A Round-Up Of Recent VAT-Related Developments

Update On Reverse Charge Accounting For Smallvolume/ High-Value Goods

Following the changes to combat carousel fraud announced in Business Brief 10/2006 (see VAT Focus September 2006), HM Revenue & Customs (HMRC) has provided further details on proposals to introduce a reverse charge on a range of goods such as mobile phones and computer chips. Despite delaying the expected implementation of the reverse charge accounting to 1 December 2006, HMRC acknowledges the practical difficulties for affected businesses and has promised to operate a ‘light touch’ approach until businesses have time to adapt. HMRC also recognises concerns regarding the proposed de minimis limits and related anti-disaggregation provisions, and aims to find a solution to minimise the administrative burden for businesses. The UK has requested a derogation to permit this departure from the normal VAT system and cannot introduce the measure until the European Council has made its decision.

Businesses affected by the proposed changes should review their systems and engage in dialogue with their advisers and HMRC to ensure their concerns are registered. Your Smith & Williamson VAT contact will be happy to assist.
[Business Brief 14/2006]

Following the Court of Appeal decisions in Michael Fleming t/a Bodycraft and Conde Nast Publications Ltd on the vires of the introduction of the three-year cap to reclaim input VAT, HMRC has decided to appeal to the House of Lords. HMRC has set out in detail how taxpayers should make claims if they do not want to wait until the House of Lords decision. This includes active claims, i.e. claims already made where no appealable decision has been given, or where the matter is subject to appeal, as well as fresh claims.

Businesses should now review whether they are in a position to reclaim any underrecovered input VAT incurred before the cap came into force on 1 May 1997. Examples of where VAT might potentially not have been claimed include staff entertainment and flotation costs.
[Business Brief 13/2006]

The High Court has ruled in the case of MBNA that the assignment of debts in the process of securitising credit card receivables does not constitute a supply for VAT purposes. This is because in this context the assignment is simply the means whereby securitisation may take place rather than a supply in its own right. In addition to this output issue the High Court also had to decide on input issues. It held that the input tax incurred on the securitisation related to more than one supply (the exempt supply to the credit card holders and the VAT-recoverable ‘specified supplies’ to the non-EU securitisation vehicle for servicing the assigned debts) and must therefore be attributed to both supplies. The task to decide on the extent of the actual attribution has been referred back to the Tribunal.

On another input issue, the High Court decided that HMRC has the power to withdraw a special partial exemption method without directing a new method or making the comparison between the old method and the application of Regulations 101/103, if the business makes out of the country supplies. This is because Regulation 103 is flexible enough to allow the business to apply an alternative method that is fair and reasonable.

Businesses involved in securitisations should review their input tax attribution and recovery rate in light of the decision. Not all securitisation transactions are structured in the same way as that in MBNA, and this may lead to different outcomes. The Court’s findings on Regulation 103 may lead to more businesses having their special partial exemption method withdrawn. If you think you may be affected by this decision, please speak to your normal VAT contact.

The Court of Appeal has decided in favour of the taxpayer in Bookit Limited in respect of card-handling charges made to customers using a credit or debit card to pay for cinema bookings. The Court has agreed that these are exempt financial services. Bookit Limited operated call centres and took telephone bookings for cinema tickets for its parent company. Bookit charged an additional fee for dealing with payments when customers booked via telephone or internet and paid with credit or debit cards. HMRC has been denied leave to appeal the decision to the House of Lords.

Businesses charging (or considering charging) separate card-handling fees in similar circumstances should review whether they might be able to benefit from this ruling and/or make VAT refund claims (subject, as ever, to the unjust enrichment provisions). Going forward, businesses offering services that can be booked via telephone or internet may wish to consider treating these charges as exempt or restructuring their supplies, whilst bearing in mind the effect on their input VAT recovery rate.

[Bookit Limited [2006] EWCA Civ. 550]

HMRC is consulting with businesses and trade organisations involved in trading on commodity exchanges, such as the London Metal Exchange or the International Petroleum Exchange, with a view to updating the Terminal Markets Order (TMO). The TMO was drafted in 1972 when the markets operated very differently and was allowed to continue under a derogation by the European Commission. The TMO applies a zero rate of VAT to transactions taking place within these exchanges.

Any proposals for changes need to be carefully considered. Smith & Williamson is actively involved in these discussions. If you have any questions, please contact Martin Sharratt, Antje Forbrich or your usual Smith & Williamson contact.

In Topps Tiles plc (Topps) the taxpayer, which did not use a retail scheme, questioned HMRC’s calculation of VAT, specifically the rounding up or down to the nearest penny for VAT calculation purposes and whether this should be on a line-by-line or ‘basket’ basis. Topps initially claimed that each single tile was a supply unit but later claimed a supply unit should comprise each separate item of merchandise, for example the purchase of, say, a certain kind of white tile and a certain type of blue would comprise two different supply units. HMRC agreed, but highlighted that this would not necessarily apply in other circumstances.

Topps argued that by rounding up VAT on any supply the taxpayer would effectively pay more VAT than required by law which would be wrong. Accordingly, VAT should always be rounded down to the nearest penny. The Tribunal agreed with HMRC that, compared to the figure calculated on the aggregate sales (no rounding), a calculation based on rounding down only would guarantee a wrong result in all cases. Mathematical rounding, however, would achieve a result as nearly accurately as possible.

Retailers not operating a retail scheme may want to discuss their ‘rounding’ arrangements.

[Topps Tiles plc [2006] UKVAT V19751 (15 August 2006)]

HMRC is appealing the High Court’s decision in Mayflower Theatre Trust (MTT), which stated that input tax on production costs may not always be irrecoverable. Following HMRC’s revised policy on the application of cultural exemption, MTT treated its ticket sales as exempt and had to adjust its input tax recovery accordingly. HMRC regards the input tax on production costs as wholly irrecoverable as those costs relate solely to exempt admission charges. The High Court agreed with the direct link to admission charges, but recognised that there were also ‘taxable tickets’. These were tickets sold as part of a corporate sponsorship package which was treated as a single taxable supply, and the input tax could be adjusted accordingly.

Theatres and other businesses may want to review their input tax calculation, especially if they sell similar ‘taxable tickets’. It may be worthwhile to make a protective claim, but claimants may want to await the final outcome of this case.
[Business Brief 12/2006]