VAT Update – September 2020

28 Sep 2020

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This month we consider the Chancellor’s latest VAT measures to assist businesses during the Covid-19 crisis; we assess the implications of HMRC’s change in policy regarding early termination fees, supplies made by dispensing opticians and charity advertising; and finally we comment on another agent vs principal deliberation by the Upper Tribunal.

 

Chancellor’s September announcements

On 24 September the Chancellor announced two VAT measures to assist businesses through what will be a difficult winter season due to rising numbers of Covid-19 cases. He announced:

  • An extension to the reduced rate of VAT in the hospitality sector to 31 March 2021. Under the original plan, the reduced VAT rate was due to end on 12 January 2021. You can read more about the reduced rate of VAT here.
  • The introduction of an instalment payment plan for the settlement of deferred VAT liabilities. Taxpayers who had deferred VAT payments due between 20 March 2020 and 30 June 2020 were expecting to have to pay that liability in full by 31 March 2021. The new measure will allow businesses to spread their deferred VAT bill over 11 smaller repayments with no interest to pay until 31 March 2022. Initial guidance from HM Revenue & Customs (HMRC) suggests there will be a process for businesses to ‘opt-in’ to the arrangements in order to benefit from the stage payments option. We currently await further details.

Comment: These are welcome changes to the measures already introduced to help businesses that have been impacted by the economic effects of Covid-19.

The hospitality sector in particular will benefit from the extended period that the reduced rate of VAT will apply, although some feel measures for this sector still do not go far enough. Any further lockdown measures introduced in the coming weeks and months will hit this sector again, and it remains to be seen whether further support will be provided by the government in that event.

More information is available at www.gov.uk.

New HMRC guidance for opticians and hearing aid dispensers

HMRC has published a new Revenue & Customs Brief which outlines a change a policy with regards to the VAT position for dispensers of spectacles, contact lenses and hearing aids.

Opticians make two supplies for VAT purposes; an exempt supply of dispensing services and a taxable supply of glasses or lenses. Hearing aid dispensers make similar supplies, with an exempt and standard rated element in most cases.

The VAT accounting for such supplies allowed a choice: separately disclosed prices for each supply or a fair and reasonable apportionment of the single inclusive charge made to the customer. The apportionment method applied needed HMRC approval.

The changes being introduced from 1 October 2020 allow opticians charging two separate prices to evidence this simply through a point of sale till print or equivalent. Businesses employing an apportionment method will no longer need to obtain prior approval of the method to be used from HMRC.

Comment: VAT accounting in this sector has previously been relatively complex and agreeing apportionment methods with HMRC has often been a time-consuming process. These simplifications are welcome. There is, however, a lack of detail within the initial guidance, particularly regarding what HMRC would find acceptable in terms of evidencing two different prices are charged to customers and how these are disclosed to customers. Operators in the sector should review their processes to ensure sufficiently robust and clear evidence is being retained to support the VAT position taken.

More information is available at www.gov.uk.

All Answers acting as principal rather than agent

In the Upper Tribunal case of All Answers Ltd vs HMRC (UT/2019/0067), the Upper Tribunal upheld the decision originally taken by the First Tier Tribunal (FTT) which judged that All Answers was acting as principal in the supply chain when it supplied its services to students.

The actual supply chain involved the students contracting with All Answers, which in turn contracted with essay writers to create the pieces students had requested.

The Upper Tribunal concluded that All Answers was obliged to provide the students with the material on time and to the necessary standard, and the writers were not contractually bound to the students. The Upper Tribunal agreed with the FTT and dismissed the taxpayer’s appeal.

Comment: The matter of whether a supplier is acting as agent or principal appears in the courts on a regular basis and it was interesting that the FTT originally decided this case on the basis of the commercial and economic reality, whereas the Upper Tribunal focused on the contractual terms. Ultimately, the same conclusion was reached in that All Answers was acting as principal and it is important to remember that regard must be had to both the contractual and the commercial relationship between parties to a supply when considering the VAT position.

All Answers Ltd vs HMRC (UT/2019/0067).

HMRC clarifies its position on digital advertising

HMRC has issued new guidance that has clarified the position on the zero-rating applying to charity advertising. The not-for-profit sector has been in discussions for two years with HMRC in order to clarify where a digital advert qualifies for the charity zero rate relief.

Digital advertising is commonly used on social media sites whereby users are targeted by a selected criteria. HMRC has stated that this type of advertising is targeted and therefore it has moved away from the “public” advertising criteria which allows for zero rating. HMRC has published a Revenue & Customs Brief that outlines the types of digital advertising they agree can still fall within zero-rating.

As the majority of social media platforms are based outside the UK, it is the responsibility of the UK recipient of the advertising service to account for any output VAT under the reverse charge. In the charity sector this can often result in a VAT cost to the organisation if the advertising is not zero-rated under reverse charge and relates to a non-business or exempt activity.

Comment: Charities should review their VAT accounting in respect of their digital advertising and consider their VAT reporting requirements both going forward and in the past four years.

More information is available at www.gov.uk.

VAT treatment of early termination fees and compensation payments

HMRC has announced that it no longer agrees that early termination fees and compensation payments can be treated as outside the scope of VAT. These charges were typically made when a customer withdrew from a contract.

Referring to the CJEU judgments in Meo (C-295/17) and Vodafone Portugal (C-43/19), HMRC feels its previous position is no longer in line with EU law. HMRC has updated its publicly available guidance to officers in its manuals, but has not yet updated a range of public notices.

HMRC gave a practical example of its change in approach:

“charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset are therefore liable for VAT.”

Comment: HMRC says that businesses need to review the historical VAT treatment of early termination fees and compensation payments and correct any ‘errors’ made. Only taxpayers with a VAT ruling from HMRC will be able to rely on it until the published date of the 2 September 2020 Revenue & Customs Brief. This is most unwelcome news given HMRC had previously endorsed outside the scope VAT treatment in its manuals and public notices, and the CJEU cases they refer to in their latest guidance are all several years old.

It remains to be seen how this change in policy will be applied in practice. There are many payments made under contract for breaches in terms and conditions that were traditionally treated as outside the scope of VAT. It is not clear whether HMRC intends that all such payments should be subject to VAT. This is an area that we are expecting to see further guidance on in the coming months.

We recommend that businesses that may be affected speak to their usual Saffery Champness contact.

More information is available at www.gov.uk.

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