Investment Management – Update
As reported in the April 2012 edition of VAT focus, the Advocate General (AG) has released her opinion in the Deutsche Bank case which was recently heard before the Court of Justice of the European Union (CJEU).
The taxpayer argued that portfolio management services were essentially the same as the investment management services performed for certain collective investment schemes which are treated as being exempt, so the VAT treatment should be the same under the principle of fiscal neutrality.
The AG rejected that argument, noting that the principle of fiscal neutrality is merely an aid to interpretation: it cannot be evoked to overturn the clear wording of the Directive, which restricts the exemption to the management of 'special investment funds' as defined by the member states.
This view would appear to confirm the current position adopted by HMRC and UK VAT legislation. However, the AG also indicated that it may be wrong to treat commissions which are charged separately for arranging transactions as exempt – the AG took the view that the portfolio management represented a single supply of services which ought to have the same VAT treatment.
It remains to be seen what the final judgment will say and whether further developments such as the EU Review of Financial Services and a number of cases currently pending at the CJEU may change the position (there is another hearing for a related case at the end of June).
We will be watching further developments closely.
Four-year cap – time limit is reasonable
In the recent case of Banca Antoniana Popolare Veneta the CJEU had stated that it is not acceptable to set time limits in a way that the taxpayer would be "totally deprived" of a right to VAT recovery. In this case retrospective legislation was introduced by the Italian Government which meant that the taxpayer was not in a position to make a claim within the set time limits.
HMRC does not accept that this case has any bearing on the UK as the facts of the case were very specific and the UK Government would not introduce VAT legislation with retrospective effect. HMRC has released a Revenue and Customs Brief confirming its view that the current four-year cap for retrospective VAT claims is reasonable.
There are a number of grounds on which a reclaim for previously overpaid or overdeclared tax can be made, including due to a mistake in law, the unreasonable introduction of a law, or other error by the taxpayer or HMRC. The time limit for making a claim can be affected by when the mistake was discovered or could have been discovered. The issues can be quite complex.
Alternative Dispute Resolution – pilot scheme extended
HMRC has announced that they are extending their Alternative Dispute Resolution service trial to small and medium enterprises (SMEs) and individuals across the UK (the trial was carried out in London). The service offers taxpayers an alternative way to resolve tax disputes in relation to compliance checks (for VAT and direct tax).
The process involves an independent person from HMRC (a 'facilitator'), who has not been involved in the dispute before, and who will work with both the taxpayer and the HMRC officer dealing with the case to try to broker an agreement between them. The process is available where a tax issue is in dispute, but before an appealable tax decision or assessment has been made by HMRC. Entering into this process will not affect the taxpayer's review and appeal rights.
It will be interesting to see how useful the service is and whether taxpayers will benefit from it. If you are currently in a dispute with HMRC and are eligible, it may be worth considering the use of this service.
Government u-turn on 'pasty' and 'caravan' taxes
It has been widely publicised that as a result of widespread lobbying and public appeals, the Chancellor has backed down on his proposal to impose VAT at 20% on freshly baked pasties, pies, sausage rolls and similar products that are sold while cooling down but still above 'ambient' room temperature.
Takeaway sales of the products will still qualify for zero rating but if such products are placed on heated shelves, with a view to them being sold for consumption while they are still hot, zero rating will not apply and they will be subject to VAT at the standard rate.
In addition, there has been a climb-down on the proposed VAT rate for static holiday caravans. Its implementation has now been deferred until April 2013 and it is thought that the Government may consider introducing a reduced rate of 5% instead of the standard rate.
This is a welcome measure for many food retailers, but it does highlight the anomalies and complications in the VAT system when it comes to food.
Supply of trade stands exempt despite option to tax being made
In a recent First Tier Tribunal case the Tribunal ruled that a supply of the hire of stands should be exempt even though a valid option to tax was made. The case involved a charity which ran an annual horticultural show. The show generated income from ticket sales, the hire of stands, and a fundraising gala dinner. The charity's objectives included promoting horticulture and maintaining the park in which the show was held.
The charity exercised an option to tax in respect of the park and had accounted for VAT on all income. However, it then considered the possibility of exemption for the charity fundraising aspect of the ticket sales and the gala dinner. HMRC confirmed this income did indeed qualify for exemption under the charity fundraising provisions, but also stated that hire of the stands should also be covered by the same exemption. The Tribunal agreed with HMRC in that although the VAT exemption under the supply of land provisions could not apply (because the option to tax had been made) that does not mean that the supplies are prevented from being exempt under the charity provisions of VAT law. This meant that the VAT recovery of costs incurred in generating this income would be disallowed, but would mean that the charity would not need to charge output VAT on the relevant income.
This is another illustration of the complications involved in VAT for charities and highlights that even when something looks straightforward for VAT purposes, it often isn't.
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