VAT Update – June 2020

22 Jun 2020

VAT Update

This month the VAT deferment period comes to an end, HM Revenue & Customs (HMRC) has announced another postponement of the domestic reverse charge for the construction sector, and we comment on HMRC’s announcement regarding change of use of certified buildings due to Covid-19.

We also highlight the disparity of HMRC’s views on call options and we comment on the increasing complexities around the exemption for fund management services. Finally, we also look forward to July’s ‘fiscal event’ recently announced by the Chancellor.

The VAT deferment period and additional time to appeal

The VAT deferment that was introduced for VAT payments due in the period from 20 March to 30 June 2020 comes to an end on 30 June 2020. VAT payments due after 30 June, including for May quarter end VAT returns, will need to be paid to HMRC by the normal due dates.

Businesses should take the following actions:

  • Continue to file VAT returns as normal and on time;
  • Pay your VAT liability in full on VAT payments due from 1 July 2020; and
  •  Reinstate any previously cancelled direct debits in sufficient time for the next VAT payment to be made.

HMRC is still inviting businesses that are facing financial hardship due to Covid-19 and the lockdown to contact them for additional support and advice and to agree time-to-pay arrangements where necessary.

HMRC is also allowing an extra three months for taxpayers to appeal or request a reconsideration of a particular matter. It is also prepared to consider reasonable excuse positions for taxpayers who have filed VAT returns late or paid a VAT liability late (ie one which was not deferred) due to Covid-19 issues.

Our comments: Whilst it had been speculated that HMRC might extend the VAT deferment period, as they had done with other Covid-19-related measures, it seems that will not be the case and taxpayers should prepare to start having to settle their VAT liabilities in accordance with the normal rules and due dates. Businesses that have deferred a VAT payment during this period, should keep in mind they will need to have sufficient funds available to pay any deferred amounts by 31 March 2021.

The extra time being allowed to lodge appeals and reconsideration requests is a welcome move by HMRC, as is accepting reasonable excuse arguments based on Covid-19-related causes, when considering default surcharges for late filing or payment. These are temporary easements which we expect HMRC to withdraw at some point in the future.

Please contact Nick Hart for further details.

Domestic reverse charge for the construction sector

Earlier this month, HMRC announced that the implementation of the VAT domestic reverse charge for construction services will be delayed for another five months until 1 March 2021.

The measure, designed to combat fraud in the construction sector, was originally being introduced with effect from 1 October 2019. It was postponed until 1 October 2020 to allow the sector time to accommodate the new requirements within their systems and processes. Due to Covid-19, HMRC has further postponed the implementation to 1 March 2021.

Our comments: The move by HMRC has been widely welcomed by the sector. We hope the additional time will also allow HMRC to provide more detailed guidance on the application of the new rules. There are still a great many uncertainties with regards how the reverse charge will apply in certain circumstances.

Please contact Sean McGinness, Head of our Real Estate Group, for further details.

Certified buildings change of use statement

HMRC has updated its public guidance in Notice 708 in relation to where there has been a change of use, due to Covid-19, of certified buildings. Paragraph 19 of the Notice now reads as follows:

“If you’re subject to a self-supply charge under the change of use provisions, as a direct result of loaning your building due to Coronavirus, you should contact HMRC through your customer compliance manager or the charities compliance team by email: [email protected].”

Our comments: If you change the use of a certified building within 10 years of completion, an output tax charge arises to reflect the change of use. We have seen a number of sectors potentially affected by measures to do with Covid-19, including charities and student accommodation providers. HMRC has been particularly vague in the statement now in its guidance and has not announced any concessions to a potential output tax charge at this stage. 

The VAT treatment of call options

The recent Landlinx Estates Ltd First Tier Tribunal (FTT) case has highlighted the current disparity between HMRC’s view of the VAT treatment that should apply to the grant or surrender of a call option and its own published guidance.

In this FTT case, HMRC confirmed its policy towards call options had changed and its view is that a call option is not a supply of land covered by the land VAT exemptions. The UK has enacted Article 135(1)(j) of the EU Principle VAT Directive in Schedule 9 Group 1 of domestic VAT legislation, which cover these exemptions. During the case, HMRC argued that a call option was not a supply of land because it did not give Landlinx the right to dispose of tangible property as the owner. HMRC also stated a surrender of a call option (which was the case in Landlinx) was not a supply of land and was therefore a taxable supply of services.

The FTT rejected HMRC’s argument and found in favour of Landlinx, in that the granting or surrender of a call option is an exempt supply of land (only taxable under an option to tax election).

Our comments: The VAT position of call options has been, for many years, a settled matter, and HMRC’s own published guidance indicates the grant or surrender of a call option is a supply of an interest in land and is therefore exempt without an option to tax. The fact HMRC is now announcing its own guidance is incorrect and does not reflect its own view on the position at a tribunal hearing is troubling. Should HMRC appeal the Landlinx decision we will know it is serious in maintaining the stance it took in this particular case.

In the meantime, we would advise taxpayers to take professional advice if they are planning to grant or surrender a call option. We will need to await HMRC’s decision on whether it will appeal the case further or communicate any changes to its current published guidance.

For further guidance and advice please contact Sean McGinness.

Landlinx Estates Ltd v HMRC

VAT exemption for management of special investment funds

With the onset of the Coronavirus pandemic and the delay in Brexit, the change to the VAT treatment of the management of certain property funds with effect from 1 April 2020 would have been easy to overlook.

The management of special investment funds (SIFs) is exempt from VAT. Historically, the only SIFs that ‘qualified’ for the exemption were those invested wholly or mainly in shares.

The case of Fiscale Eenheid X (C-595/13) held that property funds could be SIFs under VAT law. The UK government legislated for this change as part of the Brexit measures, however with the delay to that process the law was brought into effect from 1 April 2020.

What this means is that services of managing a property fund are now exempt from VAT rather than taxable. This means fund managers can recover less VAT on costs incurred than before under the partial exemption rules.

It should be noted that this change is specifically in respect of the fund management services and not management of the underlying property assets.

HMRC reference: VATFIN5100

Please speak with Sean McGinness if you require assistance with Brexit planning or if you have concerns about what might change.

EU notice for VAT on services

The European Commission has published a Notice to Stakeholder regarding the VAT position of services when the UK has withdrawn from the EU VAT system. The Notice provides some useful high-level comments, which are in-line with expectations of how certain VAT mechanisms and positions will be impacted at the end of the Brexit transitional period on 31 December 2020. The Notice covers several key points including the application of the MOSS scheme and VAT refund claims.

Our comments: Covid-19 has largely taken Brexit off the front pages recently, but the UK is in the transitional period and fully expects to leave the EU single market and VAT system at the end of this year. The publication of this Notice by the EU is a timely reminder that we are only six months away from this now and businesses should once again begin planning for life outside the EU VAT system. The Notice has not thrown up any surprises, in terms of the high-level positions which it covers regarding supplies of services between the UK and the EU.

Please speak with Nick Hart if you require assistance with Brexit planning or if you have concerns about what might change.

Rishi Sunak’s July Fiscal Event

The chancellor Rishi Sunak recently announced his intention to hold a “fiscal event” in the week commencing 6 July. Whilst this event is not seen to constitute a Budget, measures are expected to be announced to help stimulate the UK economy post-lockdown.

It is possible that the UK government will temporarily reduce the standard rate of VAT (perhaps similar to measures recently announced by the German government and others across the EU).

Another possibility may be a targeted approach to provide a stimulus to those sectors hit hardest by the lockdown, such as the leisure, hotel and hospitality sectors, by temporarily extending the scope of the VAT reduced rate of 5%.

Once the fiscal event has taken place, we will be updating clients on the announcements that will affect them. Please speak with your usual Saffery contact for further details.