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

Last Updated: 5 March 2008
Article by Martin Sharratt

Default surcharge – out of time?

In a recent case decided at the VAT Tribunal, an appellant successfully appealed against a default surcharge.

The appellant had submitted late VAT Returns for the 07/04, 10/04 and 01/05 VAT Return periods. The VAT payments for the 07/05 and 07/06 VAT Return periods were also late. HM Revenue & Customs (HMRC) imposed a default surcharge penalty of 15% for the VAT due for the 07/06 VAT Return period. The appellant contended that because he had mitigating circumstances for the late submission of the 10/04 VAT Return, this period should not be treated as in default and thus the penalty for the 07/06 period should be reduced.

Although the appeal for the 10/04 period was 'out of time' (as the appellant did not appeal within the set deadline), the appellant argued that it was relevant as it had an effect on the current surcharge being issued. The Tribunal agreed that the appellant had a reasonable excuse for the late submission of the 10/04 VAT Return and concluded that, as it was material to the level of the 07/06 penalty, it could be considered, even though the deadline had passed. The penalty amount should therefore be calculated on the basis that the appellant was not in default for the 10/04 VAT Return period.

What next?

If you have paid any VAT Returns late due to mitigating circumstances, and have been issued with a penalty, it may be worth considering appealing against an earlier default. Please speak to your usual Smith & Williamson contact if this applies to you.
[Aardvark Excavations Ltd v HM Revenue & Customs VTD 20468]

Acting as principal or agent?

A catering company provides services to the US embassy in the UK. The company initially acted as an agent of the American Embassy Employees Association, which is based in the US. But this original agreement was superseded in 2001. Following this, HMRC argued that the company acted as principal in supplying its catering services to the US embassy and should account for VAT on the full value of its services.

It was determined that, within the new agreement, catering services were now being provided to embassy staff and not to the association. The company also shares the risks associated with the catering operation and exerts control over the pricing of food at the embassy. In this situation, in order to be a principal, the business would be expected to have a licence or sub-lease of the property. But due to security risks at the embassy, this was not appropriate.

A Tribunal decided that these factors were indicative of the company ending its agency agreement and now acting as principal. As such, the catering company must account for VAT on income received from the embassy for catering services.

What next?

This case highlights the difficulties in determining whether you are acting as principal or agent, which could have implications for your business. Please speak to your usual Smith & Williamson contact for further information.
[Aramark Ltd v HM Revenue & Customs VTD 20515]

Partial exemptions and direct attribution

Following a Tribunal decision involving Cheshire Racing Limited (CRL), HMRC has revised its policy on the recovery of input tax for Satellite Information Systems (SIS) services in betting stores.

SIS services provide live coverage of racing and real-time odds, as well as commentary on sporting events. In Business Brief 17/06, HMRC states that where a bookmaker contributes additional content to the SIS service so that it partly relates to his/her taxable supplies, the input tax can be treated as residual rather than exempt; it should be treated as exempt in all other situations.

In this case, although CRL provided no additional information, they claimed their content directly influenced their customers' environment and facilitated their choices when placing bets. CRL therefore suggested that the input tax should be treated as residual in their partial exemption calculations, regardless of whether or not they incorporated additional content.

CRL successfully demonstrated that there was a direct and immediate link between the SIS broadcast and gaming machine income, and that further input tax should be treated as residual in the company's partial exemption calculations. HMRC now accepts that a direct and immediate link exists.

What next?

This case highlights the difficulties involved in determining what constitutes a direct and immediate link for partial exemption purposes. If you are unsure whether you have applied the correct treatment to any of your costs, please ask your usual Smith & Williamson contact for further advice.
[Revenue & Customs Brief 01/08]

Free insurance – a supply in itself?

The Court of Appeal recently released its judgment on an appeal by a car manufacturer (the company). The company had launched a promotion scheme whereby, for certain models of cars for nominated periods of time, it offered 'free' insurance and RAC breakdown cover for one year (provided purchasers met the criteria prescribed by the third-party insurer). The company met the cost of the premium charged by the insurer and RAC.

The company initially charged VAT on the full selling price of all the cars sold under the scheme. However, it subsequently sought a partial repayment of the VAT paid, arguing that some part of the total consideration related to an exempt supply of insurance. Both the Tribunal and the High Court rejected this argument.

However, the Court of Appeal agreed with the company's argument, ruling that where a transaction as a whole involves two supplies, one of services and the other of goods, there is still only a single supply if either element is ancillary to, or subsumed within, the other. As acquiring the free insurance was not the aim of the transaction for the customer but merely a means of enjoying the car more, this constituted a single taxable supply. The appeal was subsequently dismissed.

What next?

If you provide any free services in connection with other supplies of services or goods, you should ensure the correct VAT treatment has been applied. If this affects you, please speak to your usual Smith & Williamson contact.
[Ford Motor Company v HM Revenue & Customs EWCA Civ 1370]

Flat Rate Scheme

The Flat Rate Scheme allows small businesses with an annual taxable turnover of up to Ł150,000 (excluding VAT) to calculate the VAT due to HMRC as a percentage of their total turnover, rather than declaring output tax at 17.5% and claiming input tax through their VAT returns.

To determine the percentage businesses should use to calculate the amount of VAT accounted to HMRC, HMRC has developed a list of main activity sectors, each of which corresponds to a flat rate percentage. Businesses are required to specify the category to which their main business activity relates and apply the corresponding percentage to their turnover.

In a recent Tribunal case, HMRC disagreed with the classification a company chose for its main business activity and, therefore, the corresponding flat rate percentage. The company defined its main business activity as services of forensic employment consultants and expert witnesses. It did not believe this was classified under the available sector options and instead selected 'Business Services not listed elsewhere' as the most appropriate sector, which carries an 11% flat rate percentage. After initially accepting the company's application, HMRC challenged this classification and suggested its activity type was more akin to 'Management Consultancy', which corresponds to a 12.5% flat rate.

The Tribunal's decision favoured the company as, through analysis of the business, it decided that the company did not provide management consultancy services as defined by the Chartered Institute of Management. The Tribunal concluded that the business type must therefore fall within the originally selected category of 'Business Services not listed elsewhere'.

What next?

If you would like further information on the Flat Rate Scheme, or require any advice on the most appropriate business sectors relating to your business, please speak to your usual Smith & Williamson contact.
[Calibre Tas Limited v HM Revenue & Customs VTD 20508]

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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