UK: VAT Focus: A Round-Up Of Recent UK VAT-Related Developments – April 2012

Last Updated: 2 May 2012
Article by Smith & Williamson

VAT costs set to rise for listed buildings

In a surprise move, the Chancellor announced plans to remove the VAT zero-rating relief for approved alteration work carried out on listed buildings (used for relevant residential, relevant charitable, and as dwellings). The plans are subject to consultation, but as the legislation has already been drafted no substantive changes are expected as a result of the consultation.

The zero-rating relief for the first sale of a listed building that has been 'substantially reconstructed' (i.e. where 60% of the reconstruction work was approved alterations) will also be withdrawn. However, zero-rating relief will remain for listed buildings that have been reconstructed from a shell.

Both reliefs are to be removed with effect from 1 October 2012. There are special rules which apply for works that have already commenced, or which have been contracted for and will be completed after 1 October 2012.Anti-forestalling measures will also apply.

What next?

Alteration work on listed buildings will now be on the same footing as repair work and become standard rated for VAT purposes.

These changes will lead to increased costs for private individuals, businesses and charities who own listed buildings which currently qualify for VAT relief.

If you are involved in planning any approved alteration work for a listed building you should discuss the arrangements with a member of the VAT team to ensure that appropriate VAT planning is considered.

Is grant funding subject to VAT?

A recent tribunal case has decided that funding made available to meet a shortfall was not grant funding and should be subject to VAT.

The case concerned payments by the city council and a local university made to a joint venture company that they had set up. The joint venture company was set up to take advantage of grant funding made available by a Scottish sports agency for the establishment of a regional sports facility.

Once the sports facility was constructed, the company charged for the use of these facilities. However, the income generated was not enough to meet the costs of running the facilities and the joint venture owners agreed to provide additional funds to meet the shortfall.

HMRC took the view that the additional funding was further consideration for the services provided by the company to the owners and therefore that these payments should be subject to VAT, whereas the owners argued that the payments should be treated as a donation and outside the scope of VAT. The tribunal agreed with HMRC and concluded that the purpose of the additional funding was the operation and maintenance of leisure services supplied to the council and the university. Therefore, the payments represented consideration for a taxable supply.

What next?

It is a common mistake to assume that everything that is called grant funding can be treated as being outside the scope of VAT. Any businesses or charities receiving any type of grant funding for any activities should review their arrangements to check the VAT treatment applied is correct. Please contact a member of the VAT team to discuss this in more detail.

Is a finance lease a supply of goods?

Recently, the Court of Justice of the European Union (CJEU) delivered its judgment in the case of Eon Aset Menidjmunt (Eon). The company entered into a leasing and financial leasing contract for the lease of motor vehicles for its managing director to travel between his residence and work. The company reclaimed the VAT incurred on these costs in full, but the Bulgarian National Revenue Agency disputed the VAT recovery on the basis that the cars were not used for Eon's economic activities.

As part of the judgement, the CJEU examined the nature of the finance leasing contract. The court held that a finance lease was a contract under which a transfer of legal ownership is made to the lessee at the end of the contract and thereby having features which are comparable to an acquisition of a good. The CJEU stated that where the contract effectively transfers all risks and benefits of ownership to the lessee, the lease should be regarded as a supply of goods.

What next?

This decision is interesting in that it highlights some of the difficulties involved in the VAT treatment of finance leases and could cast doubt on the treatment of such contracts in the UK. A finance lease contract that does not transfer legal title is currently treated as a supply of services; however, the CJEU's judgment suggests that this may be incorrect. If finance leases were to be treated as supplies of goods, this could have significant implications for VAT purposes (changing in some cases, both the time of supply and the amounts of VAT due). If you would like any further advice please consult a member of the VAT team.

Cost-sharing exemption – further update

HMRC has recently published its draft guidance relating to the implementation of draft legislation to introduce the cost-sharing exemption into UK law. The draft legislation, which was previously published in December, is expected to come into effect in July 2012 once the Finance Bill receives Royal Assent.

HMRC is carrying out an informal consultation among those who have previously responded to consultations on the cost-sharing exemption to discuss the draft guidance it has produced.

What next?

The draft guidance goes into some detail as to the conditions and restrictions that will be applied in relation to the exemption. One of the main points to note is that the guidance states that the exemption will not apply to outsourced services. However, it is not clear what HMRC means by outsourced services or how the rules will apply in practice. If you are interested in learning more about how this could assist your organisation please get in touch with a member of the VAT team to discuss this in more detail.

Investment management – decision out soon

Currently, investment management services are subject to VAT while the management of certain collective investment schemes is exempt. A case has been heard before the CJEU in which it was argued that these services are so similar that their VAT treatment should be the same. The Advocate General's opinion in Deutsche Bank (C-44/11) is expected on 8 May and we will be watching developments closely.

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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