UK: VAT focus - A round-up of recent UK VAT-related developments

Last Updated: 29 June 2010

Update – VAT on Royal Mail postal services

Following the announcement in the March Budget that from 31 January 2011 VAT will be applied at the standard rate to certain postal services provided by Royal Mail, there have been further announcements by Royal Mail to clarify which services will be treated as taxable. In addition, HMRC has confirmed that it is looking at backdated claims for VAT incurred on Royal Mail services in the past where they should have been treated as taxable rather than exempt.

Royal Mail has confirmed that the following services will be taxable.

  • Parcelforce.
  • Express and tracked services.
  • Catalogue and magazine services.
  • International services.
  • Unaddressed mail and door-to-door.
  • Receiving and managing mail services including early extraction.
  • Early collection.
  • Admail.
  • Business mail secure.

What next?

If you have incurred costs in relation to any of the above services from Royal Mail you should consider making a backdated claim for VAT deemed to have been included in the price of the services.

Businesses should lodge their request as soon as possible: retrospective VAT claims are capped at four years, so every day of delay reduces the potential refund. Typically, businesses may be able to recover up to 7/47ths of the gross cost of those services with the Royal Mail. We have already submitted claims for a number of clients; if you are interested in discussing this further please get in touch with your usual Smith & Williamson contact. [HMRC Revenue & Customs Brief 19/10]

Holidays and the tour operators' margin scheme

A recent Tribunal case ruled that a company which marketed hotel accommodation outside the UK was operating under the tour operators' margin scheme (TOMS) and was assessed for output VAT of over £7m. The company marketed its hotel accommodation through a website: about 94% of sales were to travel agents and 6% to private individuals. The company argued that it was acting as agent for the owners of the hotels and therefore should not have to account for UK VAT. However, the Tribunal disagreed and held that the company was an independent principal and was not merely supplying agency services but was itself supplying the holiday, therefore the services were subject to TOMS

What next?

This case again demonstrates the difficulties involved in supplying any services that may be subject to TOMS – this includes passenger transport, hotel services, and holiday packages of any kind. This also shows the problems associated with VAT and agency services of all kinds. If you are affected by these issues you should consider reviewing your current VAT treatment with our VAT team. [Secret Hotels2 Limited TC00431]

Salary sacrifice schemes: ECJ opinion

The European Court of Justice (ECJ) has released the opinion of the Advocate General in the long-running case of Astra Zeneca.

The case concerned the situation where an employee was entitled to opt to receive part of their remuneration in the form of retail vouchers. The employer purchased the retail vouchers at a discount, plus VAT, and then used the vouchers as part payment to those employees who had opted into the scheme via a salary sacrifice arrangement.

Astra Zeneca argued that it should not be required to account for output VAT on the provision of the vouchers to the employee, as there was no consideration received for them, while at the same time claiming entitlement to recover the input VAT incurred on the basis that the purchase of the voucher forms an overhead of the business. HMRC argued that the provision of vouchers was subject to VAT either because the salary sacrificed by the employee constituted a 'payment' for the vouchers or because they were put to private use. In either case, HMRC contended that the vouchers were a supply of services which was subject to VAT. Alternatively, if VAT was not due on the provision of the voucher, then HMRC argued that there was no entitlement to recover the related input VAT. The UK VAT Tribunal referred a number of questions to the ECJ seeking to confirm the VAT treatment of these arrangements.

The AG's opinion concludes that there is a supply, for consideration, of vouchers by Astra Zeneca to its employees so output VAT is due. The objective of the VAT regime means that there can be no right to input VAT deduction in the circumstances, because the employer has not borne the burden of the VAT, as the employee sacrifices an amount of salary equivalent to the VAT inclusive price paid by the employer for the vouchers. This input VAT cannot be a cost component of any other taxable supplies made by Astra Zeneca and is therefore not recoverable.

What next?

It remains to be seen whether the ECJ will concur with the AG's opinion. Businesses which operate salary sacrifice arrangements will need to urgently review their existing arrangements, not only to determine the potential value of any historic VAT liability, but also to consider alternative methods of rewarding employees. It will be interesting to see the impact of any ECJ decision on the previous government's cycle to work scheme, and HMRC's confirmation that VAT on the purchase of the bicycles by businesses can be recovered in full. If you could be affected by the outcome of this case, please speak with your usual Smith & Williamson contact for further advice. [Astra Zeneca Case C-40/09]

Samples and gifts of small value

The AG has recently issued his opinion in the case of EMI Group Plc.

EMI freely distributed copies of CDs for promotional purposes to broadcasters and media businesses. In accordance with UK VAT law in relation to giving away 'gifts and samples', EMI accounted for VAT on the CDs it had given away, where the value of successive 'gifts' to the same person exceeded a certain threshold. UK law currently requires VAT to be accounted for on business gifts exceeding £50, a series of gifts to the same person where the cumulative value exceeds £50, and on a series of the same samples given by, and to, the same person (excluding the first sample given away).

In 2003 EMI submitted a repayment claim for more than £1.6m backdated to 1987 on the basis that UK law on samples was beyond the powers of European VAT law.

HMRC rejected the claim on the grounds that VAT had been correctly charged on the CDs, and that most of the claim was outside the three-year time limit laid down at the time. The Tribunal referred the case to the ECJ for rulings on the interpretation of the relevant EU law and requested a ruling on the essential characteristics of a 'sample'.

The AG opined that UK law was clearly at odds with EU law in relation to the definition and interpretation of samples and business gifts. VAT should not be due when more than one sample is given to the same person, and a gift of 'small value' should not be assessed by the cumulative value of a series of gifts given to the same person. The AG did confirm that it is for the UK to determine a 'small gifts' value, under which no VAT is due on the value of these goods when given away, but that UK law should, in exceptional circumstances, allow gifts exceeding the national threshold to be considered 'small', and hence no VAT be due on their gift. The AG also went on to confirm what constitutes the supply of a sample – essentially being an item that is given away to promote sales, or allow testing of the product in question.

What next?

While a final discussion is awaited from the ECJ, any business that has accounted for output VAT on gifts or samples should consider submitting a protective claim to HMRC (covering the previous four-year period). If you have accounted for VAT on business gifts in accordance with the current UK rules, please contact your usual Smith & Williamson contact. [EMI Group plc Case C-581/08]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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