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Julie Park

Halle Concerts Society – Challenging the scope of the philanthropic VAT exemption

By VAT news

This VAT case represents a 17 year old dispute with HMRC which was originally concerned with the VAT liability of Halle’s ticket income – the question of whether the philanthropic VAT exemption applied.  The issue before the Tribunal related to one final point on the VAT status of Halle’s membership scheme.  Halle is a charitable organisation, set up with the aim of “promoting the study, practice and knowledge of the art of music” through its orchestral concerts and education programmes .  In return for an annual subscription, Halle members could receive a number of benefits including corporate rights, priority bookings on concert tickets and publications.

The First Tier Tribunal was asked to consider whether Halle’s supplies of the membership scheme were within the scope of VAT and, if so, whether they fell within the exemption for philanthropic activities.

The FTT concluded that the Halle was making a supply of services (being a package of benefits in return for the membership fee).  The question was whether the services are within the scope of the philanthropic exemption.  VAT exemption applies when a not-for-profit organisation makes supplies to members of services that are in keeping with the aims of the organisation and which are not charged for beyond the membership subscription.  Qualifying organisations include those with objects in the public domain that are of a philanthropic nature.

There is no statutory definition of “philanthropic”.  In HMRC’s view, Halle’s activities were cultural rather than philanthropic as they primarily benefitted those who enjoy classical music rather than being for the “good of all mankind”.  However, the Tribunal noted that the great philanthropists of the 19th century did not limit their activities to basic provisions such as housing and sanitation but also focussed on the arts and literature and that music should be no different.  The fact that the Halle’s concerts were free or heavily subsidised meant that they wouldn’t be offered by commercial operators, further supporting the philanthropic focus.

This case is relevant to any charity/not-for-profit organisation that provides services to members in return for a subscription.  The case demonstrates that the scope of the term “philanthropy” is wider than HMRC have previously accepted.  It will be of particular relevance to those organisations that host events for members without further charge e.g. conferences/concerts etc. both in the UK and overseas.  However the exemption is unlikely to apply where a separate and additional charge is made for entrance to an event, even if by a not-for-profit body.

Permitted Development Rights VAT

By VAT news

HMRC has clarified its policy on zero-rating and reduced-rating for projects carried out under permitted development rights.

Business Brief 9/2016 clarifies the evidence required to support zero-rating (the sale of the converted property) and reduced-rated (conversion services) where a conversion from non-residential to residential use takes places without full statutory planning consent under the permitted development rules.

This brief is relevant to:

  • Developers selling converted dwellings wishing to apply the zero rate;
  • Construction industry contractors who may apply the reduced rate to the services they provided related to the conversion; and
  • DIY housebuilders looking to reclaim the VAT incurred on a conversion carried out for their own purposes.

The first grant of a major interest (i.e. the freehold sale or granting of a lease over 21 years) in a dwelling following its conversion from non-residential use can be zero rated, provided certain conditions are met.  One of those conditions is that statutory planning consent must have been granted and the conversion must have been carried out in accordance with that consent.  However, as part of the process to streamline planning applications, some conversions do not require a full planning application and can be carried out under permitted development rights.

Evidence required

HMRC have clarified that they still require evidence that the conversion is lawful and would require one of the following:

  • Written notification from the Local Planning Authority (LPA) advising of the grant of prior approval; or
  • Written notification from the LPA advising that prior approval is not required; or
  • Conversion VATEvidence of deemed consent (i.e. evidence that you have written to the LPA and your confirmation that you have not received a response from them within 56 days).

So the zero-rate and the reduced rate apply whether or not planning permission is granted?

No. Taxpayers will also need to provide evidence that the development is a permitted development.  If a conversion is carried out and there was a requirement for planning permission then the developer and contractor cannot rely on the permitted development rules.  This would mean that the most likely outcome would be VAT at 20% on the contractor costs which would likely be irrecoverable in the hands of the developer. VAT liability of any conversion that is not carried out in accordance with the applicable planning route would be exempt on sale.  The works to the premises in the course of the conversion would be subject to VAT at 20%.  It is therefore still important that developers and contractors ensure they are applying the rules correct to avoid a VAT cost.

The evidence that a developer or contractor should hold, includes all of the following (if available):

  • Plans of the development;
  • Evidence of the prior use of the property (e.g. evidenced by its classification for business rates purposes etc.); or
  • Confirmation of which part of the planning legislation is relied upon for the development and a lawful development certificate where one is already held.

Whilst the use of permitted development rights is intended to streamline the planning process, HMRC’s clarification demonstrates that some interaction with the LPA will still be required in order to provide the necessary evidence of the planning status of the property in order to gain the benefit of the zero-rate and the reduced rate of VAT.

Should you have any queries on the above, or any other property related VAT matters please contact Sean McGinness or Steve McIntyre on +44(0)1962 735 350.

EU Action Plan on VAT

By VAT news

The European Commission has today published its Action Plan on VAT. We will be reflecting on the comments made and providing our insight on this in the next few days. In summary the key features of the proposals are:

• Fundamental changes to the way cross-border retailers deal with their VAT compliance. Draft law is to be published by the end of 2016 to introduce a system where the retailer is registered in one member state and accounts for VAT at the rate in force in the other 27 member states on sales to customers in those countries. This is effectively an extension of the one-stop shop (MOSS) that applies to suppliers of electronic services and telecommunications;

• Removal of the low value consignment relief for non-EU suppliers of goods;

• Simplification for SMEs in respect of VAT compliance across the EU;

• A new set of VAT rules to be published to replace the existing rules (they were drafted in 1993 as transitional rules). The objective is to move all VAT determination to be based on a place of supply of destination;

• A set of measures to reduce the VAT gap (the difference between what the EU and member states believe is the amount of VAT that should be paid and what has actually been paid); and

• More freedom for member states to choose VAT rates.

Should you have any queries on the measures announced please contact Sean McGinness or Julie Park on +44(0)1962735350.
EU Action Plan on VAT

Online Sellers Budget 2016 VAT

By VAT news

We understand that a large online selling platform has written to a number of retailers/traders and their agents requesting confirmation of their VAT number. It is likely that this is in response to the measures announced in the 2016 Budget to counter VAT avoidance and evasion that may have taken place through large online platforms. The measures would potentially make the online platforms jointly and severally liable for any VAT that should have been accounted for on the sale of products.

Should you or your clients receive any correspondence from online platforms regarding VAT registration and you are unsure how to deal with the request and/or need assistance with VAT registration please contact us on +44(0)VAT registration1962 735 350.

VAT in the Gulf region (GCC)

By VAT news

It has recently been announced that the Gulf Cooperation Council (GCC) has agreed that its member states will introduce VAT from 1 January 2018.

The members of the GCC include Bahrain, Kuwait, Oman, Qatar, Saudia Arabia and the United Arab Emirates.

The rate is initially set at 5%, and similar to most VAT systems there will be a range of exemptions.  It is intended that certain foods will be exempt. Certain services, including education and healthcare, will also be exempt.  With rapid growth in the region continuing, the impact on construction and the various world events taking place over the next few years, including the 2022 World Cup in Qatar needs to be fully considered by businesses.

VAT under the magnifying glass

Whilst the implementation date is 1 January 2018, there is a long-stop option which requires full implementation by 1 January 2019. It is expected that further information on the detail of the rules will be available by mid 2016.

As with any introduction of a new tax there is a systems challenge for corporates in terms of how they capture the correct information for reporting and invoicing. Certain GCC member countries rely on cheques and post-dated cheques as the main instruments for carrying out large corporate transactions in certain industries.  Businesses will therefore need to fully understand the tax point rules and how to correctly book these transactions to ensure correct VAT reporting.

There are also a number of free zones in the GCC countries.  The impact of the new VAT rules and the interaction with the existing free zones regulations will have to be considered by businesses.

Please contact Sean McGinness on +44(0)1962735350 for further information.

Brexit – VAT and Customs Duty Considerations

By VAT news

With the date of the referendum now fixed for 23 June 2016 attention is turning to the VAT and Customs Duty considerations of a Brexit and questions are being asked by businesses about the likely timing of any changes and what these might be. The impacts can essentially be broken into 3 key areas for both taxes:
i) Changes to bottom line VAT and Duty costs
ii) Compliance and
iii) Systems

Timing and Transition
HMRC have not, understandably, published any specific VAT and Customs Duty guidance on the impact of an exit from the EU but the Government has published a useful paper ‘The Process for Withdrawing from the EU’. Crucially this details the legal process and the timelines which will be of interest to businesses. In simple terms:
• the UK would have up to 2 years to exit the EU from a legal perspective – this means current VAT and duty legislation which has an EU framework can remain in place during this period
• once the 2 year period is up, the UK can extend the transition period if it has the approval of the majority of Member States
• if no extension is applied for or granted, the UK ceases to be an EU Member State at the end of the two year period.
There would be a number of immediate impacts which are set out below. In terms of the legislation, leaving aside the extreme complexity of enacting new VAT and customs duty legislation, there is no obvious reason as to why we would not simply replicate existing legislation, adopting the same tax point, place of supply rules etc and the same reliefs and similar for customs duty. The elements that become irrelevant and require change are areas impacted by EU as opposed to non EU status. This is where the situation becomes a little complex for VAT – from an outbound perspective ie from a UK supplier’s perspective, HMRC would likely want to retain the tax impact of the EU versus non ‘flag’. This is due to the fact that, generally speaking, B2C transactions with EU counterparts create sticking tax whereas those with a non EU flag do not. Therefore, there would be a drop in VAT revenues unless the legislation is amended to create special rules specifying the VAT treatment of certain transactions where the counterpart is in one of the other 27 Member States.

Bottom Line VAT Costs
There is no obvious attraction in HMRC trying to make wholesale changes to the legislation on Brexit (there could be some politically motivated changes and we expect lobbying regarding the extension of the zero-rate in particular), but there is a question over whether the VAT rates would change. The current rate range is fixed within the EU framework but this would cease to be relevant post exit. It is unlikely that a VAT rate change (up or down) would be an immediate feature as the rates could be changed pre exit within the parameters of the current EU legislation, and the existing rate is competitive within the EU framework. The only caveat on this is the fact that the threat of an exit followed by a positive vote to exit could likely create significant economic turmoil for the UK, and VAT rate changes could be used to counter the impact.
As mentioned above, there are a number of areas of the EU VAT legislation which use an EU versus non EU flag to determine the VAT treatment of a transaction. These include (but is not limited to) the following:
– specified supplies – in the financial services and insurance sectors, transactions with non EU counterparts allow VAT recovery on costs – EU suppliers of such services to UK counterparts will see their VAT recovery rate boosted – this could in theory positively impact on pricing for UK buyers. The more crucial question for the sectors impacted in how their overhead VAT recovery rate is impacted by the loss of the EU/non EU flag
– TOMS – EU travel taxed under TOMS is subject to VAT, non EU travel is not. EU travel companies outside the UK will see their VAT costs reduced, making the UK a more attractive location. For UK businesses does revenue for all non UK destinations become UK VAT free? This seems unlikely given the revenue gap it would create.
– Use and enjoyment – this is applied to certain services and bites in a B2C environment in practice – if the UK becomes a non EU country the VAT treatment of such services used and enjoyed here would change and again UK suppliers could face a material change in the taxation of charges
– The distance selling rules would cease to be applicable to the UK which means that B2C sales of goods to EU customers could become VAT free exports. However, with the tightening of low value thresholds globally, Brexit could force UK retailers to look at maintaining an EU hub to make their sales to EU private customers as EU import procedures could put off potential customers

Bottom Line Costs – Customs Duty
For duty the position is more acute and clear in that, until new trade agreements are in place, the UK would lose the benefit of the duty rates afforded by being an EU Member State. This would increase the landed cost of many goods and, based on current experience it takes a good number of years to negotiate trade agreements.
In addition to the duty rate increasing on imports, current acquisitions from EU Member States become imports and thus attract customs duty at the new higher rate. The impact of the duty rate increase has featured in a number of articles in the mainstream press but the point about the change in status from acquisitions to imports has not been highlighted. This reclassification would create bottom line duty costs in addition to increased compliance costs – see next section.

Compliance
On a positive note Intrastat and EC Sales Lists would no longer need to be completed and this would be very welcome for most businesses. However, where a business trades in goods, this would be replaced by the need to complete additional import and export declarations. This compliance function is often outsourced to a freight agent or customs broker. Therefore, whilst internal resource would be freed up by removing the need to report intra EU transactions for VAT and Intrastat purposes, an additional external cost would arise from the cost of completing the additional entries. The cost of this will vary depending on the commercial arrangements businesses have in place with their agents. This varies from say £1-£2 to around £35 per entry. On a related and perhaps more critical note, deferment account guarantees will need to cover additional amounts as the former intra EU acquisition transactions are reclassified as import transactions. HMRC are currently battling with the new EU customs duty regulations to be rolled out 1 May 2016 (The Union Customs Code, UCC). As with VAT it is likely there would be a clear preference to ape the existing legislative framework, albeit the volume of transactions captured will increase. Almost half of the goods leaving the UK are currently destined for the EU so a Brexit would double the number of export declarations currently processed.

From the perspective of VAT compliance, the UK would presumably lose access to the EU ‘one stop shop’ mechanisms (for electronic service and telecoms providers there is the non-union MOSS scheme that may become relevant) gradually being rolled out in various areas of VAT to remove the burden for a business requiring 28 VAT registrations across all Member States. This would be problematic for smaller to mid-sized businesses in the B2C arena in particular, as they would face a disproportionately high compliance cost and burden in needing to file VAT returns monthly, bi-monthly or quarterly in up to 28 locations in order to remain compliant and ensure their customers are not adversely impacted, for example by the changes in terms of the speed with which they receive their goods.
Triangulation is a simplification measure meaning EU businesses can be in a chain of 3 where the goods move from the original manufacturer in EU Country A to customer in EU Country C, without the supplier in EU Country B needing to VAT register in Country A or C. This easement would cease to be available and Supplier B in the UK would need to VAT register in multiple additional locations in the EU countries where such transactions currently take place and rely on the simplification.

Systems and Resource
Businesses will need to have sufficient warning of any changes to allow them to update IT systems etc where the status of a location has an impact on tax determination and this changes post Brexit. Invoice templates will also need to be changed and any new VAT registrations required as a result of the changes outlined above configured into the system.
One of the potentially critical systems issues however would be HMRC’s import and export system, CHIEF, and its ability to deal with a doubling of the number of transactions it processes as a result of the reclassification of intra EU trade. An overhaul to CHIEF is already tabled for 2016 to 2020 to enable it to meet the requirements of the UCC, and an exit from the EU would likely have an impact on this, in particular the need to ensure that the speed with which CHIEF processes entries is not impeded by the significant increase in volume.
On a more fundamental level there has to be real concern over HMRC resourcing for both VAT and customs duty in the event of a Brexit.

What Should Businesses Be Doing Now?
It is likely that most businesses trading in a significant way with other EU Member States will have initiatives running outside tax to identify the impact of a Brexit on the business. From a VAT and duty perspective the position will remain the same for up to 2 years post Brexit and therefore, as to what should be done now, this is likely to be limited to determining which of the factors outlined above (and any others) are relevant. Where there could be an impact on pricing depending on how changes are implemented, the wider business would need to be aware of this asap so that appropriate decisions can be made in the event of a vote to exit. For the other changes eg the increased compliance burden, there is no clear business case for doing much more at this stage than drawing up a short list of what these impacts could be so that a more specific and detailed piece of work can be done once we know the outcome of the Referendum – the short timescale on this means awaiting the outcome before doing a more detailed analysis is feasible.

VAT and Insurance Intermediary Services – Aspiro

By VAT news

The European Court of Justice (CJEU) has released it decision in the Polish case of Aspiro. The key question in this case was whether the VAT exemption that applies to insurance intermediary services can be applied to claims handling and management services. The case is very similar to the questions raised by the CJEU case in 2005 of Arthur Andersen and reaches the same conclusion – these services are not exempt as they are not provided by a business as part of finding prospective clients or introducing them to an insurer.

The court held that, for the services to fall within the VAT exemption for insurance intermediary services, the supplier must meet two conditions:

• It must have a relationship with the insurer and the insured party, either directly or indirectly. The court held that Aspiro had a direct relationship under its contract with the insurer. This contract also gave it an indirect relationship with the insured (presumably on the basis that the contract could not be performed if Aspiro did not interact with the insured by way of managing the claim); and
• The activities carried out by the supplier must cover the essential aspects of the work of an insurance agent or broker.

It is this second test that was not met. This was because Aspiro was not finding or introducing potential clients. It could therefore not be an insurance intermediary for the purposes of EU VAT law and its services are therefore standard rated. The court indicates that if a business does provide introductory services and also provides other services such as a claims handling then the service could be exempt (this then becomes a question of what is being supplied and whether it is one supply or not).

It is interesting to note that the Court refers to the UK Government position regarding consideration of the definition of insurance mediation under EU insurance law. It dismissed this reference on the basis that it was not relevant for the purposes of VAT law which has to be interpreted narrowly.

What does this mean for the UK?

The case basically reflects the position of the CJEU in the Andersen case which highlighted that the UK VAT law was too wide. HMRC chose not to make changes to the law or guidance following the case and state in their internal manual (VATINS5210) that claims handling and certain administrative services provided in the performance of an insurance contract can continue to be treated as being exempt from VAT until the EU FS review is concluded. This review is not on the agenda currently.

However, with another case adopting the same position we would recommend that claims handlers and other outsourcers in the insurance supply chain continue to monitor the position. Clearly the introduction of a taxable supply to the supply chain impacts on profitability within the chain.

Should you have any queries on the impact of this decision on your business as either a supplier of services to the insurance industry or as an insurer buying in services, please contact Sean McGinness on 01962735350 or at sean.mcginness@thevatconsultancy.com.

Union Customs Code (UCC) – Key Changes and Impacts for Businesses

By Customs Duty news|Featured|Uncategorized|VAT news

The attached slide deck summarises key changes brought about by the new EU wide customs legislation, the Union Customs Code (UCC) which is introduced wef 1 May 2016.  Contact Julie Park on +44 208 977 3228 or julie.park@thevatconsultancy.com if you would like any further information

 

Download it here by clicking the link below:

Union Customs Code (UCC) – Key Changes and Business Impacts.pdf

Copthorn Holdings VAT decision – backdated VAT group registration

By Uncategorized|VAT news

The following summarises the findings in our recent Tax Journal article on the implications of the Copthorn Holdings VAT decision which considered whether a VAT group registration application could be backdated.  Contact us if you would like more details or the full article:group

Speed read

In a recent case, Copthorn Holdings returned to the First-tier

Tribunal for a second time to challenge HMRC’s refusal to accept

a backdated VAT group registration. Following the taxpayer’s

initial success, HMRC was instructed by the tribunal to reconsider

its policy regarding when discretion might be exercised in this

area. e second appeal concerned HMRC’s continued refusal to

allow the backdating, even a€er its policy had been revised. e

tribunal found HMRC’s revision of the published guidance to be

a ‘cynical endeavour’, but its only option was to remit the case

back to HMRC for further consideration, with recommendations

regarding the scope of the policy. the case raises important

questions about HMRC’s approach to its published guidance and

how it should be held to account.