With the continuing political uncertainty following the government’s recent Brexit vote defeat, what happens if the UK leaves the EU without a deal?
If nothing changes between now and 29 March 2019, UK businesses will broadly be subject to the same VAT and customs rules that apply when trading with the rest of the world (commonly referred to as a hard Brexit).
In summary this is expected to mean:
- An obligation to make import declarations and to pay any customs duties on imports on dutiable goods from the rest of the EU.
- Businesses may need to put in place guarantees or Customs Comprehensive Guarantees (CCG) with HMRC in respect of their imports from the EU.
- Normally importers of goods must pay import VAT and subsequently seek to recover it through their VAT returns creating, at best, VAT cash flow costs. The government has announced it will introduce a deferred accounting scheme that allows import VAT to be declared (and recovered where applicable) through the same VAT return. This should alleviate the cash flow cost for those businesses able to fully recover VAT (SI2019/60).
- VAT deduction rules for UK businesses supplying insurance and financial services to the EU will need to change. HMRC are considering the changes and how generous the recovery rules will be.
- Businesses importing and/or exporting goods will need to register for an EORI (Economic Operator Registration and Identification) number to be able to import goods (this was not necessary previously if all goods imported were from the EU).
- Distance selling arrangements will no longer apply to UK businesses selling and shipping goods to EU consumers. Member states are likely to treat imports of goods from the UK in the same way as goods from other non-EU countries.
- Intrastat and EC sales lists for goods and services will no longer need to be completed by VAT registered UK businesses.
- The UK will stop being part of the EU-wide VAT IT system which includes VAT Mini One Stop Shop (MOSS). Businesses that sell digital services to consumers in the EU will be able to register for the MOSS non-union scheme.
- UK businesses will no-longer be able to use the EU VAT refund system. They will need to use the existing claims procedures for non-EU businesses.
Businesses that import and re-export large volumes of potentially dutiable goods from the EU may urgently want to explore customs simplification procedures that defer or mitigate customs duty costs into the UK.
In summary, no-one knows the final outcome of the political process, or if a last-minute extension or compromise deal will be agreed to allow the status quo on VAT and customs to continue past 29 March. However, as the cliff edge is fast approaching, an increasing number of businesses are assuming they will need to deal with a hard Brexit from 29 March.
Zero-rating certificates: reasonable excuse
The Upper Tier Tax Tribunal (UTT) has released its decision in the Greenisland Football Club (GFC) case. GFC was a not-for-profit organisation which built a clubhouse on leased land. The clubhouse was to be available for use by the whole community in a similar way to a village hall. Having read HMRCʼs guidance, GFCʼs development officer consulted with GFCʼs accountants and tax advisers, both confirmed that the building work could be zero-rated. The construction of a relevant charitable building can be zero-rated in certain circumstances and a certificate stating the purpose of the building must be issued to the builder in order for the builder to zero-rate the supply. GFC issued a certificate to the builder.
HMRC issued a 20% penalty to GFC contending that because the clubhouse was not owned, administered or organised by the local community, the clubhouse was not freely available to the larger community, and as such did not qualify for the zero-rate. The penalty was levied on GFC on the basis that it had issued an incorrect certificate.
GFC appealed on the basis that GFC had no priority over the building and that the building was promoted as a facility for the whole community rather than a specific group. Furthermore, if the work was standard rated, rendering the certificate incorrect, there was a reasonable excuse and as such the penalty should not have been issued.
The First Tier Tribunal (FTT) agreed with GFC on both counts; that the clubhouse was used in a similar manner to a village hall and so the supply should have been zero-rated but also that if this decision is incorrect GFC had a reasonable excuse for issuing the certificate and so the penalty should be withdrawn.
HMRC appealed to the UTT on the following grounds:
- The FTT made an error in law by not providing an adequate reason as to how the intended use of the clubhouse was like that of a village hall.
- The FTT made an error in law by not considering whether what was taking place at the clubhouse constituted a business.
- The FTT made an error in law by concluding that there was a reasonable excuse for issuing a zero-rated certificate.
HMRC succeeded on the first two grounds. However, the UTT agreed that GFC had a reasonable excuse in respect of believing its issue of the certificate was correct and therefore no penalty could apply.
Comment: This is an interesting decision as HMRC were successful in arguing that the building did not qualify for the zero-rate. However, as GFC had a reasonable excuse, no tax or tax equivalent penalty has been paid. HMRC appear to have not pursued the builder for incorrectly zero-rating their supplier (presumably on the basis that the builder acted in good faith).
HMRC continue to challenge DIY housebuilder claims
Mr Tabb and his wife owned a barn and several out buildings. One of the out buildings had been converted into a games room and then subsequently living accommodation (’the annexe’) for Mr Tabb’s mother-in-law. After her death, Mr Tabb and his wife decided they would demolish the annexe, build a new house in its place and then sell the barn. Mr Tabb made an application to HMRC for a refund under the DIY Builders Scheme for the VAT incurred on constructing the new house but HMRC rejected the claim.
Mr Tabb appealed this decision with the sole issue being whether the construction of the new house constituted ’the construction of a building designed as a dwelling’ under the VAT legislation. HMRC argued that the building was not ’new’ because the existing building had not been completely demolished to ground level. This was on the basis that whilst the annexe had been demolished, the barn was still standing. HMRC considered the annexe and the barn to be one building whereas Mr Tabb argued that they were separate. Mr Tabb (who represented himself) went on to argue that even if the building was not new, the enlargement of the existing building should be considered to be a new dwelling (there was no access from the new building to the existing barn conversion).
The FTT agreed with Mr Tabb that there is an alteration to an existing building and that the alteration creates a new dwelling.
Comment: HMRC continue to regularly challenge DIY housebuilder claims. It is important that HMRC guidance is carefully reviewed and followed to ensure that properly recoverable VAT does not become a cost of qualifying projects. Further, if HMRC initially reject a claim, the grounds for rejection should be considered. As Mr Tabb demonstrated, HMRC’s rationale is not always sound.
Roy Tabb  UKFTT 0737 (TC)
Care providers: partial exemption allocation of accommodation costs
Adullam Homes is a housing association providing services to local authorities. These include support services with accommodation and the same support services without accommodation.
The FTT was asked to determine if the appellant was entitled to recover VAT on costs related to the provision of residential accommodation. The letting of residential accommodation is VAT exempt and therefore VAT incurred in the course of providing this is normally irrecoverable. However, in this case the appellant argued that the VAT was an overhead because there was a direct and immediate link between the costs of providing the accommodation and the taxable support services provided to the local authority.
HMRC and the appellant agreed that the supply of the accommodation was exempt and the additional support services were taxable. The Tribunal considered the appellant’s supply to the local authority under the accommodation support contract to be one supply with two strands. And that the costs of providing the accommodation, as required under the contract, was incurred so they could bid for support contracts.
The Tribunal agreed with the appellant that the costs were apportionable because it had to provide the accommodation so it could bid for these contracts so there was a direct and immediate link. If the accommodation had been supplied under a separate contract the Tribunal may well have come to a different conclusion.
As both parties agreed that the accommodation and support services had different VAT liabilities the Tribunal did not explore the issue of whether there was a single supply. The Tribunal would then have had to decide if the supply was all exempt or all subject to VAT where the VAT would have either been fully recoverable or fully irrecoverable.
Comment: As this was a FTT decision it is open to further appeal from HMRC and is not binding precedent. However, it demonstrates the value of considering the allocation of costs for partial exemption purposes.
Adullam Homes Housing Association Limited  UKFTT 0012 (TC)
Is a Raw Choc Brownies a cake?
Pulsin’ manufactures ‘Raw Choc Brownies’ products. The products are marketed as ‘healthy brownies’ which are available in four different flavours.
Pulsin’ submitted an error correction notice to claim a repayment of the output tax it had previously paid on the sales of the Raw Choc Brownies. It had treated the sale of the ‘Raw Choc Brownies’ as a standard rated supply of confectionery but now believed the product should be classified as a zero-rated cake. HMRC rejected the claim as they believed that the product did not have sufficient characteristics to be classified as a cake and instead was an item of confectionery.
Pulsin’ Ltd appealed HMRC’s decision and the FTT, considering the production process, the ingredients and the VAT classification of similar products, concluded that the brownies were cakes and therefore eligible to be zero rated.
Comment: The case shows the importance for manufacturers of considering the scope of the zero-rate for food products. The margin improvement on a zero-rated product is clearly significant for retail products.
Pulsin’ Ltd  UKFTT 0775 (TC)
For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.