July 2014

Following the recent seminar on the 2015 VAT changes for broadcasting, telecoms and e-services, HMRC has published its responses to the questions raised which can be viewed on HMRC’s website (http://tinyurl.com/k5fx3n8).

The European Commission is continuing its roadshows with an event in Warsaw on 9 September 2014, followed by an event in the US in Santa Monica on 16 September 2014, and they are useful forums for businesses to attend.

In preparation for the 2015 VAT changes we have prepared a MOSS readiness project document to assist businesses with their planning – http://www.thevatconsultancy.com/mini-one-stop-shop-download/

Should you wish to discuss mini-one stop shop for broadcasting, telecoms and e-services and what your businesses needs to do prior to 1 January 2015 please contact your usual TVC contact or Sean McGinness on +44 (0) 1962 735350 or Julie Park on +44 (0) 208 9419200

The Court of Justice of the European Union (“CJEU”) gave its decision recently in the Banco Mais SA (“Banco”) VAT case. The case concerns VAT partial exemption and which values should be considered turnover for the purposes of calculating the deductible proportion of overhead input tax.

Banco’s activities

• Banco is a Portuguese bank which carries out leasing activities in the automotive sector;

• Banco enters into finance lease arrangements with its customers;

• Banco acquires goods from a third party and supplies them on to the customer under a finance lease; and

• In return for this the customer pays Banco a “rental” payment which covers the cost of the goods, an interest charge and any other charges that might be due.

What is the case about?

In 2004 Banco recovered the full amount of VAT paid on the acquisition of the goods and services which were used exclusively for the purpose of carrying out taxable transactions. This included the acquisition of the vehicles.

With regard to mixed use goods and services, Banco calculated the deductible proportion of the VAT incurred on the basis of a fraction containing, as a numerator, the payments collected from the financial transactions in respect of which VAT is deductible, to which the turnover from leasing transactions was added. This method enabled Banco to reclaim 39% of the VAT incurred on the purchase of goods and services that related to mixed use goods and services.

In 2007 the Portuguese Tax Authorities assessed Banco for VAT claimed under this method, claiming that the calculation used to determine the VAT recoverable on the leasing transactions should have excluded the part of the rental payment which offset the acquisition cost of the vehicles.

Banco appealed the decision and the case was heard by the Lisbon Tax Court in 2008. The Court upheld the action brought about by Banco on the grounds that Banco had correctly applied Article 23(4) of the CIVA (which states that the proportion to be used for mixed use goods and services should be calculated by reference to the share of the turnover relating to transactions in respect of which VAT is deductible). Under this provision Banco should have been allowed to take account of the whole of the rental payments made in determining how much of its input tax should be reclaimed.

The Lisbon Court sought a referral from the CJEU. The referral sought guidance on the value to be included in the denominator and whether only the interest element should be taken into account, since it constitutes the true remuneration (profit) accruing to the bank from the leasing contract.

What was the outcome?

The CJEU ruled that the inclusion of the entire “rental” payment in the partial exemption calculation is likely to be distortive. Therefore, only the part of the “rental” payment which equates to the “interest” element of the leasing transaction should be included in the numerator and denominator of the pro-rata calculation (this is on the basis that this is more likely to provide an accurate reflection of the extent to which the overheads of the business are used for taxable purposes).

However, the CJEU held that it was for the national court to determine what was more appropriate in the present case. The decision has therefore been put back in the hands of the Portuguese Tax Authorities to determine the way forward for Banco.

What does the decision mean for UK Lenders?

With regard to the UK position you may recall that the VWFS Court of Appeal hearing was vacated pending the outcome of the Banco case. It is likely that this case will now be concluded in light of the CJEU decision. If concluded in favour of the CJEU this will mean that Lenders will be significantly worse off depending upon the current methodology applied. We eagerly await HMRC’s response to the above and would recommend that those affected by the decision to seek advice on possible alternative methods. If you are affected by the decision and would like to discuss the implications in more detail please contact Julie Park on 0208 941 9200 or via email at julie.park@thevatconsultancy.com

Following on from the result in the Bridport and West Dorset Golf Club VAT case at EU Level (C 495/ 12), HMRC have now issued guidance on the line they will take on VAT claims made in respect of non-members’ green fees (HMRC VAT Brief 25/14 refers). HMRC state that they plan to enact the change to their approach by 1 January 2015.

In short, HMRC’s view of the treatment of fees charged to non-members of a members’ golf club for playing at the club (green fees) was that they could not be VAT exempt under the sporting exemption VAT rules, thus treating such fee income as liable to VAT at the standard rate. Over the past few years, a number of retrospective VAT claims were made by members’ golf clubs, on the basis that the exemption for sports played by members of a club should also be extended to non-members. These claims were rejected by HMRC, pending the outcome of the lead case, Bridport and West Dorset.

HMRC now accepts that the VAT exemption was available on fees charged to non-members, provided that the “services were closely linked and essential to sport” and were “made to the persons taking part in the sport”.

What action is required?

Any sports club that has not submitted a claim should consider whether it has/is accounting for VAT on guests’ fees and also how this change to the VAT treatment of income will affect the sports club’s VAT recovery on costs, both for the past and on an on-going basis.

I run a proprietary club – can I make the claim?

No. The exemption applies only to non-profit making bodies so the status of the club would need to change going forward to make use of the exemption.

Will HMRC repay the VAT to the club? 

HMRC are considering the claims in two phases:

• Phase 1: where the members’ clubs have decided to reimburse the non-members and must demonstrate they have made arrangements and a legally binding commitment to reimburse the non-members in a timely manner.
• Phase 2: where HMRC consider that unjust enrichment will be applicable, they are considering restricting such claims, e.g. where the amount charged to non-members has been/will be reduced due to treating the pricing as inclusive of VAT, if applicable, and where no refund to the non-member player would be made by the club as a result.

There are some key points arising from this:

• Here, HMRC will be looking to offset any reimbursable VAT against any previously recovered input VAT which, under the partial exemption method used by the club, will now relate wholly or partly to VAT exempt supplies rather than (as previously) to taxable supplies.
• The possible assumption on HMRC’s part that the pricing of the non-members’ green fees was influenced by inclusion of the VAT element and whether this is a valid reason not to repay the claims.
• Can HMRC’s “unjust enrichment” concept be over-turned in favour of the claimant club where it can be demonstrated that there were reasons/factors other than VAT for the pricing of the non-members’ fees to be higher than the members’ fees.
• Clubs which are yet to make a claim will be time-blocked in how far back they can go – the four year cap.

Should you wish to discuss whether your club is eligible to make a claim, please contact Marianne Hawksworth on +44 (0)1962 735350 or your regular TVC contact.

The first VAT Tribunal case regarding the cost sharing exemption, West of Scotland Colleges Partnership (“WOSCOP”) [2014] UKFTT 622 (TC), has now been reported and we thought it timely to raise the issue for two reasons:

• there is little HMRC guidance on how to achieve the exemption available, making organisations unsure of how to implement it within their procurement arrangements; and,
• whilst certain sectors or types of entity/business have established a cost-sharing arrangement, the cost sharing exemption provisions would still appear to be “under the radar” of many organisations who are potentially eligible to benefit.

The cost sharing exemption is not only beneficial in situations involving the centralisation and sharing of costs for “not for profit”/social sector organisations, it is equally applicable to commercial organisations with low or nil VAT recovery rates for business purposes, e.g. from partly exempt organisations such as in the financial and insurance sectors to independent/private schools. The arrangements could be of benefit not only financially, but also in terms of time/administrative costs, where eligible costs (n.b. only on services and not on goods) are shared.

In the WOSCOP case, the taxpayer was ultimately unsuccessful due to the basis of the cost allocation between its members being deemed insufficiently accurate/exact. This is one of the six conditions for operating a Cost Sharing Group (“CSG”), which are as follows:

• there must be an independent group (i.e. the CSG cannot be controlled by one or several members);
• members of the CSG must have VAT exempt or non-business activities (or can have both);
• the services supplied by the CSG must be “directly necessary” for the members to make those exempt or non-business activities;
• the services must be supplied to the CSG members at cost (i.e. no additional charge or profit must be made);
• the supply must not give rise to a distortion of competition; and,
• (an additional rule introduced by HMRC), apart from having exempt or non-business activities, a member must also receive a qualifying service which is exempt ( as defined within Group 16 of Schedule 9 to the VAT Act 1994), i.e. an onward charged commercially outsourced service cannot be provided by a CSG to its members.

Why Would I Want a Cost Sharing Group? 

If you cannot recover VAT but incur VAT on labour-intensive costs, this may be of benefit to you. Whilst the CSG cannot register for VAT and so cannot recover VAT on costs, the services supplied by the CSG to its members can be exempted from VAT, if all of the conditions apply. This means that where the costs incurred themselves are exempt, such as staff salaries, or zero-rated, such as food products, a clear benefit arises. In addition there may also be a benefit for organisations using outsourced services, such as IT, accounting, legal, catering services, etc., and where a number of organisations (although not necessarily a large number) need the same type of service.

The benefit to partly exempt businesses and to organisations with heavily VAT exempt or non-business activities would be to receive labour-intensive services free of VAT, thus keeping costs down by 20%.

Should you wish to discuss the above, please contact Marianne Hawksworth on +44 (0)1962 735350 or your regular TVC contact.