VAT Connect – July 2015

Summer Budget, 8th July

Here are some of the key VAT announcements in the Government’s post-election Budget

  • New powers allowing HMRC to recover unpaid tax direct from bank and building society accounts as well as ISA’s, and also the powers to obtain data from electronic payment providers and intermediaries making it more difficult for tax evasion from online marketplaces;
  • Changes to HMRC’s interest rates on assessments (following the recent Court of Appeal’s ruling for Littlewoods) with effect from 8 July 2015 will be equal to the Bank of England base rate plus 2%. From the same date, late payment interest rates will be 3%, applicable to debt’s owed to HMRC;
  • The plan to refund VAT incurred on specified shared services to eligible public bodies (no further details have been provided at the time of publishing);
  • Increased funding for both Criminal Investigation and Local Compliance departments (to investigate the tax affairs of serious and complex tax crime particularly focusing on wealthy individuals and corporates, and the non-compliance of SME’s, public bodies and affluent individuals) with the hope of increasing revenues by £2.6bn over the next 5 years; and
  • Changes will be made to shift the place of supply rules to ‘use and enjoyment’ for UK repairs made under insurance contracts, with additional consideration given to changing the rules with regard to services such as advertising when purchased by an exempt business.

It’s Still Easy to Be Green!

Following our article on energy saving materials in June’s VAT Connect, HMRC confirmed in the Budget that they would not seek to remove any items from the zero or reduced rate schedules.

Supplies relating to these should therefore remain eligible for reduce-rating for the next five years at least.

Direct Marketing Services and Printed Matter

HMRC have issued further guidance with regard to this matter in R&CBrief 10/2015.

The Brief specifically covers:

  • clarification of the supplies involved and how HMRC define them;
  • confirmation of how these supplies should be treated with effect from 1 August 2015;
  • the circumstances and conditions required to avoid the need to adjust for these errors (‘transitional arrangements’); and
  • the conditions for disclosing errors if you do not qualify for the transitional arrangements (‘settlement’).

Given the nature of direct marketing, these changes will impact organisations that are partly exempt or have non-business activities (such as charitable organisations), giving rise to additional costs through irrecoverable VAT. The new rules regarding VAT refunds to certain charitable services may assist a proportion of the third sector in this regard, but unfortunately, not all.

Input Tax: Retail Income Relevant to Exempt Memberships

A zoo has succeeded in their appeal against a VAT assessment that exceeded £1m after the Tribunal deemed that their retail income should be included in the Partial Exemption Standard Method Override.

The assessment arose from HMRC’s decision that the inclusion of retail income in The North of England Zoological Society partial exemption method was distortive, and a Standard Method Override should apply that excluded the income.

The First Tier Tribunal (FTT) held that input tax deduction should be considered beyond the physical use, with consideration given to the real economic use of the VAT incurred: specifically trading income that contributes financially in supporting the charitable and social aims of the zoo when considering the recovery of residual mixed-use input tax.

Input Tax: Fund Management Fees Recoverable if They Benefit the Business

The FTT has held that whilst investment fund management fees are linked to the overall business activities of a company, the VAT incurred can be treated as an overhead.

In refusing HMRC’s appeal, the Upper Tier Tribunal (UTT) agreed with the FTT that the VAT cost relating to the management fees incurred by the University of Cambridge can be directly linked to the income that the endowment fund generates, and therefore financially supports the University’s economical activities. The VAT on the fees can therefore be treated as an overhead, and recovered to the extent of taxable business activities through their partial exemption method.

This is another important case on input tax deduction, echoing the principals tested and established previously that costs relating to something that has not been undertaken as an economic activity in its own right but as a means to benefit the business can be treated as an overhead, and not a direct cost.

Input Tax: Holding Companies That Support Subsidiaries are in Business

The EU’s Court of Justice has determined that the administrative, financial, commercial and technical services supplied by a holding company to its subsidiaries is an economic activity, and related input tax was recoverable to that extent.

In a hearing that covered two linked cases (Larentia & Minerva, and Marenave), the Court clarified that the key issue was that there had to be a direct or indirect management of the subsidiaries: no involvement with the subs meant no recovery.

The question of partnerships being eligible to join a VAT group also arose, specifically that UK legislation (which allows for only companies and partnerships that are limited to be included in VAT Groups) does not sit with EU legislation. Unfortunately, the Court deferred this particular matter to be considered separately.

Fazed by Phasing

Zero-rating of a ‘new’ build was lost when too much time passed between construction stages.

The decision in the recent case of the York University Property Company Limited served as another reminder that if too much time has elapsed between phased construction works, the zero-rating available for a ‘new build’ can be lost to an extension of an existing building, and could give rise to a substantial VAT cost.

In this instance, the business undertook to construct a research building for their parent company York University. The first part of the building was constructed, but the second phase delayed for several years whilst funding was sought. Despite there being an intention from the outset to create one research facility and although the planning permission confirmed this, the Tribunal agreed with HMRC that by the time second stage commenced the works were not ‘in the course of construction of the original building’, and therefore is was an extension and attracted 20% VAT from the builder.

Pre-Registration ‘Input Tax’

Apportionment of the VAT incurred in relation to pre-registration costs is required.

Whilst HMRC’s policy and guidance confirms this, the Public Notices do not, referencing only the general rules on services and goods. A link to the guidance has been provided below, and businesses should consider a fair and reasonable method in applying a restriction to their pre and post registration input tax.

Please read HMRC’s Input Tax manual to ensure that your first return does not also trigger your first penalty.

EU Refunds Deadline

Don’t forget – you can recover the VAT you have incurred whilst on business in the EU during the year to 31 December 2014, but the deadline for making that claim is the 30 September 2015.

And finally…

Without proper planning and consideration of VAT risks, errors can lead to significant financial losses. So whether you are planning for specific capital expenditure, or if you looking for something of a general nature highlighting risk areas within your business sector, the Henderson Loggie VAT team can provide the guidance and support that you need.