In this month’s VAT Update we highlight the current position with regards to deferred VAT liabilities; we emphasise the need to check direct debit VAT payment arrangements; we comment on a Court of Appeal case regarding VAT recovery on theatre production costs; a First Tier Tribunal case regarding VAT recovery and outside the scope income; and finally HMRC’s confirmation of policy regarding the VAT liability of welfare services.
Deferred VAT liabilities – action required
The date to enrol in the payment scheme to spread payment of deferred VAT liabilities from 2020 under the deferred VAT scheme has now passed. Where taxpayers have an unpaid deferred VAT liability as at 31 March 2021, and they have not signed up to the payment scheme (now closed), an alternative arrangement for paying those liabilities in full must be made by the end of June.
Taxpayers will face a 5% penalty where they do not contact HM Revenue & Customs (HMRC) either to make payment in full before 30 June or to agree further time to pay.
Read more at: www.gov.uk
Comment: If you are VAT registered and you still have an unpaid deferred VAT liability, you should take immediate action to either pay the liability in full by 30 June or agree additional time to pay with HMRC, to avoid the risk of a 5% penalty. Please contact your Saffery contact for further advice and support as required.
VAT payments by direct debit
It was recently announced that HMRC has not met some of its obligations under the UK Banking Regulations. As a result, HMRC will cancel all direct debits currently set up for VAT where its records do not include a valid email address.
This may affect some Making Tax Digital (MTD) taxpayers and will affect all taxpayers not yet signed up to MTD (those trading under the £85,000 threshold limit). If new direct debits are not set up in time, taxpayers are at risk of incurring penalties and interest charges.
HMRC is writing to taxpayers over the next couple of months to alert them to the cancellations and those affected will be required to set up a new direct debit at least 10 days before a VAT payment is due. This must be actioned using the taxpayer’s Business Tax Account (BTA).
HMRC has confirmed that direct debits set up under the new payment scheme for VAT deferred due to Covid will not be affected.
Comment: Setting up a new direct debit is not something agents can do on behalf of their clients, so if you have a direct debit set up for VAT payments, you should be particularly vigilant on this matter, otherwise there is the risk of a late VAT payment being made and penalties being incurred.
HMRC’s correspondence will encourage taxpayers to regularly check their online VAT account through their BTA to see whether a direct debit arrangement remains in place. If there is a prompt to set up a direct debit then immediate action should be taken. Taxpayers should be wary of receiving emails with links to setup new direct debit instructions as they may not be genuine emails from HMRC. Usual diligence around clicking links in emails is advised.
For further assistance, please get in touch with your regular Saffery contact.
Theatres: VAT recovery for production costs
The Court of Appeal has upheld the decision of the Upper Tribunal in the case of Royal Opera House Covent Garden Foundation (EWCA Civ 910) to confirm that VAT on production costs does not have a direct and immediate link to supplies made at the venue of meals, drinks, and souvenirs.
The case concerns supplies made by the Royal Opera House (ROH), a charitable theatre whose supply of admission to its performance events is exempt from VAT. ROH sought to argue that VAT on production costs had a sufficient link to the taxable supplies it makes, as well as the shows themselves, to mean such VAT is residual and partially recoverable.
The taxable supplies under consideration were of meals and souvenirs at the theatre, including ice cream sales, gift shop sales and restaurant meals. HMRC’s position was that there was not a sufficiently direct link between the production costs and these taxable supplies to provide ROH with the opportunity with reclaiming VAT on those costs. Whilst the First Tier Tribunal originally found in favour of ROH, HMRC appealed and the Upper Tribunal overturned the FTT’s decision and the Court of Appeal has agreed.
As a general principle, in order for VAT to be recoverable, there must be a direct and immediate link between the costs and taxable supplies. In this case, it was held that the production costs were not a cost component of the taxable supplies mentioned.
Comment: The decision of the Court of Appeal in this case is not unexpected. Whilst it has generally been acknowledged that there is some commercial link between the costs and the supply of meals in the restaurant, it is an indirect one only. The productions themselves provide a commercial opportunity to provide additional services to patrons, but those services are not the reason why the production costs are incurred and therefore the link is not a sufficient one for VAT recovery purposes.
Whilst the original FTT judgement in this case had provided hope to the sector, clearly events since have quashed the opportunity for additional VAT recovery on production costs for establishments that do apply the cultural exemption to their event admission income.
Read more at www.bailii.org
VAT recovery and subsidy income
HMRC has regularly sought to restrict the VAT recovery of taxpayers who receive grant income, such as Renewable Heat Incentive payments, often without success in the courts. The recent judgement by the FTT in the case of Colin Newell  TC 08149 is another example of this.
The FTT concluded that Mr Newell was entitled to recover all of the input VAT he had incurred in his business despite the fact that he also received payments, which are outside the scope of VAT, under the Renewable Heat Incentive Scheme (RHI).
Mr Newell operated a fully taxable business that involved drying and selling wood chips and other biomass materials. Mr Newell also received periodic support payments (PSPs) under the RHI. HMRC argued that because Mr Newell was undertaking activities to generate heat, which gave rise to the entitlement to the PSPs, that the VAT on his expenditure that related to both his taxable and outside the scope income should be apportioned.
Mr Newell successfully argued that the input VAT should be fully recoverable, because the receipt of outside the scope funds was a subsidy and not an outside the scope activity; ie there was no direct and immediate link between the VAT incurred and an outside the scope activity. The FTT concluded that Mr Newell is entitled to recover all of his input VAT. This conclusion is not affected by the fact that he is in receipt of PSPs, which are outside the scope of VAT, or whether or not his business would have been viable without the subsidies.
Comment: The judgement in this case will be of interest to businesses and organisations receiving subsidies and grants, especially within the farming and renewable energy sectors. Over the last few years HMRC has sought to restrict VAT recovery where businesses receive grant income. This followed on from the Frank Smart case (which we reported on in August 2019), and is another welcome decision in favour of the taxpayer but continues to show HMRC’s reluctance to accept the principal that outside the scope grant income doesn’t mean an otherwise fully taxable business must restrict its VAT recovery.
For further guidance please contact Nick Hart.
Read more at www.bailii.org
VAT liability of welfare services
HMRC has issued Revenue & Customs Brief 9 (2021) entitled VAT liability of day-care services supplied by private bodies in England and Wales, in response to recent Court of Appeal cases. It confirms that to exempt their supplies, the providers of welfare services must be charities, public bodies or regulated by the relevant authority in the country concerned. In particular, it makes explicit that for suppliers who aren’t charities, they must be a state-regulated, private welfare institution or agency in order to exempt their supplies of welfare services.
The brief was published following the recent judgment of the Court of Appeal in the joint appeals of LIFE Services Ltd and The Learning Centre (Romford) Ltd. Both provided services to individuals under agreed care plans, and the majority of funding for both providers came from their respective local authorities. However, neither were a charity, and neither supplier was regulated by the Care Quality Commission.
HMRC maintained that the services were subject to VAT at the standard rate, whereas LIFE Services Ltd and The Learning Centre (Romford) Ltd contended that they were exempt. Both appeals were allowed by the FTT. However, the Upper Tribunal decided that LIFE Services Ltd was not a state-regulated, private welfare institution or agency and that in both cases there was no breach of the fiscal neutrality principle.
The Court of Appeal agreed with the Upper Tribunal on both points and the welfare service provided in this case are taxable and not exempt.
Comment: Providers that are not charities or state regulated in England and Wales and have not accounted for VAT on the supply of these services should now do so with immediate effect. Corrections to the historic position will also be required.
Providers of day care services in Scotland and Northern Ireland are unaffected by this decision. This is because day care has been state-regulated in Scotland since 2002 and Northern Ireland since 2005. The exemption remains in place for suppliers in Scotland and Northern Ireland, provided they are state regulated.
The concept of fiscal neutrality is at the heart of the VAT system. It is interesting that, in these cases, the devolution of the regulation of welfare services is not seen as a threat to that principle of fiscal neutrality, on the basis that a provider in England is perhaps not in direct competition with a similar provider in Scotland for example.
If you are concerned about your VAT liability following this decision, please contact Nick Hart VAT Director.
Read more at www.gov.uk