This month we summarise the position regarding the temporary reduced rate of VAT and explore the difference between education and consultancy services.
We also comment on HM Revenue & Customs (HMRC) widening the net for Making Tax Digital for VAT, and its current approach with 64-8 agent authorisation. There is also an interesting input tax case with wider implications and we review HMRC’s recent announcements on the movement of goods post-Brexit.
Temporary reduced rate of VAT
A temporary reduced rate of VAT has been introduced from 15 July and will run until 31 March 2021. It affects the following sectors:
- Visitor attractions
- Hotel and holiday accommodation
- Restaurants, cafes, bars and similar establishments.
We have prepared frequently asked questions and answers to clarify some of the issues around practical implementation. You can also view our recent webinar, in which our VAT experts provide additional insight into the scope of the reduced rate.
Our comments: Whilst HMRC has published some amended Public Notices, further guidance has been limited and there has been no guidance paper issued, as accompanied VAT rate changes in 2008 and 2011. That previous guidance contained details of anti-forestalling measures. It remains to be seen whether HMRC will publish any further guidance or introduce similar measures again when the temporary reduced rate period comes to an end.
In advising clients on the implications of the temporary reduced rate, it has become clear that the legislation and guidance does not take into consideration how varied supply chains and product and service offerings are. In the absence of specific guidance, we are reliant on existing guidance and case law in respect to such matters as single/multiple supply, value apportionment, room hire when catering is not the main object, to what extent a business is obliged by VAT law to change their pricing and refund customers the difference when the VAT rate changes.
These remain complex areas of VAT and further advice should be sought by businesses operating in the affected sectors. For further details on the rate change please get in touch with your normal Saffery Champness contact.
HMRC to extend reach of MTD for VAT
HMRC has updated its Making Tax Digital (MTD) guidance to reflect that, from 1 April 2022, all businesses registered for VAT in the UK, will need to comply with MTD and file their VAT returns through functionally compatible software that links to HMRC’s API platform. Currently, only those businesses whose taxable turnover exceeds £85,000 need to file their VAT returns in this way.
Our comments: This move will force the remainder of the VAT registered population not already filing under MTD to reconsider their VAT filing processes and to prepare to adopt a new process to comply with MTD rules. This includes micro-business with a very small turnover and businesses whose supplies are outside the scope of UK VAT because of the place of supply.
Whilst the move will provide certainty, in that from 1 April 2022 VAT returns will no longer be available to submit through a Government Gateway Account, it will mean businesses and agents will have to navigate the rather cumbersome registration and authorisation process in all instances. It is hoped HMRC will recognise some improvements to the registration process are required.
For further details of the Making Tax Digital for VAT requirements please speak to your usual Saffery Champness contact.
VAT agent authorisation (64-8)
The 64-8 agent authorisation has long been third parties’ route to discussing the VAT affairs of their clients or associated businesses with HMRC. 64-8s are also used for other taxes as well, such as corporation tax and income tax. Historically, HMRC has insisted on original signed 64-8s being posted,but during the Covid-19 lockdown, postal services in and out of HMRC were restricted. Agents have therefore been emailing 64-8s in to HMRC and retaining the original on file.
HMRC’s response to this and current handling of 64-8s has been inconsistent and we have experience of officers insisting on hard copy originals being posted in before they will accept an agent has been given authorisation by their client. We are also aware that, on occasion, HMRC has removed an existing 64-8 which covers, for example, corporation tax, when a new 64-8 for VAT, authorising a different agent, is received.
Our comments: The current position regarding 64-8s is not being consistently applied and businesses should be mindful of the need to manage 64-8s carefully. We would advise sending a covering letter with any 64-8 submitted to HMRC, either by post or by email, explaining the context and to ensure the submission of a 64-8 does not necessarily mean that an existing 64-8 covering a different tax should be removed.
For further details of the Making Tax Digital for VAT requirements please speak to your usual Saffery Champness contacts.
Consultancy vs education services
In the recent case of Mandarin Consulting Limited v HMRC  TC07714, the First Tier Tribunal (FTT) has opined that a supply was one of consultancy services and not education services. The case also considered who was the actual recipient of the supplies in question, which was a relevant point in determining the place of supply. Mandarin (the appellant) supplies career coaching and support to students of Chinese origin.
In finding in favour of the appellant in this case, the FTT concluded the services were not education services (which is how HMRC had classified them) but rather were “specialised tuition which does not amount, in itself, to the transfer of knowledge and skills covering a wide and diversified set of subjects or to their furthering and development which is characteristic of school or university education”.
The FTT also considered the employees of Mandarin delivering the ‘tuition’ to the students to be ‘consultants’ under the normal meaning of the term.
On the place of supply point, the FTT agreed that from 2016, when Mandarin contracted with the student’s parents who resided in China, and a record of this was maintained, that the place of supply was China and outside the scope of UK VAT as a result. Prior to 2016, when Mandarin had contracted with the students and had not kept a record of their usual place of residence, the FTT concluded the place of supply was therefore in the UK and VAT was due.
Our comments: The case highlights the difficulties that can arise when deciding whether a service is one of consultancy, or one of education, or indeed something else.
The nature of supply of services is critical in determining the VAT liability of that supply and also the place of supply. The line between when a service is a consultancy service and when it is education, is often a fine one. Whilst not binding, the FTT decision in this case is helpful in understanding the court’s view of when a service is education and when it is not.
The case highlights the importance of keeping a record of customers’ usual place of residence when a supply of services is a non-taxable person (private individual) to support the place of supply position taken.
For further information on the topics covered by this case please contact Nick Hart.
Border controls with the EU after Brexit
In recognition of the strain Covid-19 has had on UK businesses, the government has announced that UK border controls on the movement of goods will be introduced in three stages following Brexit on 1 January 2021. From that date the UK will cease to be part of the EU VAT and Customs Union (albeit Northern Ireland will have a special status the details of which are still being finalised).
The first stage will see basic import requirements for most goods requiring sufficient record keeping and import VAT accounting under the new postponed accounting rules. Traders will have six months to complete customs declarations. Customs duties (where due) can be deferred until the customs declarations are made. Export declarations and UK exit safety and security declarations will be required for all goods.
From April 2021, most farm products will require pre-notification and health documentation. Physical checks will be conducted at the point of destination until July 2021.
Finally, full customs declarations will need to be made from July 2021, including customs duties settlement (where due). Although customs duties will be payable on some goods, many are to be relieved from customs duties under the temporary tariffs that will apply in line with earlier government announcements.
This guidance contains practical advice for importers getting ready for Brexit. This includes ensuring traders have obtained an EORI number, which is essential for deferring import declarations.
Input VAT recovery on legal services fees
In the FTT case of T&C Bainbridge Farming Partnership, HMRC refused to allow an input tax credit claimed by the partnership in respect of legal services incurred in proceedings to rescind transfers of land to a discretionary trust.
The partnership argued that input VAT on the costs had been incurred for the purposes of the partnership’s business and as such should be recoverable by the partnership. Conversely, HMRC argued that the costs were not incurred for the purposes of the partnership but rather as a “result of individual concerns about the land being split up in the event of a member of the partnership dying”. Therefore, HMRC concluded that there was no direct or clear link between the costs and the business carried out by the partnership.
The FTT rejected the partnership’s argument and found in favour of HMRC, holding that the discretionary fund was set up for the purposes of determining which individuals would get the benefits from land previously belonging to one of the partners after his death. As such, there was “no real connection, or nexus, between the expenditure on establishing the discretionary trust and the business, that was directly referable to what the business was in fact doing”.
Our comments: HMRC’s position is in line with its own published guidance and case law and is a timely reminder that for a business to recover costs it must be able to demonstrate that the costs are for the business and not for the benefit of partners or directors in their personal capacity.
For further guidance and advice please contact Sean McGinness.
Changes to VAT treatment of overseas goods sold to customers
In another Brexit-related announcement, the VAT treatment of imported goods sold to UK consumers that do not exceed £135 in value will change from 1 January 2021. VAT will be collected on sale of these goods in the UK rather than on importation. Currently, there is no import VAT due on the importation of these goods.
The measure is designed to protect UK based businesses from competition from VAT free imports by overseas-based traders.
Overseas-based traders will be forced to register for UK VAT and account for VAT on their sales to final consumers unless they are sold via an online market place (OMP). Where an OMP is involved, there will be a deemed sale too and then by the OMP to the final UK consumer. These measures are designed to ensure that UK VAT is brought to account on sales of imported goods not exceeding £135 to UK consumers. The policy paper accompanying the announcement sets out the detailed rules, including the valuation rules to apply to determine if the goods do not exceed £135.
It is recommended that businesses involved in this area read the detailed guidance on the application of the rules.