VAT Connect – September 2016
HMRC’s exemption of health and welfare in breach of EU law
The First Tier Tribunal has determined that UK VAT legislation has erred in allowing exemption of health and welfare services to apply only to non-profit making organisations.
The Tribunal considered, in the case of Life Services Ltd, whether their services fell within the definition of ‘health and welfare services’, currently exempted under UK VAT law. The Tribunal found that the organisation’s services did not qualify for exemption. Importantly, they were also asked to consider whether UK VAT law breached the principal of fiscal neutrality set in EC law, by restricting the VAT exemption of health and welfare services to charities, state-regulated private institutions/agencies, and public bodies.
In answering the issue, the Tribunal stated that HMRC had been wrong in their interpretation to allow only certain entities the right to exempt the services, and had breached the purpose of the legislation by not recognising that non-charitable organisations could also be devoted to social welfare.
VAT exemption typically applies based on a combination of the nature of the supplies and the status of the organisation making those supplies. This decision could therefore have a wider impact, and it will be interesting to see whether HMRC appeal the Tribunal’s decision, or accept their comment and amend legislation and guidance. If the latter, some organisations may find themselves unexpectedly making exempt supplies, and suffering increased costs through irrecoverable VAT.
Sport clubhouse qualifies for zero-rating
The Upper Tribunal has determined that HMRC have misinterpreted EU VAT law, and restricted the VAT relief available on the construction of a sporting clubhouse.
Caithness Rugby Club had constructed a new clubhouse in 2012 and had sought that the builder zero-rate the construction cost, using the Relevant Charitable Purpose relief (i.e. used for non-business activities). The relief zero-rates the construction of “a village hall or similarly in providing social or recreational facilities for a local community”. In this instance, the VAT cost was in the region of £60,000.
HMRC disagreed that the Club qualified for the relief as it was run by the Club for the Club, and not for the community under the direction of the community. The First Tier Tribunal found in favour of the Club, but HMRC appealed the issue to the Upper Tribunal.
In reaching the same conclusion, the Upper Tribunal confirmed that the law does not require the ‘local community’ to have direction or control over the use of the building as HMRC had argued; whilst the absence of direction or control will be a relevant factor in qualifying for relief, it was not necessarily a decisive one. The key issue was that the building was at the disposal of the local community.
The decision in this case is relevant to the particular extent of use of the property and its place within the community, and may apply to other organisations. It is yet another example where HMRC have been found to over-restrict reliefs and illustrates that it is always worth treating any ruling from HMRC with professional scepticism.
Bad Debt Relief claim allowed on genuine grounds
The First Tier Tribunal has confirmed that interest write-offs between companies were nothing more than voluntary acts of support by the lenders, and not payment towards a bad debt.
When their customer went into administration, D Jacobson & Sons Limited recovered VAT previously declared on their sales under the bad debt relief (‘BDR’) arrangements. Due to the business structure, the shareholders of D Jacobson & Sons were also affected, and agreed to forego the interest payments on loan notes which had accrued over a few years.
HMRC denied D Jacobson’s BDR claim, stating that the write-off of the loan notes represented the payment of consideration against a contract debt on their supplies.
In upholding the business’s claim for BDR, the Tribunal criticised HMRC for assuming that the write-off of the loan interest between the companies was to gain a VAT advantage, and not for genuine business reasons. They further confirmed that for the payment to represent a consideration towards the supply, there had to be a direct link between the supply and the payment, and that there had to be reciprocity between the supplier and the customer, neither of which existed in this scenario, as the payments were clearly linked to the loans and not the supplies.
Successful appeals help define ‘reasonable excuse’
There have been three default surcharge cases heard at Tribunal in the last month that have helped define ‘reasonable excuse’.
A Default Surcharge occurs when a business has not submitted their VAT return and payment (or just the return if repayment), by the due date. Default Surcharges incurred by businesses can be removed or mitigated if the business has a reasonable excuse, but not when the reason is lack of funds, or reliance on third parties. So what is a ‘reasonable excuse’?
There are several default surcharge appeals heard every week; the majority of which tend to fail. However, in three recent cases taxpayers were successful in their appeals.
In the case of McNamara Joinery, the business knew it would be unable to pay the VAT amount due on their return, and asked their agent to call to advise HMRC and arrange time to pay their quarterly VAT liability before the due date, which he did. Their agent experienced difficulties contacting HMRC. The Tribunal accepted HMRC’s argument that payment was late, but the business had attempted to contact HMRC before the due date, and HMRC not picking up the phone was their issue, and the business should not be penalised for it.
In the case of Spence & Horne Solicitors, the business used the Annual Accounting Scheme, but after defaulting on payments, they were removed from the scheme. The business had retained all documents sent to them by HMRC, with the exception of the notification that the firm had been removed from the Scheme; the firm had never received the document. The Tribunal accepted this explanation on the balance of probabilities (having considered the firm’s record keeping process) and requested that HMRC delay the first default period to the date of the first Default Surcharge Notice, not the Annual Accounting Scheme termination letter.
SOS Joinery suffered severe cash flow issues due to an overpayment of CIS contributions to HMRC. Although it was reiterated by the Tribunal that ‘lack of funds’ was not a reasonable excuse, specifically when the VAT collected from customers represents an ‘interest free loan’ from HMRC, the funds (or lack of) in this instance were not VAT collected, and the business should not be penalised for HMRC’s “inexcusable delay” in refunding the CIS payments.
It is preferable to avoid the default regime altogether by submitting the return and any payment by the due date, but there are instances where you find yourself unable to meet the deadlines. These cases highlight a few points;
- start the VAT return process sooner rather than later,
- consider whether cash flow is an issue, and if so, take action by contacting HMRC before the VAT return due date,
- record all contact and attempted contact with HMRC (including a call reference number if you do speak to an advisor), and
- consider everything that HMRC sends you, and sense-check what you receive.
No exemption for membership subscriptions
The First Tier Tribunal considered whether a company limited by guarantee could exempt the members’ subscriptions.
The Association of Graduate Careers Advisory Services approached HMRC with the view that they were an organisation whose activities were that of an association or a body whose primary purpose was advancing the knowledge and professional expertise of the members, or whose objects were in the public domain, and were of philanthropic or civic in nature, which would mean their subscriptions would be exempt from VAT.
The Tribunal found that the Association did not qualify for exemption under any of the legal criteria, in particular, a career advisor was not ‘professional expertise’, the Association had no one primary purpose (they had many aims and objectives, none of which were predominant above any others), their activities were not in the interest of any group beyond that of career advisors, and their aims were too narrow. VAT should therefore continue to be charged on the membership fees.
When setting up a not-for-profit entity or charity, in particular where there are membership subscriptions or a reliance on the organisation to meet the criteria of an ‘eligible body’, it is important to consider the wording of the Articles in line with your desired VAT treatment. Vague or omitted detail (such as the lack of a clause precluding profit distribution) can impact the VAT liability of the income, VAT registration, and input tax recovery.
Consultation on VAT liability of eBooks
The European Commission is seeking opinions into the disparity between printed books and those supplied online.
The VAT rates applied to books and eBooks vary on a domestic level, and also across the EU. The Commission is now seeking comments from publishers, book sellers, retailers, and consumers in three areas; allowing Member States to apply the same VAT rates to each platform, to define ‘electronically supplied publications’, and the potential impact of reduce-rating eBooks.
The consultation is currently open, but due to close 19 September, 2016.
If any of these articles raise further questions for you, please contact any member of our VAT team.
Alan Davis – VAT Partner & Head of Tax