VAT Update – May 2019

21 May 2019

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HM Revenue & Customs (HMRC) has published confirmation of how to handle certain types of transaction for digital reporting purposes and an update to various aspects of sponsorship and VAT. Meanwhile there have been interesting judgements in cases regarding entitlement to VAT recovery, the value of a supply and supplies of insurance within the self-storage market.

Making Tax Digital for VAT: an update

HMRC has updated its Making Tax Digital for VAT (MTDfV) Public Notice 700/22 and the key changes to this notice are summarised here.

The changes are largely to clarify how digital record keeping requirements can be met in certain circumstances.

Charity fundraising events: HMRC has acknowledged that charities holding events run by volunteers may face difficulties in complying with the digital record keeping requirements. HMRC confirms, by force of law within the notice, that charities can digitally record all supplies made in relation to the event as a single invoice. Charities can also treat supplies received in relation to an event in the same manner.

Petty cash transactions: HMRC confirms a number of petty cash transactions can be digitally recorded as a single transaction within the purchase records, subject to a £50 VAT inclusive limit per individual purchase and an overall £500 total per entry in the petty cash records.

Consolidation supplier statements: HMRC confirms it is acceptable for digital records to include an entry for a supplier statement that covers several purchase invoices, provided the supplies in question all relate to the same VAT accounting period and the rates of VAT charged are clearly shown. Any reconciliation between supplier statements and the purchase invoices can take place outside of the digital records.

HMRC has also confirmed that if a taxpayer has voluntarily registered for MTDfV because it is trading below the VAT registration threshold, it can effectively leave MTDfV and return to the old process of filing VAT returns through its government gateway online account, provided it advises HMRC of the fact.

Comment: We expect further updates and clarifications will be published as the first MTDfV VAT returns are being filed and as taxpayers move towards a fully digital VAT reporting process in April 2020. This is still very much a learning curve and it is important to stay on top of changes in law or guidance, to ensure any easements available are taken advantage of.

Public Notice 700/22

No right to deduct incorrectly charged VAT

The Court of Justice of the European Union (CJEU) has provided judgement in the PORR Építési Kft (PORR) case, which concerns whether a taxpayer has a right to deduct input tax, when the supplier has incorrectly charged VAT. In this particular case, a supply of construction services should have been treated as being subject to the reverse charge, and therefore no VAT should have been charged on the supplier invoice.

The case originates in Hungary, where a domestic reverse charge applies to construction services, and therefore it is worth UK businesses taking note given that a construction services reverse charge is due to take effect in the UK on 1 October 2019.

PORR purchased construction services from a supplier in relation to a motorway project. The supplier charged VAT on its invoices issued to PORR, and PORR duly paid the invoices in full and reclaimed the VAT as input tax.

The tax authorities in Hungary took the position that the customer was not entitled to reclaim the VAT charged to it, as the VAT had been incorrectly charged by the supplier. The services are subject to the reverse charge and therefore PORR should have accounted for the output tax on the supply rather than the supplier (had PORR self-accounted for the VAT under the reverse charge it would also been able to recover this VAT at input tax on the same VAT return). The tax authorities disallowed the input tax as it had been claimed under the incorrect VAT reporting provision. Whilst the tax authority did acknowledge PORR had an entitlement to deduct VAT, it was not able to claim VAT which had been incorrectly charged to it, as a matter of principle. The tax authorities did not provide a method of recourse for PORR, and it should have requested that the supplier refunded the incorrectly charged VAT.

The CJEU upheld the decision on the basis that incorrectly charged VAT cannot be deducted as input tax. It did, however, suggest that in such circumstances a remedy should be available to the customer. The remedy involves the tax authority, before refusing the right to deduct, reviewing whether the supplier who applied the incorrect VAT treatment in the first instance, is in a position to reimburse the VAT amount paid by the customer through an appropriate correction mechanism applicable in that jurisdiction, to ensure the customer is not out of pocket. In such cases, where it is revealed the supplier would not be in a position to make that correction or it would be excessively difficult for it to make it (because of insolvency for example), the CJEU concluded the customer should be able to approach the tax authority directly in order to receive that reimbursement.

Comment: With the reverse charge on construction services coming into effect in the UK in October 2019, there is a strong possibility parties will receive invoices from suppliers of construction services on which VAT is incorrectly charged. If so, it is vital that the VAT position applied by the supplier is discussed with them in order to determine whether it has been correctly charged or whether reverse charge VAT should be applied. In the case of any errors, the parties can then work together to ensure the output tax and input tax is being accounted for in the correct way.

CJEU v PORR Építési Kft

Overpayment does constitute consideration for a supply

The Court of Appeal has provided its judgement in National Car Parks Ltd v HMRC, and it has confirmed that payments in excess of a standard parking tariff are to be treated as additional consideration for the supply of car parking, upholding the original approach taken by HMRC.

Overpayment for car parking services typically occurs when a customer does not have the correct change to pay at a meter or payment kiosk and change is not available or provided. The taxpayer had sought to obtain a refund for overpaid VAT on the basis the overpayments were to be considered as ex gratia payments outside the scope of VAT. HMRC’s decision to reject the overpayment claims was upheld by the First Tier Tribunal (FTT) and Upper Tribunals.

In reaching its decision, the Court of Appeal concluded the amount paid by the customer was the consideration for the supply, which the customer was prepared to pay in order to receive the right to park for a specified period of time. The taxpayer had sought to argue the payment of the amount over and above the charges levied for parking for a specific period of time, was essentially a voluntary amount as the customer was not contractually obliged to pay the amount it did to receive the supply in question.

Comment: Instances where customers pay an amount to a supplier over and above what is required to be paid to receive a supply of goods or services, should be examined carefully to determine whether the extra payment is outside the scope of VAT or not. The contractual arrangements are important in this regard, as how pricing is communicated to customers and how payment is collected may influence why an overpayment is being made and therefore how it should be treated for VAT purposes.

National Car Parks Ltd v HMRC

The supply of insurance or intermediary services?

The FTT has held that a provider of self-storage was also providing exempt insurance to its customers. Safestore had argued that under the terms of its agreement with the Guernsey resident captive insurer (Assay Insurance Services Limited), Safestore was providing insurance intermediary services to Assay and not insurance to its customers. Safestore’s position was that Assay was providing the insurance directly to the customer.

If Safestore’s argument was correct, then its supply of insurance intermediary services would be exempt with a right of a recovery of input tax, as its customer (Assay) was established outside the EU. It should be noted that the UK government changed the law with effect from 1 March 2019, removing the right of recovery in cases where the ultimate insured party was a UK resident.

The FTT held that, notwithstanding that Assay was disclosed as the insurer to the end customer, Safestore was providing insurance to its customers and therefore the payments made by the customers were exempt in Safestore’s hands. The FTT based this decision on the fact that Safestore arranged the insurance policy and it was required that its domestic (non-commercial) customers took the insurance when they hired a storage unit. There was no choice in the matter. Following Card Protection Plan, Safestore was able to provide insurance to its customers from a VAT perspective, even though it was not regulated to do so. Its “open cover” policy with Assay, and the requirement that the customer took the policy, meant that it was supplying insurance services to its customers.

The case also contains some interesting observations on the application of time limits and when HMRC is in full possession of the facts, enabling it to raise an assessment, which are well worth considering.

Finally, whilst the FTT found for HMRC on the substantive point, it also commented on HMRC’s ancillary argument that by virtue of Safestore operating UK self-storage facilities it created a fixed establishment in the UK for Assay. The relevance of this argument is that even if the services had been categorised as intermediary services they would not have carried a right of recovery of input tax. The FTT commented that it would have found for Safestore on this point, as it felt that the Safestore and Assay being under common control was not the same as the relationship in the case of DFDS, where it was held that the direct UK subsidiary was an “ancillary organ” of a Danish parent company, and therefore created an establishment in the UK for the Danish parent company.

It should be noted that HMRC is appealing the decision in the case of Hastings Insurance Services Limited, which considers the place of establishment rules in more detail in respect of an insurance supply chain. It is suggested that whilst the FTT’s comments are useful in Safestore, they should be considered along with Hastings Insurance Services Limited and other cases in this area.

Comment: This is an interesting judgement in that the FTT held that the provision of EU law on insurance were not conclusive from a VAT perspective. It serves as a reminder that insurance supply chains need to be viewed from a VAT perspective, considering the purpose of VAT law in respect of the services being provided and the place of establishment rules.

Safestore Limited v HMRC

HMRC updates Public Notice on sponsorship

HMRC has updated Public Notice 701/41 this month, which concerns VAT and sponsorship – – it is the first time in almost 20 years that this has been updated.

The key changes cover mixed sponsorship and donations, including the concept of crowdfunding and recovering VAT on the receipt of prizes for competitions. The updated notice confirms that HMRC will accept that where a donation is made separate from a sponsorship agreement or an agreement clearly shows which part of the sponsor’s payment covers sponsorship and which part covers a donation, then no VAT will be accountable on the donation element.

HMRC has confirmed that a payment under a crowdfunding arrangement is not consideration for a taxable supply unless the funder receives something meaningful in return – a simple acknowledgement of the recipient is not considered to be meaningful.

The public notice also now covers sponsored prizes for competitions. Where there is a supply and both the donor and recipient are VAT registered, the recipient may be able to recover the VAT on the value of the prize.

Comment: Donations freely given, with no expectation on the donor’s part that they will receive anything in return for the donation, continue to be treated as outside the scope of VAT. With the emergence of crowdfunding, there are more instances where a determination is required to identify a donation or consideration for a tax supply received. The specific facts in each case must be carefully assessed in order to reach a conclusion either way.

Public Notice 701/41

For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.