February 2014

HM Revenue & Customs (HMRC) have issued Business Brief 08/14 accepting a change in their policy following their defeat in the First Tier Tribunal case of Goals Soccer Centres Plc (GSC).

GSC owned and operated a chain of five-a-side soccer centres incorporating artificial pitches with floodlights and high quality amenities. Their core business was pitch hire and at the Tribunal hearing it was accepted that the hire of pitches on their own was a VAT exempt supply when the conditions within the VAT Act Schedule 9 Group 1 were met. The issue at stake was the VAT treatment of GSC’s supply of small sided football leagues in which GSC provided a pitch and the management of a football league competition to the participating teams.  There was no dispute that the management of the competition was a taxable supply at the standard rate. GSC however argued that the pitch hire was a separate supply under a separate contract and not so closely linked with the league management contract as to be artificially split. Therefore their supplies constituted multiple supplies each having its own identity and VAT treatment. HMRC contended that there was a single supply of participation in a football competition liable to VAT at the standard rate. Importantly The Tribunal concluded it would be artificial to combine them as a single supply.

HMRC now accept that, provided the conditions are met, the pitch hire can be exempt from VAT but the management services are standard rated. If there is a single price then businesses must apportion the values. This decision reinforces the key VAT principles established on the CPP case on the complex area of VAT on single and multiple supplies. Businesses which have over declared VAT on pitch hire in similar circumstances may be eligible for a VAT refund.

For more information and advice please contact Malcolm Nichols on 01962 735350

We continue to advise our property development clients on the VAT implications of the conversion of commercial premises to either residential or mixed use. The properties tend to be former pubs, but also, following the change in 2013 to the General Permitted Development Order 1995 (relaxing some planning requirements), offices changing to residential use.

The VAT treatment of the property purchase, conversion costs and future income stream has a major impact on the financing and profitability of projects which can often be small scale, fast turnaround projects where margins are tight.

Recent examples include:

• A pub with pre-existing residential accommodation (manager’s flat) converted to residential properties with the question of the availability of the VAT zero-rate for the sale of the new properties (see our blog on the Alexandra Properties case). The benefit of Alexandra is that it provides an absolute VAT saving on the conversion costs;

• Funding of the VAT on the purchase of a commercial property – as the intention was to convert to residential use, we assisted with the commercial negotiations between the vendor and the purchaser to disapply the option to tax. This meant the buyer did not need to fund the VAT on the purchase which helped with their arrangements with the bank. It also resulted in a bottom line SDLT saving for the purchaser.

• Minimising the VAT charged on conversion costs by agreeing appropriate VAT rates with the contractor. This resulted in a significant working capital saving.

Each project is different in terms of the bottom line and working capital VAT impact and we would recommend that VAT is considered at the outset of any project to ensure that VAT cost is managed and minimised, or where there is a VAT cost, it is built into the budget and funding requirements.

If you would like to discuss any of your property projects, please call Sean McGinness or Steve McIntyre on 01962 735 350.

A parliamentary debate took place this morning in which various MPs lobbied for the reduced rate of VAT of 5% to be introduced for certain travel services in the UK, initially hotel accommodation and visitor attractions and later for pub and restaurant meals. This is a subject regularly commented on and there appears to be a strong body of evidence to suggest that, over a relatively short period of time, the upside across a number of areas would outweigh the initial dent in revenues.

The following key points were made in support of a reduction:

• The UK is one of only 4 EU Member States applying the standard rate of VAT to hotel accommodation
• According to a report written by a treasury advisor, Professor Blake, whilst the reduction would create a deficit in tax revenues in year one of around £640m, this would be offset in years 2 and 3 by an increase in tourists visiting the UK and spending more, adding £2.6bn to treasury coffers in 10 years. These figures are calculated using the Treasury’s own economic modelling methodology
• In addition to VAT revenues eventually increasing there would also be a significant benefit to the economy in the shape of job creation (particularly for the young), the ability to pay higher wages within the sector, a reduction in benefits payable to those currently unemployed, and an increase in corporation tax from more profitable businesses
• The current high VAT rate for hotels and visitor attractions means that businesses operating just below the VAT registration threshold (£79k) are not incentivised to grow their business in excess of the threshold
• In addition to applying the standard rate of VAT, the UK imposes high levels of APD and visa charges on visitors, meaning the UK loses out to more cost effective EU destinations when tourists are deciding where to holiday
• Business travellers e.g. those attending conferences, spend significantly more during trips to the UK but in deciding where to hold international conferences etc. are deterred by our higher VAT rate (albeit most business travellers can recover the VAT charged on hotel accommodation and venue hire)

The following points were made by the Treasury Minister against the proposal:

• The figures mentioned in the Blake report were brushed over and instead a deficit value in year 1 of £2bn on hotel accommodation alone was cited (this did not appear to take account of offsets mentioned in support)
• There is no evidence that the UK suffers from having higher VAT rates as it is still one of the most visited countries in the world
• The UK has the advantage of applying more VAT reliefs to passenger transport and to cultural activities than other EU countries
• France recently increased its relatively recently introduced 7% reduced VAT rate for restaurant meals to 10% – the suggestion being that the reduced rate had not increased overall revenues as anticipated
• The UK has the highest VAT registration threshold in the EU meaning many small businesses in the industry are not within the VAT net

In summary the Minister (supported by the shadow minister) made it clear that current strategy would simply not allow a deficit in VAT revenues to be created in the short term as this would increase the need for borrowing. This is an issue which will and should continue to be debated, the figures cited in the Blake report are convincing but in the current climate it is clear that there will be no progress whilst a reduction would create an initial deficit.

If you would like to discuss this area further or the impact of VAT on your travel business generally please get in touch with Julie Park on julie.park@thevatconsultancy.com or call on 0208 941 9200

Last week, HMRC issued a technical note which announced the withdrawal of a number of VAT extra-statutory concessions. The withdrawal of the concessions has come about further to The House of Lords’ decision in the Wilkinson case which clarified the scope of HMRC’s administrative discretion to make concessions that depart from the strict statutory position. Those concession that have been identified as being beyond the scope of HMRC’s discretion will need to be withdrawn.

The note included five VAT concessions which are due to be removed with effect from 1 April 2015. These include the following Tour Operator Margin Scheme (‘TOMS’) concessions that have been used by the industry for a number of years:

• TOMS and the use of a fixed rate margin (10%) for shore excursions sold by cruise operators – this is the current concessionary treatment which allows cruise operators to use a fixed rate 10% margin to determine the VAT due on sales to cruise passengers of bought-in shore excursions; and

• TOMS and the Airline Charter Option – the concessionary treatment allows tour operators to treat certain supplies of a charter flight, which they have bought-in and sold on to a traveller, as an in-house supply of zero-rated passenger transport.

What’s the Impact?

On first review the impact would seem relatively straightforward:

• Cruise operators will have to account for bought-in shore excursions, which are sold on as principal, using the TOMS; and

• Tour operators who are applying the Airline Charter Option would have to account for UK VAT under TOMS where the charter flight is bought-in and re-supplied as a principal.

However both of these changes will result in additional VAT due to HMRC in respect of EU travel, and the potential erosion of profit margins if businesses are unable to pass the VAT cost on to their clients.

The Wider Impact

Although it could be said that the withdrawal of the TOMS concessions will impact only on a minority within the travel industry, what is more of a concern is the potential wider impact of the updated guidance that will be issued on what constitutes “material alteration” and/or “further processing” (as referred to in the Airline Charter section of HMRC’s note).

It seems the Airline Charter Option is considered to be ultra vires due to the fact that the travel products supplied under the option are not considered to be significantly ‘materially altered or further processed’. However, HMRC’s note does not explicitly state whether the in-house definitions relating to coach/rail, cruises and accommodation are also going to change.

It would seem strange for only the in-house guidance on air transport to change when other areas have not (as the broad thrust of the guidance for all in-house areas is the same and the principles are clearly understood within the industry).

We are currently liaising with the HMRC Policy team to understand the wider implications of the withdrawal of the concessions and their intentions with regard the revised TOMS guidance. We will continue to update you on the position. In the meantime, if you would like to discuss the HMRC note and/or its implications in more detail please do not hesitate to contact Martyne Pearson on 01962 737 951 or via email at martyne.pearson@thevatconsultancy.com

HMRC have published their updated policy in relation to VAT recovery by employers for pension schemes. The change in policy is as a result of a European Court of Justice decision from 2013 (PPG Holdings), and may result in businesses being able to recover VAT previously treated as being irrecoverable. It is possible to revisit VAT recovery over the past four years.

Historically, HMRC have sought to distinguish between administration/set up costs of an employees’ pension fund, and the cost of management of the investment activities/assets of the fund. In HMRC’s view VAT on the admin costs was recoverable and VAT on the investment management costs not recoverable. If costs where invoiced from one supplier, HMRC took the view that 30% related to the general management and was recoverable by the employer and 70% related to the management of the investments (HMRC say this would have been recoverable by the pension fund, but it is extremely unlikely that a pension fund would be in a position to recover all, if any, of the VAT).

HMRC’s Brief 06/14 confirms that they have changed the above policy following PPG and now accept that, where a supply of pensions administration and investment management is made from one supplier to the employer, the VAT is recoverable. This is on the proviso that the employer contracts for and bears the cost. If there is a recharge to the pension fund or a set off against contributions, HMRC indicate that the employer can fully recover the VAT but must account for output tax on the recharge to the pension fund (which is likely to be irrecoverable VAT). Therefore although this appears to be good news, it is critical that businesses determine whether the employer entity as opposed to the pension fund will be able/happy to fund the investment management fees without the need to make a recharge or reduce the funding it provides to the pension. Given that many large pension funds currently have significant deficits and given the investment management fees can be significant in value terms, this is a key point to consider before changes are made as any recharge or deemed recharge would effectively put the pension fund back to square one. Similarly the question of corporate tax deductions for the employer arises.

Where an employer receives invoices for separate services, it should review what these services relate to as HMRC have reiterated that, where separate fees are charged solely in relation to investment management of the pension fund’s assets, they do not see this VAT as recoverable. It is unclear from the guidance what stance will be taken in relation to the basic VAT principle of single versus composite supplies – the guidance suggests that the VAT on a single invoice covering both administration and investment advice will be fully recoverable by the employer but if the investment management element is regarded as a single supply with ancillary administration services included, there is a risk HMRC could deny the employer any VAT recovery, meaning the business would be worse off than with the historic 30/70 split.

It is recommended that the VAT recovery policy in relation to your pension scheme is reviewed, along with future arrangements regarding contracting and invoicing from suppliers to ensure that the VAT recovery position is understood and maximised. Pension managers may also wish to consider how the new policy impacts on their supplies. Should you wish to discuss further, please contact Sean McGinness on 01962 735350 or sean.mcginness@thevatconsultancy.com