UK: Deloitte Weekly VAT news - Week ended 25 November 2005

Following the announcement that Debenhams have been refused leave to take the merchant charges case to the House of Lords, we understand that HMRC will be writing to retailers who have implemented the merchant charges arrangement to invite them to withdraw appeals and to set out a basis on which they (HMRC) will accept settlement. We understand the HMRC will accept that charges by the retailers to the card handling companies can be calculated on a cost plus basis, but that they will insist that these are based on a proportion of the total costs (not just the incremental cost of operating the merchant charges structure) and that they want the value of access to the retailer’s client base included as well. Both these contentions seem designed to increase the potential cost of having implemented the arrangement, in line with recent statements from HMRC about making tax avoidance "not worthwhile" and may be open to challenge in individual cases.

HMRC have confirmed that businesses raising additional capital by issuing preference shares, bonds, loan notes and debentures, etc., and through rights issues and the like can treat the VAT on related costs as recoverable to the same extent as the VAT on other business overheads. Following the decision of the ECJ in the case of Kretztechnik A.G., the issue of such financial instruments as well as the issue of shares or units in collective investment schemes like OEICs and Unit Trusts are no longer recognised as supplies for VAT purposes.

The Tribunal’s decision in the case of John Clark (Holdings) Ltd may mean that some businesses that have either not filed claims for refunds of overpaid VAT or had their claims rejected by HMRC may be entitled to be paid. The Tribunal has decided that http://www.gnn.gov.uk/content/detail.asp?ReleaseID=29612&NewsAreaID=2&NavigatedFromSearch=True&print=trueon "target=_new> HMRC’s views when businesses can make retrospective refund claims were too strict.

Some businesses may be able to claim refunds of VAT now that HMRC have confirmed that they are not appealing against the decision of the Tribunal in the case of Willis Pension Trustees Limited. The Tribunal decided that the foreign exchange transactions that the fund entered into with UK banks to hedge its exchange rate risk did not involve supplies by the fund, so it was entitled to treat the related costs as general business overheads. For many businesses, that would mean that the VAT on such costs would be recoverable in full. HMRC point out, though, that when businesses that cannot recover all the VAT on their overheads (e.g. many financial sector businesses) enter into forex deals with counterparties outside the EU the new treatment may result in an increase in irrecoverable VAT.

The Tribunal hearing the case of Technip Coflexip Offshore Ltd in which the company appealed against an assessment for more than £600,000 in relation to supplies that were completely outside the scope of VAT found that HMRC had "… failed to consider whether they are justified in seeking, obtaining or retaining this windfall which in our view would be a matter of unjust enrichment, before making an assessment … ". It went on to say that "There is something deeply unsatisfactory about a Government department relying upon accounting procedures to create a taxable transaction which did not exist in the particular circumstances of this case." The taxpayer’s appeal against the assessment was successful.

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