, the goods are used in part: for making supplies in the course of an economic activity that give a right to input VAT deduction (broadly, taxable supplies, supplies that would be taxable if made in the UK or certain financial and insurance supplies to non-ec customers) for the private purposes of the taxpayer or his staff or, exceptionally, for other uses which are wholly outside the purposes of the taxpayer s enterprise or undertaking Taxpayers who applied Lennnartz Accounting to an asset before 1 January 2011 must continue to operate it in respect of that asset. However, for land and property, ships and aircraft, any VAT incurred on or after this date is recoverable only to the extent that the asset is used to make taxable supplies or other business supplies with input tax credit. As a transitional measure, many taxpayers who had incorrectly been permitted to use Lennartz Accounting were able to continue using this mechanism, unless they chose to unravel the Lennartz Accounting completely (see R&CB 02/10). From 1 January 2011, any VAT incurred on land and property, ships and aircraft is also recoverable only to the extent that the asset is used to make taxable supplies or other business supplies with input tax credit. From 1 July 2011, taxpayers who were incorrectly permitted to use Lennartz Accounting will be able to unravel only where normal assessment time limits still apply to the original claim. Page 5

6 Latest VAT News (continued 4) REVENUE & CUSTOMS BRIEF 54/10 This Brief sets out HMRC s position following the ECJ decision in Axa UK plc (C-175/09). The Axa case concerns the exemption under Article 135(1)(d) of the EU VAT Directive for "transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection", which is implemented by Item 1, Group 5 of Schedule 9 to VATA Denplan Limited (Denplan) was a member of a VAT group where Axa UK plc (AXA) was the representative member. Denplan operated payment plans on behalf of dentists. Under those payment plans patients could pay a fixed monthly charge in return for dental services. Denplan provided a service which consisted in the collection of these payments by Direct Debit from the patients' accounts and, subject to the deduction of a fee, accounted to dentists participating in the plan for the amounts collected. The issue to hand was the liability of this service. The VAT Tribunal and High Court agreed with Axa that there was an exempt supply of payment services under Article 135(1)(d). The Court of Appeal, however, decided to refer the issue to the ECJ for a preliminary ruling. The ECJ held that the concept of "debt collection" extended to the services provided by Axa, even though those services principally related to the collection of payments made by Direct Debit, rather than to the enforcement of defaulted debts. As such, the services were subject to VAT at the standard rate In this Brief, HMRC moves from its previously stated view that "debt collection" refers broadly to chasing and recovering overdue payments for a creditor (para 5.10 of Notice 701/49). HMRC now considers that, after the Axa case, "services principally concerned with collecting payments from the person owing them for the benefit of the entity to which the payments are owed (regardless of whether those payments are received before, on, or after their due date) fall within the exclusion to the exemption and so are liable to VAT at the standard rate". With effect from 12 January 2011, businesses must standard rate any service falling within the scope of the Axa decision. All contractual arrangements to which the decision may be relevant should be urgently reviewed. Those businesses party to outsourcing arrangements which are currently treated as exempt under the Item 1 Group 5, particularly those in which the principal activity consists of collecting payments, should now consider whether VAT must be applied to those services. VAT INFORMATION SHEET 20/10 Electronically supplied services: Special scheme for non-eu businesses On 4 January 2011, the standard rate of VAT in the UK increases from 17.5% to 20% VAT INFORMATION SHEET 21/10 Place of supply of natural gas and electricity (also heat and cooling) This Info Sheet replaces Info Sheet 10/04 to reflect minor changes to existing rules and an extension of the arrangements to cover heat and cooling, both effective 1 January The changes are as follows: the arrangements are extended so that they also apply to heat and cooling for natural gas, the rules extend to all types of pipeline (including storage facilities), but only where the pipeline is located within the EU or linked to a system within the EU, and the relief from VAT at importation extends to all imports of natural gas via the UK natural gas system (including wet gas and liquid natural gas imported by tanker) Page 6

7 Latest VAT News (continued 5) The arrangements simplify the rules for cross-border supplies of natural gas, electricity, heat and cooling. Under normal rules, goods are taxed where the dispatch or transport to the customer commences. However, the special rules in this Info Sheet reflect the fact that supplies of natural gas, electricity, heat and cooling are normally transmitted through networks and grids that are linked with other Member States. The place of supply for wholesale supplies of natural gas and electricity purchased for resale is treated as taking place where the customer is located. Otherwise the place of supply is where the natural gas or electricity is effectively used and consumed. VAT INFORMATION SHEET 22/10 Electronically supplied services: Special scheme for non-eu businesses On 1 January 2011, the standard rate of VAT in Poland increases from 22% to 23%. VAT INFORMATION SHEET 23/10 Electronically supplied services: Special scheme for non-eu businesses On 1 January 2011, the standard rate of VAT in Portugal increases from 21% to 23% There are also two additional rules. The first applies where a supply is to somebody who intends to resell the natural gas or electricity as part of a different supply. The second special rule applies where the supply is to a member of a VAT group registration who is to resell the natural gas or electricity for consumption by another member of the same group. In both cases, the resale is exceptionally treated as being consumed by the recipient at the place where actual consumption takes place. This ensures that the natural gas and electricity concerned remains liable to taxation at the place of consumption. In addition to the special place of supply rules, the following provisions also apply: a reverse-charge mechanism for VATregistered customers to account for VAT where the supplier is located outside the UK time of supply rule for supplies covered by the reverse charge mechanism, and relief from VAT at importation Page 7

8 In Focus Tenant recharges should VAT be added? Commercial landlords regularly incur costs on their properties that they recharge to their tenants. Typically, they are seemingly non-vatable costs relating to insurance, rates, and upkeep of the common areas of the property. Whether VAT should be added to the recharges is an age-old problem, and is an issue that HMRC often look at during VAT inspections. The recent Tribunal case of OM Properties Investment Ltd (TC00752) again highlighted the difficulties associated with such recharges, so this article is intended to provide some useful guidance on how to decide whether VAT should be applied. In the Tribunal case concerned, the landlord, OM Properties Investment Ltd ( OM ), had six commercial rental properties that were opted to tax, and had been treating its recharges of building insurance as exempt. OM had taken out a single buildings insurance policy through its brokers whereby each tenant was individually provided with a certificate of insurance which named OM. The premium was paid by OM and then recovered as a matching sum by direct debit out of the tenant s bank account. Not unreasonably, OM thought that, as the tenant was named in the policy, it was a block policy under paragraph 2.5 of VAT Leaflet 701/36/02. HMRC disagreed that the recharges were insurance, and as the properties were opted to tax, assessed for output tax on the basis that they were additional taxable rent payments. Unfortunately, the Tribunal held that only OM was the insured, and that it had acted to insure the buildings because it was liable to do so. The tenants had merely covenanted to reimburse OM s insurance premium. Since the recharges were not exempt insurance, the Tribunal agreed with HMRC that they were subject to VAT as a result of the options to tax. Given the clear difficulties associated with these costs, what practical steps can landlords take to decide whether the recharge is subject to VAT? In short, there are two steps that can be taken as follows: Step One - Who does the cost actually belong to? The first thing to check is whether the cost is even the landlord s to begin with. In the case of buildings insurance, is the landlord the insured party on the relevant policy, or is it the tenant? For business rates, Page 8

9 In Focus (continued) does the landlord s name appear on the local authority demand, or is the tenant actually the rateable person? Similarly, with a recharge for the upkeep of common areas, does the lease stipulate that the landlord is responsible for such costs (and is able to recover them via a service charge)? Where the answer to the question is the landlord, the cost does actually belong to the landlord. As such, its recharge to the tenant is an additional supply to the rent, and, depending on the outcome of Step Two below, might be subject to VAT. Clearly, if the answer to the first question is the tenant, then the cost is proper to the tenant, and means the landlord is simply looking to be reimbursed for funding the tenant s own costs. In these circumstances, the recharge can be treated as a disbursement, which means it is not subject to VAT, regardless of the outcome of Step Two (in other words, Step Two can be ignored). Step Two Has the property been opted to tax? Having established that the cost belongs to the landlord, a check should now be made on whether the property has been opted to tax. This should be a simple question to answer, because if it has been opted to tax, VAT will have been charged (or else should have been charged!) on the rents. It should be noted that in these circumstances, regardless of the option to tax position, the recharge of insurance, rates, or upkeep costs is actually an additional supply of rent. It cannot be treated as an onward supply of insurance or rates, because the landlord is not itself an insurer or local authority. As the recharge is effectively rent in another name, it follows that where an option to tax has been taken to add VAT to the main rents, any recharge of insurance, rates, or upkeep would also be subject to VAT. Conversely, where there is no option to tax, the recharge is then free of VAT (i.e. it is exempt). Summary Remember, the primary fact for landlords to establish when considering if VAT should be added to a recharge is whether the cost is actually theirs. Specifically, they should ask themselves Am I the insured person, the rateable person, or upkeeper of the common areas of the property? If the answer is yes, VAT will be chargeable where an option to tax exists (otherwise exempt). If the answer is no, the cost will be proper to the tenant, and can be treated as a VAT-free disbursement. Page 9

10 VAT Cases UPPER TRIBUNAL REJECTS USE OF REDROW PRINCIPLE ON RECOVERY OF INPUT VAT ON CORPORATE RESTRUCTING FEES This case concerns the right of a business to recover VAT charged by an adviser undertaking a strategic review of its business. It examines the key question of to whom did the adviser provide its services, and as such, who can recover the VAT charged. The Appellant wanted to restructure itself, and had presented detailed proposals to the banks that would be involved if implemented. The banks required a strategic review of the Appellant to be taken by a third party adviser so that a report could be produced to help them decide whether to continue to provide finance. Both the banks and the Appellant received a copy of the report, which was issued under an engagement letter addressed only to the banks. The First-Tier Tribunal had previously held that the Appellant was a party to the engagement letter (via frequent references to you which were held to contractually include the Appellant) and had a role in deciding which adviser to appoint. Since the Appellant paid the adviser s fees, the First-Tier Tribunal also held (applying the Redrow decision) that it had received a service from the adviser (and therefore incurred the VAT charged), irrespective of the fact that the banks had also received a service from the adviser. In contrast, the Upper Tribunal held that, in substance, the adviser was providing its service to the banks to enable them to decide whether to continue to support the Appellant. Whilst the Appellant was a party to the engagement letter, it did not obtain any service for use in its business, but contracted to pay the adviser for supplying its reports to the banks. The banks had initiated the need for the report and the benefit to the Appellant was that the report might lead to continued finance from the bank which it was willing or was forced to pay for. In short, the Upper Tribunal did not consider that Redrow applied in this case. Other factors taken into account were that the banks first approached the adviser, contracted for the work and authorised it; the drafting of the engagement letter was not always clear (e.g. whether the references to you always did include the Appellant); the Appellant had received a copy of the report more as a courtesy than as a supply of services to the Appellant from the adviser. Crucially, the Upper Tribunal had chosen to apply a substance over form interpretation of the relationships between the parties, referring to its own more natural reading of the flavour of the engagement letter terms, in preference to a legalistic approach. The decision of the Upper Tribunal to focus on the substance of the relationships was the key factor in it coming to the conclusion that Redrow did not apply in this case. The banks wanted the report, but the Appellant had to pay, and was not even entitled to see all parts of the final report. The benefit received by the Appellant was the possibility of continued finance rather than any business use of the report (which may limit application of this decision to other cases). Where there are multiple parties to a contract this case is a new barrier to VAT recovery, and means a resolution of the corporate finance sector s wider ongoing dispute with HMRC over recovery of VAT on deal fees is now even further away. Litigation on the point of to whom services are provided can be expected to continue, with the next round being HMRC's appeal in the BAA case due to be heard early in In the meantime, this case should act as a spur to ensure engagement structures always reflect the underlying relationships between the parties, and that engagement letters are always clearly drafted to minimise the possibility of any alternative interpretation by HMRC or the courts. Airtours Holiday Transport Ltd, Upper Tribunal (NCN [2010] UKUT 404 (TCC) Page 10

11 VAT Cases (continued) TRIBUNAL SAYS FRUIT SMOOTHIE IS A STANDARD-RATED BEVERAGE RATHER THAN ZERO-RATED FOOD This case concerns the correct VAT liability of a well-known brand of fruit smoothie. The Appellant submitted a voluntary disclosure for overpaid VAT in 2007, having decided that its smoothies were actually zero-rated. HMRC refused to make the repayment on the basis that the product was a beverage, and so excepted from zero rating under Item 4 of Group 1 of Schedule 8 of VATA 94. The Appellant stated that its product was treated by the Government as being equivalent to 2 out of the 5 recommended daily portions of fruit and vegetables, and that the main purpose of a beverage was not to provide nutrition, but increase bodily liquid levels and slake thirst or give pleasure. The taxpayer further argued that its smoothies were the same as fruit salad, and should therefore have the same treatment. In seeking to establish the meaning of beverage the Judge began by looking at existing case law. The Tribunal concluded that social policy offered no help in determining the meaning of beverage, and so turned to the ordinary meaning. Applying the tests applied in the Bioconcepts case, the Tribunal noted that the smoothies were not mainly consumed to rehydrate or quench thirst, and whilst they were drunk for pleasure, this was not the principle reason for consumption. Concluding the Bioconcepts test was not exhaustive, the Tribunal went on to consider the smoothies in a social context, and concluded they are drunk in coffee bars and are pleasant and easy to drink. Whilst accepting they would not generally be offered to guests, they could be offered as alternatives to tea, fruit juice or alcohol. In reaching a decision in favour of HMRC, the Judge stated: We considered comparators such as fruit juice, alcohol, coffee, soft drinks, other smoothies and milk. We find beverages can be small (an espresso) or large (a litre bottle of soft drink). They can be alcoholic or non-alcoholic. They can be thirst-quenching or not. They can be a stimulant or not. They can also be healthy or not so healthy. Many will contain little or no nutrition, and most will not require digestion. Our conclusion is that there is a great deal of variation in beverages. As drinks go, fruit smoothies are unusual in that they are quite thick, and do require digestion: however, we do not think this is sufficient to mean that they are not a beverage if they are drunk as other beverages would be drunk. Accordingly, the appeal was dismissed. Innocent Ltd (TC 00771) ECJ SAYS VAT WAS DUE ON BOAT WHEN TITLE WAS TRANSFERRED, NOT WHEN IT ARRIVED IN THE MEMBER STATE OF DESTINATION An interesting case if only because it involves the ever-contentious issue of VAT incurred on purchases of yachts and sail boats by private individuals. The Appellant, the purchaser, intends to take possession of the boat in the UK. The sailing boat will be used in the UK and other Member States for 3 to 5 months before being taken to the Appellant s place of residence in Sweden. The Appellant argued that the place of supply should be in the state of origin (i.e. the UK) whilst the Swedish Tax authorities argue that this constitutes an acquisition in Sweden. The EU VAT Directive provides for the supply of the new means of transport to individuals or exempt/non-taxable persons to be taxed in the Member State of destination. The reasoning for this is that, because of the high value and easy transportability of such goods, there would be an incentive for private individuals to seek out low VAT rate countries in contrast, taxation in the Member State of acquisition means the individual pays the same amount of tax irrespective of the Member State from which it was purchased. Page 11

12 VAT Cases (continued) Article 2.2 of the Directive defines a vessel as being 'new where the supply takes place within 3 months of the date of first entry into service, or where the vessel has sailed for no more than 100 hours. The Appellant argued that the boat will have been used in excess of both 3 months and 100 hours before being transported to Sweden, and as such, does not fall to be treated as an intra-community acquisition. In order to provide legal certainty, a time limit is required. The Court began by considering whether the transportation to Member State of acquisition was required within a certain time period. It noted that such a time limit would, in fact, help purchasers choose where the supply would be subject to VAT. The Court then dismissed the Appellant s argument that, due to the UK s three month time limit, UK VAT would become due, with subsequent taxation in Sweden resulting in double taxation. It said the remedy for this was for the UK to refund this VAT should the conditions subsequently be met. In order to provide some guidance to the referring court, the Judgment agreed with the AG s Opinion that it was necessary to conduct an overall assessment of all the relevant objective evidence in order to determine whether the goods purchased have actually left the territory of the Member State of supply and, if so, in which Member State the final consumption will take place. The Judgment goes on to refer to some of the general factors that could be considered, such as the amount of time spent on transporting the goods in question, the place of registration and usual use of the goods, the place of residence of the purchaser, and the presence or absence of links between the purchaser and the Member State of supply or another Member State. On the specific issue of acquiring a sail boat, relevance may also be attached to the flag Member State, and the place where the sailing boat will usually be moored and anchored and where it will be stored in the winter. The final question to be considered was the time at which a determination is to be made on whether the means of transport was new. The Court stated that the time of supply of an intra-community supply of goods is the same as when similar goods are effected within the territory. Under Article 14, this is when title of the goods is transferred, and not, as argued by the Appellant, upon arrival in the Member State of destination. The Court found for the Swedish Tax authorities that tax was due in Sweden as an intra-community acquisition. X, ECJ (C-84/09) 18 November 2010 TRIBUNAL SAYS SUPPLIES MADE TO GRAND PRIX CONSTRUCTOR WERE SPORTING SERVICES This case considered whether the Appellant s supplies were sporting services (supplied where carried out) or advertising (supplied where recipient belongs). HMRC issued an assessment on the basis that the supplies were sporting services, and VAT was due to the extent they took place in the UK (N.B the supplies took place before the recent place of supply changes for sporting services etc). The relevant services were provided under what was called a Formula One Driver Development Agreement. The Tribunal noted that there were elements of both types of services. The development and improvement of the constructor s drivers was a supply of sporting services, whilst promoting the driver s success was an advertising service. The Tribunal acknowledged the case was finely balanced, but concluded the economic reality was that the predominant supply was that of sporting services. It noted that whilst a sporting service is normally something provided for in return for an entry payment, the absence of such payment cannot prevent it being a supply of sporting services (here the payment by the public to watch a Grand Prix has nothing to do with the supply to the constructor). This decision does seem to expand the definition of sporting services beyond what the ordinary man might think of as being the normal definition. Williams Grand Prix Engineering (TC00848) Page 12

13 VAT Tips TOP 10 VAT TIPS FOR CHARITIES 1. Are you operating as a business? The fundamental question is - does my organisation operate as a business in any way? If it doesn't, you won't be able to recover any VAT on any of your costs. Despite seeming like a simple question there are grey areas that need to be taken into consideration. Examples include providers of funding who require services in return, such as local authority or government bodies. Where this is the case, you will need to take a closer look at the arrangements to find out if VAT is chargeable on the value of the services. If it is, VAT recovery on the costs will be possible. 2. Are you VAT registered? Certain types of charity have never registered for VAT because the majority of their income is deemed to be non-business or exempt from VAT. Voluntary VAT registration can be beneficial in some cases, particularly where the charity receives zero-rated income (e.g. sales of donated goods or the provision of newsletters to members), as this allows VAT recovery on costs without any VAT being payable on income. A voluntary registration can be done retrospectively too, going back up to 4 years from a current date. 3. Could any services provided to members be liable to VAT? Some services offered by charities through subscriptions could be liable for VAT. It is therefore wise to analyse the individual services that are on offer to find out if the correct VAT liability is being applied. For example, newsletters and handbooks are good examples of supplies that could reduce the VAT payable on the subscription and increase VAT recovery on expenditure. 4. Do you undertake any fundraising? If you raise money by running a fundraising event, the proceeds will not be liable for VAT. So, income generated from a dinner dance, bars, catering, and sponsors are all exempt from VAT, provided their aim is to raise money for your charity. This income also remains exempt in the hands of a trading subsidiary, which can Gift Aid the profits to the charity free of corporation tax. 5. Do you do any advertising? In recent years, zero-rating has been extended to include all advertising, including recruitment ads. The services used to produce the ads, such as design agencies or photographers, can also be zero-rated, which means you won't incur irrecoverable VAT. It is also worth noting that there is no obligation to name your organisation in the advertisement to benefit from these rules. 6. Do you charge admission fees? If you are a cultural organisation that charges admissions fees for entry to museums, stately homes, theatres etc., you should be able to exempt the ticket prices if the managers of your body are essentially voluntary and unpaid (e.g. a group of trustees). If VAT has been incorrectly accounted for, you may be able to claim a repayment of that VAT. 7. Are you constructing or buying new property? If you are constructing or buying new premises, you could benefit from zero-rating depending on how the building is going to be used. To qualify, you must either provide services to the local community, or use the building for non-business purposes. You can benefit from different VAT treatment for different parts of the building, according to how it is to be used. In addition, zerorating can be available for some new annexes, provided they are self-contained and have a quite separate main entrance. You would be well advised to think about the future use of new buildings at the planning stage, to ensure that any eligibility for zero-rating is maximised. 8. Are your premises listed/ what do you use the building for? It s a misconception that zero-rating is widely available to works carried out on listed buildings. Eligibility for relief depends on the use of the building, and it should be noted that zero-rating can only apply to buildings which will either remain or become residential or charitable use buildings after the works are completed. As such, commercial listed buildings are excluded. 9. Are you making your building accessible for the disabled? If you are planning to make alterations to your premises to make it more accessible for the disabled, there is scope for zero-rating. All charities can take advantage of this, as it is not necessary for you to be a provider of services to disabled persons to get the relief. Zero-rating is usually available on the following works: widening of corridors and passages, the installation of ramps or lifts, and the provision of a washroom or toilet. The building work should be apportioned to ensure VAT is not charged on qualifying works. 10. Finally, what happens if you ignore VAT regulations? If you ignore the tips listed above, you could miss out on opportunities to improve your VAT situation. Ultimately, this translates into a shortfall in the funds available for your charitable activities. The worst-case scenario is that errors are being made which could lead to penalties from HMRC. Either way, VAT is not something that should be ignored, or left to look after itself! VAT Advisers Ltd is a leading independent consultancy firm specialising in VAT. We provide advice and help on all VAT matters, and also advise on Customs Duty. Our experienced consultants are ex-officers of HMRC that were previously employed by Big Four accountancy firms. If you have a query about this leaflet or VAT in general, please contact Steve Allen per the contact details below: Contact Details 1 Dundonald Avenue Stockton Heath Warrington WA4 6JT Tel: Fax : info@vat-advisers.com Website: This newsletter is a general guide. It is not a substitute for professional advice, which takes account of your specific circumstances, and any changes in law and HMRC policy. No responsibility can be accepted by the company for any loss incurred as a result of persons acting or refraining from acting on the basis of this newsletter. Please also remember that VAT Voice is covered by copyright, and should not be reproduced or photocopied without our permission. Page 13