This month’s VAT Update includes details of HM Revenue & Customs’ (HMRC’s) official guidance on the reverse charge for building and construction services: we are now just three months away from major changes likely to impact on businesses supplying construction services. We outline an advanced notification facility to allow EU businesses to pre-register for UK VAT in the event of a ‘no-deal’ Brexit. We also cover a new reverse charge for the renewable energy certificates sector, as well as various cases impacting not-for-profit organisations.
Guidance on the reverse charge for building and construction services
Ahead of the introduction of the reverse charge for building and construction services on 1 October 2019, HMRC has published its guidance note on the topic.
To recap, the reverse charge will, broadly speaking, apply to supplies of construction services to parties in the supply chain who will be re-supplying such services to their own customer.
The guidance note outlines which services are impacted by the changes and which are not. Affected services are referred to as ‘specified services’, which are also reportable under the Construction Industry Scheme (CIS). For reverse charge purposes, the VAT is applied to the whole value of the service being supplied, including materials, whereas under CIS it is just the service element which is applicable. Notable exclusions listed in the guidance are professional services, such those supplied by architects and surveyors, installing security systems and drilling for or extracting oil or natural gas.
The guidance details how VAT is accounted for under the reverse charge and when it applies. It outlines the important difference between an end user or intermediary supplier in the supply chain and how supplies need to be handled under the new rules. Greater communication is required between stakeholders in the supply chain to identify and confirm which parties are end users or intermediary suppliers, with the position being confirmed in writing so a supplier has evidence to support the VAT treatment applied.
The guidance also provides direction on when the reverse charge needs to be brought to account under the time of supply rules and the position to adopt for services supplied under a contract commencing before 1 October 2019, but not completed until after that date.
Finally, the guidance provides valuable direction to affected parties on the initial steps to take now in preparation for the changes.
Comment: We are seeing many clients now start to prepare for the introduction of the reverse charge but there is still much to be done in order for affected businesses to be fully ready. The new guidance provides a degree of surety in some cases, in terms of the treatment to apply in a particular circumstance, which will help businesses further. Given that the changes are now just three months away from being implemented, we are recommending to our clients that if they are in any way part of a construction supply chain (or expect to be in the future), that they fully assess the VAT position of the construction supplies they are making or receiving, so the correct treatment is applied.
Advanced notification facility for non-resident VAT registrations
An EU business that is not currently required to be VAT registered in the UK, because of an available EU simplification or easement, can now register in advance of the UK leaving the EU without a deal on 31 October 2019. The advance notification facility allows a voluntary registration that would have an effective date of 1 November 2019. When completing the online application, businesses should choose trade class/SIC code 99000 European Community and also describe accurately what the business does and enter a number in the estimated turnover section. This will enable HMRC to identify these applications which are being submitted in case there is a ‘no-deal’ Brexit.
Should there be a further withdrawal extension, HMRC will amend the date of registration to coincide with the new leave date. Should a deal be agreed with the EU which sees the existing VAT rules remain, applications will be cancelled by HMRC where applicable.
Comment: EU businesses trading with the UK should continue to assess their position to identify where they may need to register for VAT in the UK, should the UK leave the EU on 31 October 2019 without a deal. Submitting a registration application now is a prudent approach and will ensure a registration is in place on 1 November 2019, should there be a no-deal Brexit.
New reverse charge for renewable energy certificates
In attempt to tackle VAT fraud in the renewable energy certificates sector, new legislation has been introduced that brings in a new reverse charge. HMRC has published Brief 4 to provide more details of the changes, which take effect from 14 June 2019, with a ‘light touch’ being taken for the first six months, should any errors arise.
The domestic reverse charge will apply to all supplies of renewable energy certificates between VAT-registered businesses established in the UK. Such certificates are bought and sold as commodities. There are no de-minimis limits and therefore the reverse charge mechanism must now be applied to all supplies of these certificates.
Comment: The reverse charge continues to be introduced in sectors where there is a high degree of VAT fraud occurring. This, along with the reverse charge on construction services which comes in later this year, is the latest example of how the reverse charge is seen as the best mechanism available to tackle wide-spread VAT fraud in a particular sector. Operators within the renewable energy certificate market should now be implementing the new rules.
We are currently liaising with HMRC over this change and how it will impact our clients who supply renewable energy with renewable energy certificates. We have already received evidence from one source that from 14 June 2019 such clients will be caught by this change and we will provide an update once we have received a definitive response from HMRC.
Royal Opera House case: input VAT on production costs
There has been a recent First Tier Tribunal (FTT) case in relation to the recovery of input VAT on theatre production costs.
The case concerns supplies made by the Royal Opera House, a charitable theatre whose supply of admission to a theatre event is exempt under the cultural VAT exemption. The supplies in question were of meals and souvenirs at the theatre (before, during and after the performance) including ice cream sales, shop sales and catering in restaurants, and the case hinged on whether such supplies create a ‘link’ to the production costs for the purposes of determining whether input VAT on production costs can be, in this case, partially recovered. The FTT agreed that these supplies did create such a link.
The FTT concluded that as supplies made by the Royal Opera House were linked to the cost of production, an element of the input VAT incurred on the production costs is recoverable. Some supplies were not considered to form a link. These were commercial letting and production work for other companies.
Comment: Charitable theatres generating exempt admissions under the cultural exemption should take note of this case as it would allow them some input tax recovery. This is an FTT case at present and it is not yet known whether HMRC will appeal. The case may also present any partially exempt organisation or person with the opportunity to review its current attribution processes to assess whether additional VAT recovery can be achieved.
HMRC policy on zero-rated transport unchanged
HMRC has published Brief 3 to confirm its approach regarding the zero rate applied to transport services remains the same.
This confirmation is in response to the Upper Tribunal decision in Jigsaw Medical Services Limited (2018) UKUT 0222.
This case concerns whether or not transport in certain types of vehicle (known as ‘blue light’ vehicles, including ambulances) was eligible for the zero VAT rate. The Upper Tribunal concluded that the service was exempt and not a zero-rated supply of transport. The supply of transport services for sick or injured persons in vehicles specially designed for that purpose is an exempt supply for VAT purposes. Conversely, HMRC confirms the zero rate applies to transport in a vehicle that is designed or adapted to safely carry one or more persons in a wheelchair and, if it were not for those changes alone, the vehicle would seat 10 or more passengers.
Brief 3 contains the following guidance to help suppliers make the correct decision as to the VAT liability of their supplies:
“Does the vehicle have 10 or more seats that are safe to use at the same time? If so, transport in that vehicle is zero rated.
“If not, does the vehicle have wheelchair modifications? If ’No’, the transport will be standard rated unless the exemption for the transport of sick or injured persons applies.
“If ‘Yes’ then, without the wheelchair modifications, how many notional seats would occupy the resultant space? Then, does the number of actual seats plus these notional seats equal 10 or more that can be safely used at the same time? If so, transport in that vehicle is zero rated.”
Comment: The scope of this Brief is limited to transportation services and operators in this space should take note of HMRC’s confirmation of its position with regards to the application of the zero rate.
Glasgow School of Art loses VAT appeal
In a recent Upper Tribunal case, the Glasgow School of Art had appealed the decision of the FTT on a number of grounds, the main one being whether it had received a single supply or two separate supplies.
The case concerned the redevelopment of some of the school’s historic buildings which saw two buildings demolished, one refurbished and a new building constructed, which wrapped around and over the one which was subject to the refurbishment.
The school took the position that it had received two separate supplies from the main contractor – the demolition of two buildings followed by the construction of the new building, and the refurbishment of the building known as the Assembly Building. The contractor issued invoices throughout the project which included all elements of the project. The school wanted to be able to attribute VAT on the Assembly Building refurbishment and reclaim it in full, as it used that particular building for taxable purposes only. It would then treat the remaining VAT as residual and it had asked the contractor to separate its invoicing on this basis as there were two separate supplies. The school’s supply of the Assembly Building was to let it to the Student Union for £5,000 per year, under an option to tax.
In denying the appeal and upholding the FTT decision, the Upper Tribunal cited Card Protection Plan, the leading ECJ case on the matter of single/multiple supplies, and confirmed “a supply which comprises a single service from an economic perspective, should not be artificially split”. In summary, the Upper Tribunal, in this particular case, concluded the school had received a single supply in relation to a single development of the site as a whole.
The Tribunal also made the point that the rental supply of the Assembly Building to the Student Union was not a taxable supply, even though an option to tax was in place, as it was not an economic activity under the circumstances, and this also impacted on the final conclusion.
Comment: The facts in this case were that throughout the preparation phase for this project, which included funding, planning permission and design work, it had been treated as a single project encompassing a number of different elements. The contractor had been engaged to deliver all construction aspects of the project and had invoiced all elements together consistent with there being a single supply. The case highlights the continued importance of looking at the commercial reality of a transaction and where a number of elements are included, how those elements are connected.
The matter of whether a supply can be split into two or more distinct elements continues to be a complicated one and where such a split is being made specifically to create a more favourable VAT outcome for either the supplier or the customer, it should be critically reviewed to determine whether such a split would be considered artificial.
VAT exempt welfare services
This case concerns the Cheshire Centre for Independent Living (CCIT) and its provision of services to enable individuals with disabilities to live an independent life.
Individuals with disabilities can find themselves as an employer, when they enlist the help of a carer or personal assistant which they pay for out of local authority payments. CCIT provides a payroll service to enable such individuals to comply with their status as an employer in this context.
A supply of services closely connected to welfare is exempt for VAT purposes and CCIT argued its payroll service qualified for exemption as a result of being “closely connected to the provision of case, treatment or instruction designed to promote the physical or mental welfare of the elderly, sick or disabled persons”.
HMRC felt the payroll service was not closely connected to welfare and was in fact “one step removed” from the actual care received by the individuals. Its argument was the payroll service was one of administration rather than care.
The FTT ultimately agreed with CCIT that its payroll service was closely connected to the provision of welfare and exempt from VAT as a result.
Comment: The FTT decision suggests there is an opportunity beyond the provision of direct care to individuals, for related services to be eligible for VAT exemption under the welfare provisions. Whilst HMRC has not published its reaction to this case, providers of services in the welfare space or whose services have a connection to disabled, sick or elderly persons should review their position in light of this judgment to see if an exempt opportunity may exist.
For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.