In this month’s VAT Update, we recap on Coronavirus support measures for businesses, comment on the zero-rating for e-publications, look at the Advocate General’s opinion in a holding company VAT recovery case, and look at the Upper Tribunal’s judgement in the YMCA case.
Coronavirus VAT support measures update
VAT payment deferment
As previously reported, HM Revenue & Customs (HMRC) introduced the possibility for businesses to defer their VAT payments due in the period from 20 March 2020 to 30 June 2020. Any deferred VAT payments are payable by no later than 31 March 2021. You can read more about this in our frequently asked questions.
As things currently stand, the VAT deferment is still available for UK VAT returns with a quarter ending April 2020 and for businesses operating under the payment on account (POA) regime who may have POA instalment(s) and balancing payments due before 30 June 2020.
Comment: We are well into the VAT deferment period. Whilst it remains to be seen if the government will decide to extend the deferment period, or introduce similar measures, taxpayers should plan on having to pay VAT liabilities which fall due after 30 June as normal. Our April issue of VAT update includes some best practice tips for managing cash flow during the current crisis.
Extension of the time limit for Option to Tax notifications
HMRC recently announced a temporary extension to the time limit to notify options to tax, from 30 days to 90 days, which will be applicable to elections made between 15 February 2020 and 31 May 2020.
Comment: Whilst the extension to the 30-day notification period may be helpful, our advice is not to delay a notification of an option to tax, but to submit it as soon as the decision has been made. In the case of a buyer being required to make an option to tax to secure transfer of a going concern treatment on the purchase of trade and assets, the current rules have not changed. There is no extension to the relevant due dates for these options to tax. We recommend you always take professional advice on the relevant notification date, which is determined by the specific facts of the case.
Temporary VAT zero rate for personal protective equipment
The government has announced a temporary VAT relief available to care homes, businesses, charities and individuals, who purchase personal protective equipment (PPE) to provide protection against Coronavirus. PPE, in this context, are items such as surgical masks, visors, and gloves etc.
The relief applies from 1 May 2020 to 31 July 2020 and will enable purchases of PPE to effectively be free of VAT (0% VAT will be charged by the suppliers). The usual ‘time of supply’ rules will apply to determine whether a supply of PPE does take place within the temporary relief period.
Comment: The PPE relief will provide a welcome benefit to those purchasers who are not able to reclaim VAT they incur on these purchases, such as care homes, medical institutions and private consumers (if the VAT reduction is passed on).
Purchasers of PPE should check they are being charged VAT at the correct rate during the relief period. Businesses supplying PPE will need to check if their products are eligible and update their systems accordingly.
Import VAT deferment opportunity
Registered importers that are facing severe financial difficulties can apply for an extension to pay import VAT. The onus is on the importer to demonstrate how the Coronavirus pandemic has impacted their financial position. HMRC may then grant additional time for import VAT to be paid without holding up the customs clearance process (subject to any conditions HMRC may impose). Importers can apply for this time to pay by contacting HMRC at E: [email protected].
For registered importers that are duty deferment account holders unable to make their scheduled payment of deferred customs duties and import VAT due, there is also the opportunity to apply to HMRC for a full or partial extension of time to make the payment without impacting their guarantee. The account holder should contact the Duty Deferment Office on T: 0300 059 4243 or E: [email protected].
In all cases, decisions will be taken on a case-by-case basis and could be refused. The measure is not available to non-registered importers.
Please contact Nick Hart for further details.
Introduction of VAT zero rate on electronic publications is effective 1 May 2020
The government, at short notice, brought forward the effective date from which electronic versions of publications are eligible for the zero rate of VAT. Following the UK Budget in March, this change was scheduled to take effect from 1 December 2020.
This is particularly welcome news for the charity sector, which has campaigned for many years to have electronic and hard copy publications treated the same for VAT purposes. Membership organisations will be particularly pleased to see this new measure finally be implemented.
From 1 May 2020 the zero rate of VAT will apply to the following items, when they are supplied electronically:
- Books, booklets, brochures, pamphlets and leaflets
- Newspapers, journals and periodicals.
- Children’s picture books and painting books.
The zero rate does not apply to publications that are wholly or predominantly devoted to advertising, or comprise wholly or predominantly of audio or video content. Audio books are therefore still not within the scope of the zero-rate and remain standard rated.
Our comment: Alison Hone, our Head of Charity and Not-for-Profit VAT commented: “The removal of the standard rating on e-publications is a real landmark moment in the charity sector and has been campaigned on for many years, particularly by the wildlife and conservation sectors. The extension of the zero rating allows these and many other organisations to move their membership and other publications to be distributed online without a VAT charge”.
Membership organisations that have voting rights and apportion their fees paid by members under ESC 3.35 for VAT purposes, will need to consider the earlier introduction of these provisions where an electronic magazine, or similar, is provided to members as part of their membership package. This will result in output tax savings on income received.
The bringing forward of the implementation date at such short notice means certain aspects are still unclear at this stage and we expect HMRC to provide guidance in due course. At the time of writing, we believe normal ‘time of supply’ rules will apply, and supplies of electronic publications with a time of supply on or after 1 May 2020 will be eligible for the zero rate. Businesses operating a subscription model will have to pay attention to when their first time of supply arises on or after 1 May 2020 to ensure the zero-rate on their electronic publications is being accounted for correctly.
Advocate General’s opinion in mixed holding company case
The Advocate General (AG) has given their opinion in the latest in a series of mixed holding company VAT recovery cases. A Portuguese company, Sonaecom, had reclaimed VAT on consultancy services incurred in seeking to secure finance to acquire shares in a group it intended to generate management services income from. This intention was never fulfilled, as the acquisition of the group did not take place. Sonaecom, instead, loaned the funds it obtained to its parent company and generated VAT exempt interest income.
The AG opined on two points: the entitlement to the original input tax deduction, based on the intended taxable activity, and whether an adjustment to input tax was required if the costs were ultimately put to an exempt use in the same tax year. The AG commented that Sonaecom did have an initial entitlement to reclaim VAT on costs associated with the raising of finance to acquire the group it was going to provide with taxable management services. However, it should have also made an adjustment to that initial input tax deduction, in the same tax year, as the intention was not fulfilled and the costs became attributable to the exempt loan interest it received from its parent company.
Comment: The AG’s opinion is in line with current understanding on the VAT recovery position for mixed holding companies following earlier CJEU judgements and is consistent with HMRC’s current guidance.
It is a reminder that if intentions change, and the costs incurred are ultimately attributable to an exempt supply, an input tax recovery restriction is likely to arise.
Upper Tribunal dismisses YMCA appeal
The YMCA lost its appeal to the Upper Tribunal on whether services they were providing to local authorities fell within the scope of the welfare VAT exemption. The case highlighted HMRC’s inconsistency in approach. Three out of the four local YCMA bodies party to the appeal had originally received VAT rulings from HMRC that their services were taxable and only one was held to be exempt.
The nub of the issue was in relation to whether “supporting people” services felling within the provision of care and welfare to distressed persons.
The decision held that the services were exempt and, as a result, creates an input VAT cost for the YMCA. This contrasts to the quite different position if the local authority had provided the services itself or had used their own staff and there would be no VAT cost.
Comment: Organisations providing services to local authorities, which are relying on the welfare exemption, should be wary of this case. The scope of the welfare exemption remains narrow, but based on this case, HMRC’s application of the rules has been found to be inconsistent.
Please contact Alison Hone for further information.
Does a ‘fixed establishment’ include a subsidiary of a company established outside the EU?
The CJEU has ruled that the existence of an EU fixed establishment of a subsidiary of a parent company that is located outside the EU does not infer that parent company also has an EU fixed establishment.
A supplier of services to the parent company is not required to make enquiries when entering into contracts with the parent company should they become aware of a subsidiary company’s presence in the EU.
Comment: This is a welcome decision from the CJEU that perhaps does not go far enough. The CJEU has ruled that a supplier of cross-border services need not assume their overseas customer has a fixed establishment in their country due to the presence of a customer’s subsidiary. However, the supplier will often need to carry out basic checks on their customer’s location to determine the correct place of supply of their services. Failing to check, may result in the supplier failing to charge and collect VAT that is due.