This month the Upper Tribunal has been looking at salary sacrifice arrangements. There are also several cases looking at VAT recovery issues, including an important decision from the Supreme Court on how to determine VAT recovery on costs, which will be relevant to many businesses in receipt of grants, subsidies and non-business income. The Upper Tribunal looks at the line between medical and non-medical services. We also once again signpost the date for the introduction of the reverse charge on construction services and, finally, Brexit issues starts to loom as we move closer to 31 October.
Pertemps Upper Tribunal Case
The Upper Tribunal found in favour of the taxpayer in this case on salary sacrifice arrangements. The case concerned whether a fixed charge made by Pertemps in relation to the operation of a travel and subsistence programme under a salary sacrifice scheme was consideration for a supply the company should have accounted for VAT on.
Pertemps supplied permanent and temporary staff to its clients and the temporary staff were employees of Pertemps. Pertemps ran a mobile advantage plan under which employees were entitled to receive travel and subsistence expense payments but a deduction was made to their wage under a salary sacrifice scheme. Pertemps also charged the employees a nominal fixed fee for administering the scheme.
Pertemps won its appeal at the First Tier Tribunal (FTT) and HM Revenue & Customs (HMRC) appealed. The FTT had concluded the operation of the salary sacrifice scheme in these circumstances was not an economic activity being undertaken by Pertemps. Whilst the FTT acknowledged there was a supply taking place, it was not within the scope of VAT because it was not an economic activity.
The Upper Tribunal essentially agreed with the FTT. The reasons it gave were:
- The arrangements were not undertaken to generate income.
- This was not a service that could be provided by a third party supplier.
- It relies on a dispensation from HMRC to the employer.
- This was not an activity likely to be carried on by a private undertaking, in a market organised within a professional framework, and generally performed in the interest of generating profit.
Comment: This case reinforces the need for any activity to be one carried on for commercial purposes for it to fall within the scope of VAT. It also highlights that not all salary sacrifice schemes result in a supply taking place for VAT purposes by the employer to the employee. Businesses with salary sacrifice schemes are encouraged to regularly review their arrangements to ensure they are compliant.
Frank Smart Case
The Supreme Court has ruled in favour of the taxpayer over his entitlement to input tax deduction on the purchase of single farm payment entitlements (SFPEs).
The Frank A Smart & Son Ltd case concerns a Scottish farming business that purchased SFPEs and incurred VAT in the process. The business maintained that the costs incurred were related to the intention to make taxable supplies in the future. HMRC rejected the original input tax claim on the grounds there was no direct and immediate link between the VAT incurred and a taxable supply being made by the taxpayer, and Frank A Smart & Son appealed. The case ultimately went to the Supreme Court.
The critical question in the appeal was whether the SFPE units were services used or to be used for the purposes of the taxpayer’s taxable business supplies, to entitle it to repayment of the VAT charged on them. The taxpayer made a claim to such repayment, but this was refused by HMRC. The taxpayer appealed to the FTT, where its claim to repayment was successful. HMRC appealed to the Upper Tribunal, but the appeal was refused, and it then appealed to the Court of Session against the decision of the Upper Tribunal.
HMRC’s position rested on the costs being directly attributable to the receipt of a farming subsidy, which itself is outside the scope of VAT, and therefore the costs did not relate to a taxable activity being undertaken.
The Supreme Court agreed with the taxpayer and concluded that the key test was how the subsidy income was to be used by the business, and in this case the taxpayer was able to satisfy the court that it had a demonstrable intention to invest the funds in its taxable farming business.
An additional point did come out of the judgement which suggested HMRC should be able to revisit the position if the intention to use the subsidies for the purposes of the taxable business never crystallised. At this time, there does not appear to be a mechanism within legislation which would enable such an approach and therefore legislators may seek to introduce a measure which would enable clawback of input tax where costs were originally intended for business use but ultimately are put to a non-business purpose.
Comment: This is an interesting case which could have wider implications for the farming and not-for-profit sectors. Businesses and organisations receiving subsidies and grants are encouraged to review their VAT recovery position in light of this judgement, on costs being incurred in relation to receiving those funds. If the intention to use such payments for the furtherance of taxable activities, VAT recovery is possible following this case.
Koolmove Limited case
Koolmove Limited successfully argued it was entitled to reclaim pre-registration VAT in respect of legal costs that were incurred by the sole company director and shareholder before the company was formed.
The legal costs related to a case taken against the director/shareholder to try and prevent software that he had developed being used and distributed commercially. The developer always had the intention of pursuing the commercial applications of the software through a limited company of which he would be the sole director and shareholder and he was able to demonstrate this intention to the FTT.
The FTT decided the conditions for pre-registration VAT relief had been met and allowed the taxpayer’s appeal.
Comment: Pre-registration VAT recovery often crops up, particularly in relation to legal and professional costs, and this case certainly highlights that another party receiving the services does not necessarily preclude a newly VAT registered person from claiming the VAT. HMRC has not yet commented on this case and it is not known whether it will appeal the FTT decision or not.
Newmafruit Farms Limited argued it was entitled to reclaim VAT on legal costs incurred in relation to suing an investment partner after a property development project turned sour. Newmafruit had a lent a significant sum to the investment partner, who was then in breach of the arrangements put into place between the two parties. Newmafruit sought to argue the legal costs incurred in suing the partner, had a direct connection to the assets of the business which were used in the course and furtherance of taxable activities.
The FTT, in agreeing with HMRC’s decision to disallow input tax recovery, concluded the legal costs were directly linked to the provision of a loan that was an exempt supply and therefore Newmafruits had no entitlement to reclaim the VAT incurred.
Comment: This case further highlights the need to identify a direct and immediate link between costs incurred and the activities or objects which those costs relate to when considering input tax recovery entitlement. Only in clear circumstances, where no such direct and immediate link exists, can a taxpayer consider the costs as an overhead and recover the VAT on that basis.
Skin Rich Ltd Case
The FTT has dismissed an appeal by Skin Rich Ltd in relation to the VAT treatment of certain procedures it was arguing were medical in nature and therefore VAT exempt.
Skin Rich Ltd supplies specialist skin treatments, non-surgical facelifts, nail fungus treatment, tattoo removal and injectable treatments. It had treated some of its services as VAT exempt. HMRC disagreed and assessed the business for VAT on the services in question.
To support its arguments, the business suggested that GPs are referring patients to Skin Rich Ltd (and other clinics) to obtain nail fungus treatment, as local surgeries do not have sufficient resources.
In reaching its conclusion that the services did not qualify for VAT exemption, the FTT stated that Skin Rich’s clinic was not an approved, licensed, registered or exempt from registration body for the purposes of the VAT rules. This was on the basis that Skin Rich was under no obligation from its local council in relation to matters such as hygiene, quality of service and training/supervision of practitioners. The permissions granted by the council to the clinic were planning-related and were not associated with ‘state-regulated’ activity in terms of the provision of health and medical services. As the business was not a hospital or a state-regulated institution on this basis, it was not able to exempt the services it supplies and therefore they are taxable services.
The FTT also commented that sufficient evidence that the nail fungus removal treatment was the provision of care, or indeed a medical treatment for the purposes of the VAT exemption, had not been provided. It did conclude, however, that it considered the provision of botox to be a medical or care related treatment and was therefore within the scope of the VAT exemption on this basis. Unfortunately for Skin Rich Ltd, the fact that the FTT concluded it is not a state-regulated institution under the applicable VAT rules prevented VAT exemption applying.
Comment: The judgement in this case should be of interest to any businesses in the cosmetic services sector and operators undertaking similar procedures. The VAT law in this area is highly complex and often open to interpretation.
HMRC actions ahead of no-deal Brexit
We are aware that HMRC has written to UK VAT registered businesses identified as trading with the EU, to recommend they undertake advance planning ahead of a no-deal Brexit on 31 October 2019 on customs related matters. With growing concerns regarding traders’ preparations, HMRC is now automatically registering over 100,000 businesses for an Economic Operator Registration and Identification (EORI) as this is required in order for those businesses to be able to clear goods arriving in the UK from the EU through UK Customs in the event of a no-deal Brexit.
HMRC has also published a draft note of updates to be made to a series of public notices as a result of the implementation of The Customs (Import Duty) (EU Exit) Regulations 2018. The updates cover elements such as the presentation of goods to Customs, temporary storage declarations and customs declarations.
Comment: We expect communications from HMRC to increase over the coming weeks as we head towards 31 October and the possibility of a no-deal Brexit. Many of the provisions to be introduced in March (when the first no-deal Brexit deadline occurred) may still be relevant in the event of a no-deal Brexit in October. We await further updates from HMRC with regards to import VAT, such as the deferred VAT accounting to allow import VAT to be accounted for and recovered (where applicable) through a trader’s VAT return.
Reverse charge on construction services
The new reverse charge rules on construction services comes into effect on 1 October 2019. Businesses which either supply or receive construction services should familiarise themselves with the new rules and when they apply and what their obligations are under these provisions.
For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.