VAT Connect – May 2016
The importance of linking input tax to the benefit of the business
The Supreme Court’s Airtours decision reinforces the need for businesses to establish a direct link between the VAT incurred and the economic use by the business.
The legal issue of whether Airtours can recover the input tax on an accountancy report has been debated on four separate occasions; three previous hearings determining that Airtours could not recover input tax on the £200,000 fee.
In this latest hearing, the Supreme Court supported the previous decisions; finding that despite a signed contract for services between the accountancy firm and Airtours, the beneficiaries were the 80 financial institutions that had lent the business money. Airtours commissioned the report to support their restructuring following financial difficulties in 2002. The full decision can be read here.
Input tax is recoverable to the extent that there is a direct and immediate link to the economic activities of the business, and any contracts, especially those involving more than the supplier and recipient, should be carefully drafted if input VAT recovery is to be sought.
Card handling services determined as taxable
The European Court has determined that ‘card handling services’ are essential to the transfer of funds between a business and its customer, but they do not fall within financial exemption.
The European Court of Justice (ECJ) has considered two cases (Bookit and NEC Ltd) from the UK that have the same issue: whether booking/card handling fees are standard-rated or if they are VAT exempt.
In the case of Bookit (who are owned by Odeon Cinema), they organise the transfer of payment for cinema tickets bought via telephone or the internet. Bookit organise the debit of the ticket price plus a handling fee from the customer’s bank account. They retain the handling fee, Odeon get the ticket income. Bookit (and NEC Ltd) consider their handling fee to be an exempt financial service, but HMRC considered it a standard rated service.
In both cases, the Court determined that despite the card handling services being essential in the transfer of funds between the customer’s bank account and the event supplier, it did not mean that their processing services fell within the exemption. It held that it did not perform a specific function that is essential to the transfer of ownership of funds and does not alter ‘the legal or financial situation’ (i.e. they do not debit or credit the accounts, nor do they accept liability in relation to the funds; they merely obtain, verify, and arrange the data required by the customer and supplier).
The Court’s judgement clarifies the position that supplies of this nature are subject to VAT at 20%, so check your receipts as these fees are likely to carry input tax for your business, but unlikely to be obvious given the nature of process. If you’re entitled to it (for example if the booking is for deductible business purposes), claim it.
HMRC’s Credit Card Campaign
HMRC have issued guidance on how to disclose undeclared sales made via debit or credit card before they begin their own investigations.
HMRC have invested considerable resource in creating ‘Connect’; software which assists them in identifying tax evasion through the suppression of sales that were paid via debit or credit card. In their recently published guidance, HMRC are encouraging business who have omitted such sales to notify them. Once businesses have received their Disclosure Reference Number, they will be required to disclose all under-declared income within 4 months or risk higher penalties or even criminal investigation. The disclosure should include quantification of all taxes affected, giving consideration to declarations previously made and the taxes that have been calculated. Where the business records are incomplete, a best estimate should be made. HMRC’s focus is not simply on VAT, so other taxes affected will also be picked up by this initiative.
Non-profit making sports clubs – VAT reclaims to be paid (mostly)
HMRC has accepted the findings of the First Tier Tribunal, and issued a policy paper confirming the position in relation to sports clubs (notably Golf Clubs).
The R&C Brief 10/2016 confirms that both existing and new reclaims for VAT previously charged on green fees will be subject to a 10% ‘unjust enrichment’ restriction, and that corporate days (incorporating green fees and catering) and supplies to tour operators are taxable at the standard rate. Clubs who make supplies of the latter can treat the input tax incurred on course maintenance costs as residual.
The end of the hot food saga
In the Subway case heard in 2014, the Court of Appeal clarified the distinction between hot takeaway food and that which has been cooked and served whilst still hot. The former being standard-rated, the latter zero-rated.
In two recent cases, the same issue was considered. In a group action (4 take-away businesses), the First Tier Tribunal struck out the case, suggesting that the legal interpretation had been covered under the Subway case, and there was no additional consideration (based on the detail provided) that would amend that decision. In the case of Chilango, the debate related to the common intention and expectation of both the business and the consumer as to whether the food was sold ‘hot’. The tribunal considered the circumstances in great detail, including advertising, presentation of the food, packaging, and food safety laws, and came to the conclusion that the food was held out for sale as ‘hot’ and VAT applied at the standard rate.
Attempt to get fishing zero rated on the ‘fly’
Another case has been heard which considers whether one fee covers two elements that differ in VAT rates, or whether it is one supply with an ancillary element.
Stocks Fly Fishery charged its anglers a single standard-rated fee that covered both the right to fish as well as the right to take a maximum number of catches away. The tariff of fees were based on time (such as a half day or full day of fishing) and a set maximum amount of fish that they could take. Stocks Fly Fishery approached HMRC and asked to treat the charge separately for the purposes of VAT: a standard-rated element for the rod time, and a zero-rated element for the trout.
Following the hearing, the First Tier Tribunal decided that this was one single standard-rated supply which encompasses the right to fish and the chance of catching them. As there was no adjustment or refund to the charge fee for anglers who were unsuccessful in their catch, the right to fish must be regarded as the principal service with the right to take the trout home ancillary to that supply.
Tribunal clarifies question of ‘reasonable’
Tribunal establishes that HMRC did not act reasonably, but it wasn’t enough to win an appeal.
Threatened with the reduction of a large claim during the early part of their VAT registration, Max Investments Limited requested that their effective date of VAT registration (EDR) was backdated. HMRC has no statutory requirement to backdate, but, subject to meeting certain conditions, they can use their discretion to do so.
One of the conditions includes the business demonstrating that there was a genuine misunderstanding or error. HMRC’s refusal to allow backdating was based on the fact that the accountants completed the VAT return, and they should have known about the pre-registration input tax timing implications. The Tribunal stated the question was not whether the error/misunderstanding was reasonable, but whether it was genuine, and they found that it was.
However, the Tribunal went on to say that even if HMRC had considered this point properly, the case would still fail on other points, namely the application to backdate the EDR was made 3 years later, it was made after the submission of the first return, the EDR request on the original application was a deliberate request, and the only error/misunderstanding was the effect it had on recovering pre-registration input tax.
It is important to consider the eligible pre-registration input tax when there is no requirement or obligation to be registered. When registering a business for VAT, you should consider the extent of trading and start-up costs before selecting the date of registration.
If any of these articles raise further questions for you, please contact any member of our VAT team.
Additional Tax and Payroll information
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We have prepared a useful guide for payroll administrators, covering key changes to note for payroll for 2016/17. For help with your payroll, please speak with your Henderson Loggie contact.