VAT-Chatter Newsletter: July 2015
Round up of the recent news on VAT
This newsletter is designed to bring out the strange and unpredictable side of VAT, which continues to present a fiscal trip hazard to all those who assume it must be a logical and rational subject
Construction VAT – phased developments
A relatively small proportion of charities can enjoy a zero rate on construction of new buildings for certain charitable uses. The problem is that this does not apply to enlargements or extensions, but only to brand new buildings or to annexes (as defined in the VAT Act).
This can cause difficulties with developments that are conceived as a single job but are capable of being paused midway, and being fully built out as a ‘phase two’ a while later. These are not cases where the relevant planning permission only applies for the half way job. It arises almost always because of funding constraints. To get the benefit of phase 1, the charity builds it as soon as it is affordable. But then it raises the cash for the completion of phase 2. In such a case HMRC argues that phase 2 is not the completion of the new building, but actually an extension of phase 1. That means that the VAT relief that applied to phase 1 is not carried over to phase 2. It simply no longer qualifies for zero rated construction.
This is what happened to York University. It built a new super-lab for interdisciplinary research purposes. It designed it in full but only raised enough cash for some of it to be built. It installed a temporary wall which could easily be dismantled when it had enough cash to complete the structure. It achieved this position after another five or so years. It claimed zero rate relief on phase 2. HMRC denied it. A tribunal supported HMRC’s view. Sadly, it seems the tribunal was correct to do so, though the key point is the sheer amount of time between the phases. Matters could have been different had there been a shorter gap between them, and that is worth taking into account.
The legislation does not appear to apply logically in this situation. The intention cannot have been to tax subsequent phases of a unitary project. But that is how it applies in practice. Difficult as it is to adjust the scope of zero rates, this aspect ought to be reviewed by government.
Any charity that thinks it is caught by this dilemma can contact me to discuss the position.
Business re-organisation cases
There has been a spate of cases relating to VAT issues arising from business disruptions (for the want of a better term).
The Gordon Lye case discussed the position for a partner who has quit a partnership. It may easily be forgotten that, notwithstanding the terms of the Partnership Act 1890, such a person remains liable on a joint and several basis for the debts of the partnership of which he is no longer a member until HMRC is informed of his resignation. And, if the partnership fragments into sole proprietorships, that liability could extend as far as to the remaining sole proprietorships. It must be common for HMRC to receive no notifications of that kind at all, in which case many people remain on the hook in blissful ignorance of their potential fate. Happily, Mr Lye had written to HMRC, who lost the letter. Another warning – do not trust HMRC unless you get them to confirm. They often need chasing.
We also had the interesting case a few weeks ago where VAT recovery was denied to a partnership on the costs of a dispute between two of the four partners, and one of the remaining two. So, the dispute was not quite one between a partner and all his fellow partners, but excluded one of the partners altogether. That poor soul nonetheless took independent legal advice on his position, which was aligned more with the two than with the one. The renegade partner’s demands were resisted, and the partnership (now down to three partners) claimed VAT on the cost of the dispute. HMRC cried foul, as they saw it as having no relevance to the underlying business. The tribunal thought that it could have had relevance, but for the fact that the legal fees related to individual partners and not to the partnership. The more complex the dispute, the less likely it will be seen as a matter that relates to the underlying business.
But a recent case called Danesmoor Limited showed that VAT cannot be reclaimed even where there were no such complexities. In that case, a majority shareholder was keen to buy out the minority shareholders. He spent fees achieving this outcome, and the company claimed the VAT on the fees. The tribunal did not accept that the legal and accounting services related to Danesmoor’s business at all. They related solely to the personal share ownerships of individuals. The company was unable to point to anything of significance that benefitted the company’s trade.
If you face similar issues please contact me.
How much VAT can I claim?
Two very interesting case decisions have been issued recently on the tricky subject concerning how much VAT can be claimed on costs. These cases deal with the extent to which certain costs are seen as being used for taxable activities as distinct from non-taxable activities.
Perhaps the more interesting is one concerning animals. This relates to zoo animal keep costs. Some zoos, including Chester Zoo, do not charge VAT on admission charges. This means they cannot reclaim all the VAT on the costs related to the visitor attraction. But, how much can they claim?
Well, under the prescribed rules of the VAT apportionment you measure the use by taking the ratio of your taxable trading income to your total trading income. But, where that produces an illogical result, and as long as the difference between the prescribed method result and a more logical cost allocation falls within certain parameters, the more logical result takes precedence. For Chester Zoo, it was better to take all the income into account because this meant that it could include the hefty taxable catering and merchandise turnover. HMRC wanted that excluded, which would limit the taxable supply value to charges for specific interactions with animals (which are always taxable).
A tribunal had to sit in judgement of whether the animal costs were only used to generate admissions or also helped generate catering and merchandise sales.
You are probably thinking that this is easy. Without the animals there would be no people attending, and without the people there would be no café or shop business, so they have to be linked. Well, they are linked, but not necessarily to the extent required. Is the link one of mere circumstance, or are the animal costs actually used in generating the downstream supplies? That is a more nuanced question, and very ‘fact dependant’. As a general rule, where fact-patterns decide cases, the impact on wider interpretation of the law is less obvious, and HMRC can claim that the impact of the decision is limited.
Happily for Chester Zoo, the tribunal saw their particular cafes and shops as part and parcel of the zoo experience and not a mere adjunct. But it is not certain that HMRC would be wise to appeal. Whilst this decision could remain a millstone around their necks, a binding Upper Tribunal decision against them could be much worse.
The other case was more prosaic but illustrates the reverse proposition. This is that a case decided on a point of universally applicable law is much less easy to leave at rest. This related to investment management fees and whether the VAT on costs was a ‘burden’ on an entire charitable organisation, or merely a burden on the investment activity itself. The Upper Tribunal said that the costs were an overhead, and the issue of the assumed ‘burden’ of the costs was a red herring. It is difficult to see any alternative fact-pattern applying to a different charity which had the same issue. And, the case says some important things about HMRC’s current policy on cost attribution in VAT and thus has wider potential ramifications.
Those who are interested in it can read a fuller analysis here: Investment Management Fees
Anyone who thinks these issues could affect them can contact me to discuss.
I wrote a lengthy piece on this which can be viewed at: Mail Packs
But the subject is worthy of briefer comment. The story is one of HMRC changing their mind about the VAT treatment of a supply, but arguing tooth and nail that there was no change at all. It arises from the ‘service’ of designing, printing, and delivering advertising packs. The packs may consist of printed material which, taken on their own, would be zero rated. People also thought that the included delivery service was zero rated, because it followed the tried and tested ‘delivered goods’ treatment whereby the delivery is effectively part of the sale of the goods. I agree with those people (and so, incidentally, does a leading tax barrister). And that was the view taken over the years by large numbers of VAT inspectors.
So it was a surprise when HMRC said that there was no such rule, and that the mere act of delivery turned the entire product (not merely the delivery part of it) into standard rated marketing services. On that basis, you move from zero rating all of the supply to adding VAT to all of it.
This caused understandable alarm, and a general pointing of fingers at the HMRC Notice which seemed to imply that the supply was zero rated. HMRC accepted that the Notice was ambiguous and accordingly agreed to a stay of execution so people could adjust their arrangements. That stay of execution ends on 1 August 2015, so you only have a week or so to get ready. I am pleased to be able to say that I was part of a small team which talked to HMRC on this subject and obtained some very helpful detailed clarifications (discussed in my longer piece above).
The key change of your approach that could save VAT is for the printer not to deliver, even though he can assist in certain basic arrangements. If you arrange for the Royal Mail ‘downstream service’ to deliver, this will give you a mainly exempt delivery service and a zero rated print service.
If you need advice on this, please contact me.
Interest in cases of Official Error
The Littlewoods case, concerning claims for over-paid VAT from periods of long ago, and whether interest should be paid on a compound or simple basis, continues to lumber on after several years. The latest episode is a Brief issued by HMRC which gives their view of the most recnt court decision.
That decision went against, HMRC, to my surprise. I thought that the courts would shy away from agreeing that HMRC would owe extra billions in interest when the VAT law refers only to simple interest. Now, HMRC has applied to the Supreme Court for permission to appeal. My prediction is that they will not be denied permission to appeal, but what the outcome of that appeal will be is very uncertain. And there is no further appeal available to the Court of Justice, because that court has already made comments and referred it back to our courts.
The point only applies in practice to claims made under the so called ‘Fleming’ opportunity, which closed several years ago. This allowed claims that delved as far back as the 1970s, before the four year cap was confirmed as being effective. Claims that only go back four years are adequately addressed by simple interest. Compounding makes a huge difference over a period of decades. So, HMRC (and the government) face a real prospect of having to pay out massive sums on some of these historical claims.
Unsurprisingly, HMRC’s current message is that the decisions set no general precedent and that in any case they intend to appeal to the Supreme Court. This is as one would expect, given the gravity of the situation. There appears to be a great deal of litigation left in the system on this issue. HMRC’s Brief can be read here: Compound Interest
Feel free to contact Graham Elliott: Contact