VAT Connect – November 2015

TOGC Rules Apply To VAT Groups

HMRC have lost an argument that the transfer of a going concern (‘TOGC’) could not be VAT-free as the acquired business would be used solely within the VAT Group, as in the case of Intelligent Managed Services Ltd.

Before the transfer, the business, which was not part of a VAT Group, supplied financial services to third parties. The VAT Group treated the acquisition of the stocks and assets as a going concern, thus no VAT was chargeable on the transfer.

HMRC argued that VAT Groups are treated as a single entity and therefore the acquired company could not be carrying on “the same kind of business” – one of the conditions of the TOGC rules.

In reaching its decision, the Upper Tribunal stated that it was wrong to identify the nature of a VAT group’s activities solely by reference to the external supplies it made, and ultimately the activities of the acquired business contributed directly to the economic activities of the VAT Group as a whole.  They went on to say that whilst the ‘fictitious‘ single entity of a VAT Group disregards supplies between its members, it did not alter the nature of the supplies or that each member was, as a matter of fact, a single entity.

The full decision can be read here.

HMRC Offer Partial Refunds To Golf Clubs

Following the Bridport & West Dorset decision to exempt green fees, HMRC are set to repay clubs some of the VAT on their claims, but not all, as they are seeking clarification from the Courts as to whether there is an element of ‘unjust enrichment’.

HMRC announced in R&C Brief 19/2015 that they will repay 33% of the total claim made if the Club charged green fees in excess of £100, and 50% of the total claim if the fees were less than that.

Unjust enrichment’ is the term used by HMRC when a business attempts to recoup output tax from them that has been paid by the business customers, but the refundable VAT element may not go back to the customer that paid it.  For the golf clubs that are making such claims, they are ultimately increasing their exempt income which gives rise to a further cost of irrecoverable VAT (due to partial exemption restrictions).  HMRC are seeking to retain some of the refunded output tax to cover that element.

EU Court Look Beyond Direct and Immediate Link

The ECJ has established that the VAT incurred on grant funded capital expenditure indirectly benefited the business activity and could be recovered as an overhead.

Sveda, a for-profit organisation providing licenced accommodation, received a 90% grant from their Ministry of Agriculture to build a path that the public could use free of charge.  Sveda recovered the VAT incurred on the whole of the project, but their claim was refused by the tax authorities as it had no ‘direct and immediate link’ to their economic activities, specifically that the repayment of VAT was not intended for use for the purpose of an activity which would be subject to VAT.

The European Court of Justice (‘ECJ’) disagreed.  Whilst they agreed that there was no direct and immediate link, they stated that the nature of the expenditure should be considered for use in relation to a business, and if deemed to be a benefit, as in this case where the path would increase patron access to their facilities, then the VAT must be linked to the whole of the businesses activities, and can be treated as an overhead.  As Sveda were fully taxable, the court ruled they were entitled to all of the VAT incurred on the construction of the pathway.

Link to the full decision can be seen here.

Metropolitan International Schools

The First Tier Tribunal has found that the school were making zero-rated supplies of books, rather than two supplies of standard-rated education and zero-rated books.

Metropolitan International Schools (‘MIS’) is a commercial company that provides distance learning in certain trades (such as electrical, plumbing) and gaming courses (such as design and animation).  HMRC decided 17 years ago that the School was making two separate supplies at differing VAT rates, and they agreed with the school that a 75/25 split (education/books respectively) would be used in calculating VAT on supplies to their students.  In 2009, an HMRC VAT inspector decided that the initial decision was wrong, and that there was one single supply of standard-rated education.  The Officer sought to withdraw the method from 1998, and raise a multi-million pound assessment treating the zero-rated income as standard-rated, and to go as far back as was allowed.  In addition, interest was applied to the assessment, which exceeded £1million alone.

The Tribunal deliberated as to whether there was a single or multiple supply, and if a single supply, what was the nature, and therefore the VAT liability, of that supply.

In their conclusion, they determined that the tutor service was ancillary to the main supply of distance learning, so there was one supply.  As the School did not provide an examination that led to, or indeed award, a qualification, the Tribunal then determined that the single supply was one of zero-rated manuals, and not that of education.

As a final note, the Tribunal made some interesting comments in relation to two issues.  Firstly, the lack of guidance available to assist in determining whether there is a single or multiple supply.  Secondly, they commented on HMRC’s decision to revoke the VAT liability agreement retrospectively, citing that even changes in legislation are not normally applied historically: the taxpayer has the option to apply the change retrospectively to their supplies.  The full decision can be read here.

The VAT Team at Henderson Loggie have dealt with the issue of single/multiple supplies and can second the Tribunal’s opinion that it is a complex area with very little easy references to assist.  We are also aware that HMRC assessments can be incorrect in many aspects, most of which would be material.  In either instance, we can assist in reviewing any of these issues.

Digital Currency Ruled Exempt

The European Court of Justice (‘ECJ’) has decided that the trading in digital currency is to be treated the same as other financial transactions.

Virtual currency, such as Bitcoin, is a new form of online legal tender, spawned by the growth of the digital era that we now live in.  As something new, the Member States where unsure as to how to treat the trade of this currency for the purpose of VAT.  This led to different rules in different states, with countries like Sweden and Germany treating the trading of them as taxable, whilst the UK treated them like other currencies and treated them as exempt.

The ECJ has decided that it should be treated as any other legal tender, and therefore exempt from VAT.

You can read The Court’s findings here.

Why you should query HMRC VAT Assessments

A chip shop that destroyed its till Z readings was hit with both a VAT and income tax assessment based on the records that were available and HMRC’s method of calculating the estimated sales.

When HMRC make a ‘best judgement’ assessment it is typically because the records are incomplete. The burden of disproving their findings rests solely on the taxpayer. Whilst HMRC may accept your argument or reasons for mitigation, it is unlikely to make a material difference without proof to back it up: HMRC generally rely on their own internal guidance and their (sometimes uninformed) opinion of what the business does. In the case of Mr Bustard’s chip shop, HMRC used a weighted mark-up exercise to establish that his sales were understated – also finding purchases that were of a nature that suggested that Mr Bustard also provided outside catering.

Despite the taxpayer and his accountants offering reasons and reworked calculations, HMRC stuck by their method and quantum.

When these types of matter appear before the Tribunal, their remit is only to consider whether HMRC made the assessments to the ‘best of their judgement’.  Given all the facts of the case, including the taxpayers continued destruction of his records, the Tribunal came to the conclusion that HMRC had not considered all of the facts available to them, and the assessments and penalties were discharged.

Repayment supplements and reasonable requests

You will know that HMRC levy a surcharge on you for late VAT payments, but did you know that you are also entitled to interest when they delay your reclaims?

Unfortunately, neither are similar in their process. Where your payment to HMRC is deemed ‘late’ one second after the due date, HMRC’s ‘late’ for repaying you is far more complex, and almost reminiscent of Anneka Rice shouting “Stop the Clock!” during  Treasure Hunt.

The method of calculating a Repayment Supplement (‘RS’) starts from the later date of the day the return is received, or the day after the end of the VAT quarter, rather than the return submission deadline day.  This means that if your cash-flow has been impacted by the VAT outlay that is causing the repayment, then the quicker you get your VAT return submitted, the quicker HMRC have to respond to it.  If you wait until deadline day to submit your return, you’ve lost around 5 weeks in which HMRC are obliged to deal with your repayment.

From the relevant date of receipt, the clock starts and it continues to tick until HMRC tell the taxpayer that they require additional information to verify the claim.  If by letter, neither internal posting procedures nor royal mail delays count: the clock has stopped in calculating your repayment. Once you provide the required information, the clock starts – again on receipt by HMRC, ignoring those postal delays if that is your only method.

This brings us to some points raised at a couple of recent Tribunal hearings relating to RS.  Repayments from HMRC via payable order do not count toward a delay, so if you want to help your cashflow, and you expect to be in a repayment position, lodge your bank details with HMRC.  The second point is probably more relevant to a wider audience: what HMRC can reasonably ask for during their verification.  As a VAT registered entity, you are required to keep your prime records for scrutiny if required, and for a period of at least 6 years.  Your prime records are sales and purchase invoices, bank statements, and your VAT account, with additional records for certain sectors such as till Z readings for retailers and documents relating to the export of goods from the UK if you’ve zero-rated a sale that is normally VATable at 20%.  HMRC may request additional records, but you should always consider if the documents that they require are something that you would normally hold with your records.  You should also pay close attention to whether they specify the format, i.e. electronic or original copy – again, considering whether HMRC’s request is reasonable within the confines of your record-keeping rules.  HMRC have to satisfy themselves that the claim is proper, but it must be a reasonable request.