VAT-Chatter Newsletter: October 2015
Round up of the recent news on VAT
By Graham Elliott CTA (Fellow) MBA
VAT Chatter is an irreverent survey of developments that have caught my eye over the last couple of months. Over the summer (or so it is usually ‘labelled’, though not always warm and dry) a number of these cases have had a common them – labelling. What is this? It is a kind of analysis by generalisation. If you indulge in labelling, or let labels sway your thinking, you are heading for a fall:
Read the correct label
VAT practitioners always remind their clients not to judge the VAT treatment of an activity by applying any ‘label’ to it. It is a basic human instinct to try to comprehend through categorisation. If you can work out an approximate truth about any fact, that means that you can shortcut to your conclusions. This use of ‘heuristics’ is always notoriously unreliable, but in the case of VAT it is positively lethal.
It is worse still perhaps, to apply the wrong label altogether. Unhappily, I have to report that this is what happened in the case of Phoenix Optical Technologies Ltd. But their error is quite a common misunderstanding, so it is worth reminding people about it.
Phoenix transferred equipment as part of a settlement agreement to compensate another party. This, therefore, involved ‘compensation’. It is a truism that genuine compensation is outside the scope of VAT because it is not consideration for any supply. The appellant applied the ‘compensation’ label to his activity, and determined that no VAT was due on the transfer of the equipment to the recipient. This deduction omitted one critical point.
The problem is that the party being compensated was the recipient of the equipment. The equipment was the compensation. The equipment was not consideration for any supply by the recipient. This is not the same as saying that the equipment was not supplied by its provider. It was. It was supplied under the deemed supply provisions which state, in effect, that goods which are transferred out of the business for nil consideration are subject to VAT on their value. It is a deemed supply. The mere fact that one can identify compensation arising from the transfer does not change the fact that the deemed supply took place. This supply of the goods created the compensation, but that did not negate the fact of its having been supplied.
Only by jumping to the conclusion that there was ‘compensation’ in this arrangement could the business have failed to notice the possibility of a supply being made. Labels are always very dangerous in VAT, but particularly if you are reading the wrong one.
A different problem with labelling arises where the VAT legislation unhelpfully refers to the labels themselves, and then leaves it to the unfortunate taxpayer and his advisers to try to define what the label means. Insurance is full of such difficulties. The problem is that there is an exemption for insurance intermediaries, who may be regarded variously as ‘insurance brokers’ or ‘insurance agents’. These are more or less meaningless tags that are prone to being used (wrongly) to exempt only those who fulfil those traditional roles. The challenge is to define the labels in such a way that a wider group can fall within them when performing the same or similar functions.
This was the very problem faced by Risktop Consulting Ltd. It provided services to the insurance industry in assessing the risk of potential insured parties. Their service had a direct impact on the terms and conditions of each insurance contract, and in particular the premium to be charged. However, the tribunal did not agree that it was an intermediation service. This is not helped by the fact that HMRC had originally accepted that the service was exempt, but changed its mind in recent years. The business could not understand what had changed which brought it within the scope of standard rated VAT.
This is understandable. In many cases the insurance exemption is treated fairly liberally, as including anything dealing with the interface between the insured and insurer. There are certain clear exceptions such as loss adjusting and marketing, but these had no bearing in this case. The business could justifiably have felt secure in applying an exemption which traditionally has been given fairly broad latitude. But the difficulty is that, if it ever comes to litigious fisticuffs, the tribunal is left with little choice but to apply the law as it stands.
So, this company believed it was dealing with exempt insurance because the label appeared to have the word ‘insurance’ written on it. It also thought it fell within a fairly broad interpretation of ‘insurance intermediary’. But it was not to be.
Meanwhile, the even more perplexing case of Westinsure is heading for the Court of Appeal to determine whether the service of giving access to subagents to insurance companies is an act intermediation. I have never worked out why the courts doubted that, but to date they have not supported that interpretation either. There is a real risk that there are many insurance related service providers currently exempting services which, if they came under the spotlight of the judicial system, would be treated as taxable.
Airport VAT rage
I was quite busy during August talking to radio stations such as Radio 5 Live, about the ‘silly season’ story relating to VAT on airport shop sales. You may vaguely recall that a leading newspaper had identified the practice of flight-side retailers asking for passenger boarding passes ostensibly for security reasons, but really only to allow them to record zero rated sales where goods were due to be exported in the luggage of a traveller to a non-EU destination. The problem was that the price did not get reduced (in certain cases) and therefore the net of tax price for such travellers was higher than for those for whom there was no VAT relief. All the relief was held back by the retailer.
After this story had gained some mileage (pardon the pun) a Minister of government commented that retailers should be lowering prices in such cases, since the purpose of the VAT relief was “to benefit the consumer”, not the retailer. This, I think, was essentially a political response. There is nothing to suggest that any such purpose actually exists. Indeed, according to law, there is no zero rate relief available in these circumstances. Direct exports are zero rated, but this cannot be regarded as a direct export because the retailer does not supervise the export itself. Indirect exports have the same status, but the exporter must be a person who is resident outside the EU, whereas in these cases the travellers could just as well be EU residents. This zero rate is actually a concession – but for whom? There is nothing to suggest that the concession was introduced to reduce prices for those people who happened to be going outside of the EU (and it is more or less impossible to conceive of a good reason for doing so). Indeed, unless my memory is playing tricks on me, I recall it being introduced to encourage retailers to operate within airports.
I more or less said this in my various radio interviews. Of course, it might have been a better story had I made adverse comments about the retailers and followed the government line. But it usually pays to exercise intellectual honesty in such situations.
Of course, telling people that they had to show their boarding passes for security was unforgivable. That alone probably gave these retailers their just deserts.
Plastic bags: a tax on tax?
I am writing this on 5 October 2015, the first day on which the compulsory 5p charge for plastic shopping bags was introduced. It is been widely commented that VAT applies to the 5p charge. Some people, including some VAT consultants, think that this is wrong. Their reasoning goes as follows: since the shops have no choice but to demand money when a bag is required by a customer, this must be a ‘levy’. Levies are outside the scope of VAT because they do not arise in situations where people have a choice. This means that there should be no VAT on plastic bags.
It misses an important distinction. Yes, the retailer must charge 5p if someone wants a bag, but nonetheless there is no compulsion to have the bag in the first place. You can bring your own bags, or use your arms, or those of a friend. If you avoid taking a bag, you do not pay 5p. This therefore does not involve a levy. It involves a purchase, albeit one where the retailer did not have the choice of making it a free gift. So, consideration for a standard rated item such as a plastic bag would be inclusive of VAT.
This is another example of where a label does not help in ascertaining the VAT position. If you call the charge for a plastic bag a ‘levy’, you are prone to mis-diagnosing the VAT treatment.
Copthorne Holdings is an interesting case about VAT group registration. It deals specifically with the basis on which HMRC will agree to backdate the inception of a VAT group registration, or the inclusion of a company in an existing group. The legislation gives HMRC unlimited powers to backdate inclusions into VAT groups. HMRC’s policy however is not to exercise this at all. HMRC claims to exercise it, because it says it will allow retrospection where they themselves are at fault. That would be a right under the legislation in any case. It does not articulate a discretion which HMRC could apply in other situations.
The case in question related to a not uncommon phenomenon of a group of companies believing certain of their group members had been included in a VAT group registration when in fact they had not. This is a simple administrative oversight. In cases where the group as a whole will make fully taxable supplies, and could thus reclaim VAT on all of their expenditure, there is no good reason for HMRC not to exercise its discretion and allow the company to be deemed always to have belonged to the group from the period in which that behaviour was adopted by the group of companies.
In this case, the consequences of not being allowed retrospection was several million pounds of irrecoverable VAT. The case has been heard by two tax tribunals, both of which have remitted the case back to HMRC for further and more mature consideration. Their criticism of HMRC’s policy and its articulation of that policy has been absolutely withering. However, it remains to be seen whether HMRC can tolerate constructive criticism, and mend its ways. If not, the only logical solution would be for a lobby to be presented to government to change the legislation so as to tie HMRC’s hands in such cases.
Online VAT returns
I have seen many funny VAT cases in my career, but one of the best of these occurred recently.
A VAT registered barrister had been surcharged for failing to submit his online VAT return. He was prepared to submit an online return or a paper return. But he had failed to do so because he was not prepared to click on a box on the online return portal which stated that he had accepted the terms and conditions of using the portal itself. He said that he was simply not prepared to say that he accepted terms and conditions when in fact he was given no choice but to submit his VAT return via the portal, so that he would in effect be non-compliant with his legal obligations unless he ticked the box. This, he argued, was blatant coercion and could not denote a genuine choice to accept or repudiate the terms and conditions.
Most of us would agree with his point, but would shrug our shoulders and move on, as I myself have done. But it takes a barrister to decide that it is worth his litigating the matter. But, of course, he turned out to be right. The tribunal agreed that it was completely wrong of HMRC to require someone to tick a box implying that they had voluntarily accepted terms and conditions, when they were given no choice whatever, since not do so would create a default on their part in submitting the VAT returns that the law required them to submit. The obvious solution, of course, is to remove the tick box and simply direct those with more time than sense to read pages and pages of uninteresting information about HMRC’s use of our submitted data.
Feel free to contact Graham Elliott: http://www.cityandcambridgeconsultancy.com/contact-2/