There continues to be a large volume of material relating to Brexit and regular Covid related updates from HM Revenue & Customs (HMRC) which businesses should be aware of. In our latest VAT Update, we cover issues relevant to charities, those involved in cross-border trade and the care homes and student accommodation sectors.
Charities and holding companies: accounting for VAT on services from overseas
The European Court of Justice’s (CJEU’s) recent decision in the case of The Commissioners for Her Majesty’s Revenue & Customs v Wellcome Trust Ltd (C‑459/19) is relevant to whether an entity is a taxable person for the purposes of receiving services from abroad, which would result in UK VAT being due under the ‘reverse charge’.
The decision centred on the definition of economic and non-economic activity; the European definitions of these terms being wider than the UK ones. The court had previously found that ‘economic activity’ does not include an activity consisting of the purchase and sale of shares and other securities by a trustee in the course of the management of the assets of a charitable trust. Wellcome Trust Ltd was found to be undertaking non-economic business activity. The question was whether that non-economic business activity meant Wellcome Trust Ltd should be treated as a taxable person for the purposes of receiving the services and therefore whether it was required to self-account for VAT.
The court found that where a legal entity is undertaking a non-taxable activity, but that activity is undertaken in the course of business, then the legal entity should be treated as if it is making business supplies for the purposes of receiving supplies. That is, VAT is due on services received from abroad and must be accounted for using the reverse charge mechanism.
Comment: The ruling has potential application in the charities sector as well as to holding companies that do not have taxable activities. Where input tax recovery is restricted, accounting for output VAT on services received from abroad will be a cost to the business. It is recommended that charities and holding companies review the treatment being applied to services received from abroad to ensure that correct VAT accounting is in place.
The Commissioners for Her Majesty’s Revenue & Customs v Wellcome Trust Ltd
Charities: HMRC update on the VAT liability of digital publications
HMRC has published an update on the VAT treatment of supplies of digital newspapers and other digital publications before 1 May 2020, following the Court of Appeal decision in News Corp UK and Ireland Ltd earlier this year. The Court of Appeal held that electronic versions of newspapers should be standard rated for VAT, reversing the decision of the Upper Tribunal.
This latest decision supports HMRC’s policy that supplies of digital publications before 1 May 2020 are standard rated.
The brief confirms that the litigation on this matter (which is still ongoing) has no impact on the government’s introduction of a new zero rate for supplies of certain e-publications (including e-newspapers), which came into effect from 1 May 2020. It also explains how organisations can submit claims for overpaid VAT based on the Upper Tribunal decision and protect their position until the litigation in this case has concluded.
Comment: Businesses and charities that supplied digital newspapers and publications before 1 May 2020 should continue to submit claims for overpaid VAT (subject to the four-year cap for error corrections), whilst we await the outcome of the litigation.
Revenue and Customs Brief 3 (2021): VAT liability of digital publications – update on litigation in News Corp and Ireland Ltd
Real Estate: sale and leaseback in the care and student sectors
The recent UK Supreme Court decision in Balhousie Holdings Ltd v Commissioners for Her Majesty’s Revenue & Customs [2021] UKSC 11 provides some welcome news to businesses in the care home and student accommodation sector. The case revolved around the point of whether a VAT self-supply charge was triggered when a care home operating entity sold and then immediately leased back the care home from a funder.
HMRC views the sale as the disposal of the care home operator’s “entire interest” and therefore a self-supply charge, calculated on the value of the zero-rated purchase of the care home, should apply.
The Supreme Court found for the taxpayer and held that, whilst the sale and leaseback are separate transactions, the care home operator could not be said to have disposed of its entire interest as it continued to occupy the care home. Further, the Supreme Court rejected the argument that a legalistic approach should be taken and it did not matter for the purposes of this application of the VAT law where, for a moment in time, the legal interest was disposed of before the leasehold interest was granted.
Comment: This is good news for the sector as Balhousie was causing concern for care homes and student accommodation providers that were looking to refinance. Each case had to be considered on the facts, but the threat of a Balhousie VAT charge has prevented this route being taken. This issue now seems to have been clarified.
However, these provisions can still apply in other scenarios for those in the care home and student accommodation sector and so any disposal or change of use needs to be carefully considered to ensure that there is no unexpected VAT charge.
Please contact Sean McGinness, VAT Partner, should you wish to discuss this case further.
Covid issue: option to tax notification period
Ordinarily, a decision to opt to tax land and buildings must be notified to HMRC within 30 days of making the decision. Due to the pandemic, HMRC temporarily extended the time limit to 90 days from the date the option was made, which we reported on in our May 2020 VAT Update. That extension was due to end and the time limit revert to 30 days for options made after 31 March 2021. However, HMRC has updated its guidance and the extension is now available for elections made until 30 June 2021.
Comment: This is a welcome continuation of an administrative easement, as the signing of an option to tax form by the relevant party can be problematic when social distancing must be maintained. However, the extension period does not eliminate the need for the decision date to be suitably recorded/documented, particularly when an option to tax is required to secure transfer of a going concern treatment.
Please get in touch with your usual Saffery contact for further guidance on option to tax matters.
Brexit: GB to NI trade
The position of Northern Ireland from a VAT and Customs perspective, and transactions between Northern Ireland (NI) and Great Britain (GB) post-Brexit, are still the cause of some confusion. We recap on some of the basics here.
A shipment of goods from NI to GB is not subject to any customs controls – essentially there is free movement in this direction.
A shipment of goods from GB to NI is classed as an export from GB and an import into NI. If the transaction involves the sale of goods from a GB based supplier to an NI-based business then the NI business should be encouraged to take on the compliance regarding the import itself. The NI business in these circumstances would need to:
- Have an NI-issued EORI number with the prefix of ‘XI’;
- Register for the Trader Support Service (TSS). Amongst other things, it will enable the NI business to lodge a simplified customs declaration through the TSS; and
- Register for the UK Trader Scheme (UKTS). This is required for the NI business to make a declaration that the goods being imported into NI are not at risk of entering the EU (which would typically happen if the goods simply cross into the Republic of Ireland). By declaring the goods ‘not at risk’ the NI business is confirming they will be used or sold to customers in NI. Consequently, import VAT and duties will not be levied.
The sale of the goods from GB to NI is still subject to UK VAT which the supplier would charge and collect from the customer.
In instances where the customer is not able to fulfil the obligations above, the UK supplier is able to register for TSS and make a simplified customs declaration under temporary arrangements, although the long-term expectation is that the NI-based parties will care of the import requirements.
Comment: There is still some uncertainty and confusion regarding transactions between NI and GB which require a shipment of goods, and such confusion is not confined to just GB suppliers or NI customers. Freight agents as well appear to be struggling with understanding what must be provided by the supplier or customer in order for the appropriate formalities to be complete. Unnecessary information is being requested and this is creating an unsettling situation for all concerned.
If you are supplying goods to customers in NI, you should agree which party will be responsible for the customs formalities and whether they are registered for the TSS and UKTS and have an XI EORI number. If in doubt, it is advisable to take advice prior to goods being shipped.
Please contact Nick Hart VAT Director for assistance with Northern Ireland related supply chains in the post-Brexit environment.
Brexit: extended VAT recovery for finance and insurance businesses
Generally speaking, financial and insurance services are exempt from VAT and this means that VAT incurred on the costs relating to this income cannot be reclaimed from HMRC. The exception to this is VAT recovery on ‘specified supplies’ of certain financial services under the VAT (Input Tax) (Specified Supplies) Order 1999 (SSO).
Previously, the SSO allowed UK financial services and insurance businesses to recover input VAT on costs associated with making specified supplies to non-EU customers. However, from 11pm 31 December 2020, the SSO was extended to include specified supplies made to customers in the EU following the UK’s departure from the EU, allowing the recovery of VAT on associated costs.
HMRC has published details of the transitional arrangements where transactions either span the end of the year, or where VAT bearing costs were incurred before the cut-off mentioned, which are attributable to a specified supply carried out in 2021.
Comment: Suppliers of ‘specified services’ should take careful note of the transitional arrangements published by HMRC, to ensure their VAT recovery overall remains correct. The expansion of specified services to those supplied to customers outside the UK (and not just outside the EU, as was previously the case before Brexit) has given operators in the financial services and insurance sectors a welcome opportunity to increase their VAT recovery and they should be reviewing their internal processes to ensure VAT recovery is maximised.
The transition arrangements provide a reminder that care does need to be taken during these months where pre-Brexit transactions are still being processed through accounting.
Transitional guidance for VAT specified supplies
If you would like advice on this issue, please contact Nick Hart VAT Director.
Making Tax Digital: digital links requirement
The ‘soft-landing period’ for businesses to have in place ‘digital links’ between all parts of their functional compatible software ends in April 2021 under Making Tax Digital (MTD) requirements, and businesses will need to ensure digital links are in place for their first VAT return period starting on or after 1 April 2021. A digital link is one where a transfer or exchange of data is made electronically between software programs, products or applications.
Where businesses do not comply with HMRC’s MTD requirements, it has the power to levy penalties.
General regulatory penalty
HMRC has the power to charge a penalty for failure to comply with certain regulatory requirements, eg failure to have digital links in place. The penalty rates for such a failure are:
- If there has been no previous failure to comply with the requirement within two years prior to the present failure – £5 per day.
- If there had been only one such occasion in that period – £10 per day.
In any other case – £15 per day.
There is a minimum penalty of £50. The penalty rate is applied to the number of days a failure continues, up to a maximum of 100 days.
Record keeping penalty
HMRC has the power to charge a penalty for failure to keep the required VAT records, and can impose a maximum penalty of £500.
Filing method penalty
HMRC’s powers have been extended so that they can impose a penalty of up to £400 for filing a VAT return without using functional compatible software.
Comment: General regulatory penalties are discretionary and in our experience rarely applied by HMRC and we would expect a light touch where businesses have made reasonable efforts to comply with MTD for VAT regulations but have made errors.
Record keeping penalties cannot be charged in addition to general regulatory penalties and we would expect a general regulatory penalty to be used more often than a record keeping penalty.
If you would like further details on the digital links requirement under MTD, or VAT compliance under MTD in general please get in touch with your usual Saffery contact.
VAT groups and international branches
Danske Bank is part of a VAT group in Denmark and operates through its branch in Sweden. Danske Bank provides an IT platform that is used by all its establishments, including the Swedish branch. The Swedish tax authorities issued a ruling that the Danish VAT group and the Swedish branch should be considered two separate taxable persons, therefore the IT services provided by Danske Bank to its Swedish branch fall within the scope of VAT and should not be disregarded.
In Danske Bank A/S (Case C-812/19), the CJEU provided further clarity and remained consistent with its decision in the Skandia Case, which dealt with the VAT treatment of services recharged by a US head office to its Swedish branch (where the branch was part of VAT group in Sweden). The CJEU used the same reasoning as in the Skandia case and ruled that the dealings between Danske Bank and its Swedish branch should be qualified as dealings between two distinct taxpayers and, as such, Swedish VAT is due on the recharges and should be accounted for under the reverse charge mechanism by the Swedish branch.
Comment: Not all Member States have applied Skandia in their local VAT policies and approach, because VAT grouping is not consistently applied. No comment has been made by HMRC yet. Advice should be sought on the application where clients have head offices and branches in different countries.
The Court of Justice of the European Union (CJEU) Danske Bank A/S VAT Case (C-812/19)
Please contact Sean McGinness, VAT Partner, or Nick Hart, VAT Director, for further details.
