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VAT Update May 2017

May 2017

In the May issue of VAT Update the big news is that following the announcement of the UK general election, significant changes were made to remove some of the measures from the Spring Budget that were due to be introduced in Finance Act 2017.

This issue looks at:

Spring Budget

HMRC updates guidance on VAT recovery in holding companies

VAT (still) due on temporary workers’ fees

Partial exemption attribution of overheads

Whether a golf club was subject to ‘commercial influence’

Whether VAT was deductible on accident repair costs

HMRC updated publications

Spring Budget

A number of VAT measures were announced in the Spring Budget, but due to the announcement of the UK general election, several changes were removed from Finance Act 2017 that was passed late last month. The expectation is that if the current government is re-elected, the measures that were removed will be reintroduced in the first Budget following the general election. The change to the registration and deregistration limits for UK businesses was enacted: from 1 April 2017, registration for VAT will be required where the turnover of a business exceeds £85,000 and the de-registration threshold will increase to £83,000. However, the measures dropped included Making Tax Digital, VAT in relation to fulfilment houses and proposals for amending the regime for promoters of VAT avoidance schemes.

HMRC updates guidance on VAT recovery in holding companies

HMRC has updated the relevant pages of its internal manual on the recovery of VAT by holding companies. This was for the purposes of reflecting the principles arising in cases decided since 2014. Regular readers will be familiar with HMRC’s willingness to challenge through the courts taxpayers looking to recover VAT on deal fees, independent business reviews and other fees relating to corporate finance transactions. The new policy itself has taken some time to agree, following consultation.

The policy on the recovery of deal fees by holding companies remains complex, and open to interpretation, but in principle a holding company that provides management services to its subsidiaries in return for management fees should be able to recover VAT on related costs of services it receives, including costs relating to the acquisition of the shares in those subsidiaries. The guidance emphasises the need for clear evidence of the services provided and supporting documentation.

Holding companies with activities limited to holding investments and receiving dividends can expect to have their VAT recovery restricted in respect of those activities.

Comment: Holding companies considering making management charges to support VAT recovery should ensure that their arrangements will satisfy HMRC’s new policy and consider any wider direct tax implications. Please contact your usual Saffery Champness contact if you would like to discuss this further.

HMRC VAT Input Tax Manual, pages VIT40100, 40600 and VIT64050

VAT (still) due on temporary workers’ fees

The Upper Tribunal has upheld the First Tier Tribunal (FTT) decision that HMRC is correct to require VAT to be charged on the wages element of charges made by recruitment companies for non-employed temps.

In December 2015, we reported the case taken by Adecco in respect of VAT on the wages element of temp charges. The case arose following the removal by HMRC of the staff hire concession in 2009, requiring Adecco to charge VAT on all monies received for the provision of temporary staff, not just its margin. All temporary staff were supplied by Adecco under its contract with its clients: there was no contract between the temporary staff member and the client.

The Upper Tribunal found that the contract between Adecco and its clients contained clauses and definitions that clearly envisaged Adecco as the supplier. Doing so puts the VAT position of charges for non-employed and employed temps on the same footing, which the tribunal felt reflected the economic and commercial reality of the situation.

Comment: We are waiting to hear whether Adecco will look to appeal the decision further, but in the meantime HMRC’s policy remains in force. Agencies and clients are advised to speak to their usual Saffery Champness contact to review their position. 

Adecco and others v HM Revenue & Customs (Upper Tribunal)

Partial exemption attribution of overheads

The Supreme Court has referred the case of Volkswagen Financial Services (VWFS)  to the Court of Justice of the European Union (CJEU) in relation to the deductibility of overheads for hire purchase transactions in a partial exemption calculation. At the same time, it has dismissed HMRC’s appeal over whether the 50:50 split proposed by VWFS was fair and reasonable. 

VWFS proposed a new partial exemption special method to determine the deductible amount of input tax incurred on overheads. The transaction count-based method included two transactions for each vehicle provided on hire purchase: one for the vehicle (taxable) and one for the hire purchase finance agreement (exempt). This would give it 50% recovery of input tax in relation to a hire purchase agreement. HMRC’s policy is that as the vehicle is purchased from the dealer and sold to the customer at the same price, all costs relate to the exempt finance agreement only. VWFS appealed HMRC’s refusal to approve the method to the FTT, who found in VWFS’ favour. The Court of Appeal also found in VWFS’ favour. HMRC appealed to the Supreme Court.

The Supreme Court has referred the case to the CJEU, asking various questions including: where general business overheads attributable to hire purchase transactions have been incorporated only into the price of exempt supplies of finance, does the taxable person have a right to deduct any of the input tax on those costs? It will also be asked whether it can be legitimate in principle to ignore the taxable supplies of the cars (or their value) for the purposes of arriving at a deductible proportion.

On a subsidiary issue, HMRC had argued it had a fall-back position in challenging the ratio/transaction count put forward by VWFS. The Supreme Court disagreed. In a case where experienced counsel had been involved throughout, the court expected the grounds of appeal to have been agreed between the parties at the outset. The FTT explicitly stated in its decision that it had not been asked to consider this point and therefore it did not. The appeal was dismissed on this issue.

Comment: It will be some time before the CJEU decides on questions put to it, but similar businesses may wish to review their current partial exemption method and consider submitting claims where the calculation does not include goods supplied on hire purchase. Affected businesses should speak to their usual Saffery Champness contact.

HMRC v Volkswagen Financial Services (UK) Ltd (Supreme Court)

Whether a golf club was subject to ‘commercial influence’

In the latest case concerning the sporting VAT exemption and golf club fees, the FTT has decided a golf club was eligible and entitled to treat its sporting services as VAT exempt. Nayland Golf and Leisure Limited was a company limited by guarantee that offered golf memberships to its members. It had been treating these membership fees as VAT exempt for many years. VAT law provides that to qualify for the sporting VAT exemption, Nayland had to be free from ‘commercial influences’ and be a ‘not-for-profit body’. Nayland had close historical links to the owner and licensor of the golf course land. If Nayland had lost the case, it would have been required to retrospectively VAT register going back many years.

In a lengthy and complex judgement running to 44 pages, the FTT found that Nayland was not under commercial influence from a shadow director and was operating as a not-for-profit body. The case highlights the complex factors that need to be considered in such cases and acts as a warning for other sporting bodies that are applying the sporting VAT exemption.

Comment: The sporting VAT exemption is governed by complex anti-avoidance rules covering what organisations qualify as eligible bodies and are free from ‘commercial influence’ from third parties. If you believe you may be affected by these issues, please contact your usual Saffery Champness contact to discuss this further.

Stoke by Nayland Golf and Leisure v HMRC [2017] UKFTT 246 (3 April 2017)

Whether VAT was deductible on accident repair costs

The FTT decided that even though the car hire company arranged for and paid the costs of repairing vehicles damaged by its vehicles, the VAT was not deductible by U-Drive as it did not receive the repair service. 

U-Drive is a self-drive vehicle company. To reduce its costs of insurance claims arising from accidents caused by its hirers, U-Drive would make arrangements with garages to repair the accident victim’s vehicles and bill the cost to U-Drive, rather than it being the subject of an insurance claim. At the time of hiring the vehicle the hirer would be provided with a card to provide to the accident victim. This card offered to organise and pay the victim’s repair bill if they rang U-Drive to arrange this directly. U-Drive submitted a repayment claim for VAT incurred on the repair bills.

The Tribunal decided that U-Drive did not receive the garage services; it merely agreed to pay for them. It was a matter of economic reality that the victim was entitled to be indemnified for the cost of the repair by U-Drive’s insurer. U-Drive did not have an obligation to make the repair itself, but had calculated that it was cheaper to do that than to pay the indemnity due to its insurer. Contracting and paying for the services of the garages did not mean that it received their services. 

Comment: It is important in arrangements involving multiple parties to properly establish who receives the services and thus to whom the VAT deduction, if any, arises. HMRC may challenge VAT recovery if you appear to be paying for services that you didn’t receive. If you may be affected by these issues, please contact your usual Saffery Champness contact to discuss this further.

U-Drive Ltd v HMRC (FTT)

HMRC updated publications

HMRC has updated various VAT Notices recently:

  • Notice 700/1: Should I be registered for VAT
  • Notice 700/11: Cancelling your registration
  • Notice 701/29: Betting, gaming and lotteries
  • Notice 700/45: How to correct VAT errors and make adjustments or claims
  • Notice 700/56: Insolvency
  • Notice 701/30: Education and vocational training
  • Notice 718: the Margin Scheme and global accounting
  • Notice 718/2: The auctioneers’ scheme
  • Notice 733: Flat Rate Scheme for small businesses
  • Notice 742A: Option to tax land and buildings
  • Notice 1002: Adapted motor vehicles for disabled persons and charities

New form VAT 1617A: HMRC has also issued the declaration that will be required to be completed and sent to HMRC, by suppliers of zero-rated vehicles to disabled persons. This is compulsory from 1 April 2017. 

For advice regarding any of the issues raised here, please contact your usual Saffery Champness partner, or contact David McGeachy, VAT Partner.



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