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

Last Updated: 4 October 2007

Change To VAT Invoicing Requirements – An Update

Following the changes outlined in the July VAT Focus, HM Revenue & Customs (HMRC) has delayed implementation of new invoicing requirements, which will now come into effect from 1 October 2007.

Invoices will require sequential numbering and there will be changes to VAT accounting for margin schemes. There will also be a requirement to state why EU supplies, which are subject to the reverse charge or are exempt, do not carry VAT.

HMRC recently issued guidance on the proposed changes, including which references should be used on invoices, depending on the supply being made.

What next?

If you would like help identifying the reference applicable to your services, please speak to your usual Smith & Williamson VAT contact.

Claims In Respect Of Fund Management Services

Following the recent European Court of Justice (ECJ) decision in the JPMorgan Claverhouse case, there has been much discussion on the impact of the decision for Investment Trust Companies (ITCs) and other pooled funds. The ECJ ruled that the existing UK exemption for the "management of special investment funds" such as Authorised Unit Trusts and Open Ended Investment Companies should also apply to ITCs. This highly publicised case has led to many claims to HMRC in relation to fund management fees, including claims connected with the management of funds other than ITCs. The case will now be decided by a Tribunal, following the guidance from the ECJ. However, HMRC has stated that the outcome of the Tribunal case will only apply to ITCs and that there is no basis on which to hold over claims for any other funds, meaning that any such claims will be refused.

What Next?

If you require further advice on whether the outcome of this case will affect your business, please speak to your usual Smith & Williamson VAT contact.

[Revenue & Customs Brief 58/07]

Supply Of Staff

A recent VAT Tribunal ruled that an employment business which provided nursery nurses and support staff to nurseries should be treated as fully taxable, with VAT due on the full value of its supply. Initially the employment business argued that its supplies of staff should have been exempt. However, the business later argued that it was, in fact, not acting as principal, but as agent in supplying staff to its clients and acting as paymaster on behalf of its clients who used the workers.

The business therefore contended that VAT should only be due on the commission element of its supplies.

The contractual arrangements confirmed that the workers were self-employed and not employed by the employment business. The employment business was responsible for paying the workers’ wages and related taxes, and its clients were unaware of how much the actual workers themselves were paid. It was clear that the employment business could not be acting as paymaster for the client. The Tribunal decided that the employment business could not be seen as an agent for its clients or workers, meaning it was supplying the staff as principal, and VAT must therefore be accounted for on the full value of the supply.

What Next?

While we await the outcome of HMRC’s consultation on the concessions relating to the supply of staff, a business may choose whether to act as an agent or principal for VAT purposes in accordance with Business Brief 10/04. This appears to allow contractual arrangements to be ignored when considering VAT agent/principal arrangements. However, there are invoicing requirements that must be applied when ‘choosing’ to act as a VAT agent in that the salary element relating to temporary workers must be disclosed separately from commission received from clients.

This case highlights the complexities of VAT law associated with the supply of staff following the introduction of the ‘DTI regulations’ which required all employment businesses to act as principals for direct tax purposes. If you are involved in supplying staff or receiving supplies of staff, you should ensure that the correct VAT treatment is applied.

[Eyears Ltd v HM Revenue & Customs Commissioners (Decision 20167)]

Retained Deposits And Cancellation Charges

The ECJ has looked at the VAT liability of hotel deposits and cancellation charges retained by hotels on cancellation of a reservation by customers. The ECJ held that the payment is compensation for a hotel’s loss, rather than any consideration for a supply, and is therefore not subject to VAT.

As a hotel is already obliged to provide hotel services when a reservation is made and accepted by a customer, the retained deposit is not a payment in exchange for hotel services. The deposit must therefore be compensation for the hotel’s loss and is outside the scope of VAT. This decision confirms HMRC’s view that these payments are outside the scope of VAT.

However, HMRC considers that a guaranteed reservation granted for an optional payment is a taxable supply and the ECJ’s reasoning seems to support this.

The ECJ did not look at the ‘time of supply’ rules for deposits. It is likely that HMRC will apply the current rules and expect businesses to account for VAT on hotel deposits when they are received. Businesses should then reclaim the VAT paid to HMRC if the booking is not taken up.

What Next?

This issue may have an impact beyond the hotel sector, and businesses which retain deposits or cancellation charges (such as restaurants) may be able to make a reclaim. If you would like to discuss this matter, please speak to your usual Smith & Williamson VAT contact. [ Société thermale d’Eugénie-les-Bains (C 277/05)]

VAT On Drinks

There have been a number of recent VAT cases relating to the liability of drinks, in particular, products known as ‘smoothies’ or similar health drinks.

In HMRC’s view, subject to some exceptions for products such as milk, any drink that purports to slake thirst, hydrate the body, fortify or give pleasure, is defined as a beverage and subject to VAT under law.

Given the wealth of healthy fruit and nutritional drinks coming to the market, there is an increasing number of cases that are heading to the VAT Tribunal to determine whether the item is actually a beverage, as defined, or whether it could be considered as food or drink not subject to VAT.

What Next?

If you manufacture or sell products that may not be considered beverages, as defined, or you are unsure as to the liability of a product, please speak to your usual Smith & Williamson VAT contact.

Home Computers

In the past, HMRC allowed full VAT recovery on the cost of computers provided by businesses to employees for home use. No adjustment was required for private use, provided there was at least some business use. However, from 13 September 2007, HMRC revised its policy so that businesses will now only be entitled to full VAT recovery where the provision of the computer is necessary for an employee to carry out his or her duties of employment. The business is now required to account for VAT on any private use.

HMRC will accept any method of apportionment, as long as the result reflects a fair and reasonable estimate of business use. HMRC may also agree to the use of set percentages based on a representative period.

HMRC advises that under existing Home Computer Initiative agreements, full VAT recovery can continue until the agreement expires.

What Next?

If you have provided employees with computers to use at home (outside the Home Computer Initiative arrangements), you will need to account for VAT on any private use by employees. Should you require further information or assistance in calculating an appropriate apportionment method, please speak to your usual Smith & Williamson VAT contact.

[Revenue & Customs Brief 55/07]

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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