UK: VAT Focus - January 2013

Last Updated: 5 March 2013
Article by Smith & Williamson

Outstanding VAT returns

Earlier this month HMRC announced a ‘VAT Outstanding Returns’ campaign, which is aimed at businesses that have one or more VAT returns outstanding, and have been told to submit their returns but have not done so. These businesses are being given an opportunity to submit outstanding VAT returns and pay the amount due by 28 February. For business which take advantage of this campaign, HMRC say they will get the ‘best terms available’, which is not explained but may indicate that penalties would be waived or reduced. HMRC also say that if VAT returns are still outstanding after 28 February, “your tax affairs will receive closer attention” from HMRC.

Please contact a member of the VAT team if you wish to discuss any outstanding VAT returns.

Insurance intermediaries

VAT exemption on certain insurance-related services could potentially be under threat, subject to developments at the European level.

In 2005, the ECJ confirmed in its decision in the Andersen case that back office services, such as claims handling and the administration of insurance contracts provided separately from introductory services, when carried out for an insurer by a third party, did not fall within the exemption in EU law.

HMRC has never implemented the findings in the Andersen case into UK legislation and businesses have been able to rely on current published guidance. HMRC has long acknowledged that there is a discrepancy within the UK legislation; however, the UK position has been that there is no point in changing the law while the scope of the exemption is still under review as part of the EU Review of Financial Services.

HMRC’s decision not to change the terms of the UK exemption should not be misinterpreted as a reluctance to restrict the VAT exemption on these services, however. HMRC has recently announced changes to the VAT treatment of insurance mis-selling reviews and helpline services in its Revenue & Customs Brief 33/12.

We understand that, as progress on the EU review has slowed, the UK has come under increased pressure from the European Commission (EC) and further tightening measures may be in the pipeline.

What next?

We cannot guess when the EU review on financial services is likely to be completed or what changes will be made. However, if you are an intermediary in the insurance sector and would like to discuss your status and how best to protect your VAT position, please contact your usual Smith & Williamson contact for further information.

Changes to VAT invoicing

New EU VAT invoicing requirements came into effect on 1 January 2013. The impact on UK business may be minimal as many of the changes are already included in UK VAT legislation. The changes include the following.

  • Simplification of electronic invoicing by removing the ability for member states to impose additional conditions of use.

  • Removing the requirement for UK suppliers to issue VAT invoices for exempt insurance or financial services supplied to customers in other EC member states.

  • Clarification of the exemption reference required when invoicing from UK to EU for other exempt supplies.

  • All VAT registered businesses will be permitted to issue “less detailed tax invoices” for supplies that do not exceed £250. This was previously only permitted for retailers.

  • All EU member states must apply the same time limit for the issue of invoices for cross-border supplies, being the 15th day of the month following that in which the goods are removed or the services are performed.

If you would like to discuss the changes in more detail, please contact your usual Smith & Williamson contact.

Recovery of VAT on acquisition costs

The First Tier Tribunal decision in Cloud Electronics Holdings Limited (Holdings) was released in November 2012. The Tribunal allowed the appeal on the basis that Holdings incurred the VAT on professional services fees and was therefore entitled to recover it.

Holdings was incorporated as a vehicle to facilitate a management buyout and it subsequently acquired 100% of the shares in the relevant trading subsidiary, Cloud Electronics Ltd (Cloud). Holdings incurred costs relating to the acquisition of that wholly owned subsidiary. HMRC took the view that certain of the input tax related to services which had been used in the process of acquiring the shares in the subsidiary rather than in the business of the holding company. HMRC stated that certain services were not received by Holdings but had been supplied under engagements with members of the management buyout team. In relation to certain costs, HMRC also argued that they had been commissioned either by a member of the management buyout team or the funding bank rather than Holdings. As a result, Holdings was not permitted to reclaim the associated input VAT recovery.

The Tribunal concluded that the costs were incurred after Holdings had been incorporated (i.e. existed), and therefore could be used for the purpose of its business. The Tribunal also concluded that the professional services advice concerned whether Holdings should invest in the trading company and not, as HMRC had contented, whether the management buyout team should invest in Holdings. The Tribunal also found that Holdings had provided management services to its subsidiary company and concluded that those management services were genuine economic activities. As a result, the two VAT recovery tests in section 24 of the VAT Act 1994 (that (i) the input tax on the supply of goods or services to the claimant be for the purpose of a business and (ii) the business be carried on by the claimant) were satisfied, and Holdings was permitted VAT recovery.

What next?

It is understood that HMRC has appealed the Tribunal’s decision. Assuming the appeal is heard it remains to be seen how the Upper Tier Tribunal will reach its decision, given that there are several other active cases in the area (one worth mentioning is the Court of Appeal hearing in BAA, which occurred in 2012 and we are awaiting the release of the decision).

Care should always be taken before a deal commences to consider VAT recovery on advisors fees. This is an area of focus now for HMRC, and one where significant sums of VAT can be lost without careful planning.

For further information about the case, and to discuss the implications of it, please contact your usual VAT contact at Smith & Williamson.

Professional fees

The First-tier Tribunal recently released its decision in the case of Mundays LLP, a firm of solicitors. The case relates to the recovery of VAT incurred on tax services provided to the firm and the partners. The case has implications for all professional partnerships and should be considered carefully when determining the proportion of VAT on professional fees that can be recovered.

Further information on the decision can be found by following the link to our briefing note at publications/250-briefing-note.pdf . If you would like to discuss this further please contact a member of the VAT team.

TOGC – grant of a lease out of a superior interest

HMRC had until recently held the view that the transfer of a property business by way of a grant of a lease out of a superior interest cannot represent a transfer of a business as a going concern (TOGC), even in cases where a 999 year lease is granted out of a freehold. This was because HMRC’s view was that another asset (the lease) is created, and the freehold interest is retained.

Following a successful challenge to HMRC’s position in the Robinson Family VAT tribunal case, HMRC now accept that where the transferor of a property rental business retains a small interest (the freehold or a superior lease) and grants a lease or sub-lease, this does not prevent the transaction from being treated as a TOGC for VAT purposes. HMRC will accept that a reversion retained by the transferor is sufficiently small for the TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the

What next?

The impact of this decision also means that past transaction which relied on HMRC’s previous guidance may have qualified as a TOGC and therefore no VAT was due when in fact VAT was accounted for. This may have resulted in increased SDLT costs when a lower figure would have resulted with TOGC treatment. HMRC are considering whether to make a further communication on potential adjustments to the SDLT already paid.

Property letting and storage of goods

On 1 October 2012, standard rating became mandatory for “the grant of facilities for the self-storage of goods”.

When announced, HMRC said that mandatory standard rating would apply only to a small number of operators of “typical” self-storage facilities, but in practice it may apply to any property owner granting a lease or licence in any property that it has not already opted to tax (VAT elected).

‘Facilities’ for this purpose are defined as “a relevant structure for the storage of goods”, accordingly, the letting of any building, or part, is capable of mandatory standard rating if the lessee/licensee uses it to store its own goods (or allows someone else to store their own goods).

In some cases it will be clear that mandatory standard rating does not apply, if, for example, the lease or license prohibits the storage of goods. However, where agreements are not so specific, the onus will fall on the property owner to verify if the premises are being used to store goods.

HMRC guidance states that if facilities are suitable for a variety of uses “it will be necessary for the grantor to obtain confirmation from his customer as to the use to be made of the space. Suppliers are advised to obtain such confirmation in writing and retain it with their VAT records.”

In respect of changes in use, HMRC advises that “suppliers should ensure that customers are aware that they should notify the supplier of any permanent changes of use in the future and that this may result in a different VAT treatment. Provided this is done there is no requirement for suppliers to actively monitor, on a regular basis the use being made of the space.”

What next?

Whatever the status of a property owner; individual, partnership, trust, pension scheme, charity or company, if a property is let on a VAT exempt basis and the lessee/licensee is, or is capable of, using it to store own goods, the VAT position should be confirmed as soon as possible and procedures put in place to ensure adequate notification of any change of use affecting the VAT position of the property supply.

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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