VAT Update - August 2019

HMRC – Updated Guidance

Updated Notice 701/30 Education and Vocational training

HMRC have updated their guidance for the definition of an eligible body for the purposes of education and vocational training. With effect from 1 August 2019, higher education providers registered in the approved category of the register (maintained by the Office for Students) are now also classed as an eligible body for the purposes of providing exempt education and vocational training supplies.

HMRC – Making Tax Digital Update

Update regarding penalties for businesses not signed up for MTD.

HMRC have confirmed that businesses who have failed to sign up for MTD in time will not be penalised this time round and no penalties will be issued to these businesses. However, they must submit their returns through the old portal to avoid getting late filing penalties. Any businesses who have failed to sign up for MTD where they should have been, must address this issue immediately.

DIY Housebuilders – Zero Rate applies to both buildings

Darren Luke v. HMRC (First-Tier Tribunal)

Darren Luke made a claim for the repayment of VAT incurred on the construction of a residential house, under the DIY Housebuilder scheme. The building concerned, was a garage with some first-floor accommodation which he lived in whilst the replacement dwelling was being constructed. This was included as a condition in the Planning Permission granted.

HMRC denied part of the claim on the basis that materials which form part of an annexe, which cannot be disposed of separately to the main dwelling, does not qualify for the scheme.  The FTT allowed Mr Luke’s appeal against HMRC decision. Based on the decision in Catchpole, it was agreed that as the planning permission incorporated the construction of two buildings, the zero rate would apply and therefore the claim should be accepted.

Input tax Recovery on Professional Fees

Newmafruit Farms Limited v. HMRC (First-Tier Tribunal)

This case looked into whether VAT incurred on professional fees regarding litigation for unpaid loans, could be deducted as input tax. Newmafruit Farms Limited (NFL), a fruit farming and packaging business, had accumulated extra profit and lent them to unconnected third parties as a way of earning interested on its cash reserves.

NFL had to bring legal proceedings when these loans were not repaid, and as a result of this, they were unable to recover any interest (although they were able to recover the loan capital). NFL subsequently made a claim for the VAT it had paid in respect of the professional services in connection with the legal proceedings. HMRC rejected the claim on the grounds that the legal fees were linked to ‘the making of loans’ which is an exempt supply.

NFL appealed this decision on the basis that as there was no consideration for the funds loaned therefore was not a supply and further to this, the costs incurred should be treated as general overheads of the business.

In their decision, the FTT agreed with HMRC concluding that NFL did make an exempt supply of loans where failed consideration (i.e. the failure of the borrower to repay the loan) is different from no consideration at all. Furthermore, the legal fees can be regarded as loan administration which is a cost component of the loan itself which is an exempt supply. Therefore, NFL was unable to recover the VAT as it did not relate to the general business activity of NFL.

Welfare Exemption – Closely Connected Supplies

Cheshire Centre for Independent Living v. HMRC (First-Tier Tribunal)

Cheshire Centre for Independent Living (CCIL) is a charity providing support services for disabled individuals, their families and carers. One of these services, which this case focuses on, is a Payroll service which involves CCIL entering into contracts with local authorities and individuals to deal with issues such as PAYE and NIC on behalf of clients.

HMRC contended that the Payroll service was secondary to the supply of welfare services and should therefore be standard rated. This would have impacted the individuals to which the service was being supplied to, as it would ultimately leave them with less money to spend on receiving the support they need.

The FTT ruled that the payroll service was a means for enabling the support of disabled individuals through the service of assistants which forms part of the care plan for the individuals. Therefore, such service is closely connected to a supply of welfare services, and is an exempt supply.

Salary Sacrifice Scheme not an Economic Activity for VAT purposes

HMRC v. Pertemps Limited (Upper Tribunal)

 This case concerned the VAT treatment of the Mobile Advantage Plan (MAP) between Pertemps Ltd and its employees, which is a scheme for the provision of travel and subsistence expenses by way of a reduction in salary.

HMRC contended that the MAP was a taxable supply of services by Pertemps to the employees participating in the scheme, and subsequently raised an assessment which was appealed by Pertemps.

The FTT found in favour of Pertemps, concluding that the supply was indeed a supply of services by Pertemps to its employees, however was outside the scope of VAT due to the operation of the scheme was not classed as an economic activity for VAT purposes. They further stated that even if there had been a supply, it would have been an exempt supply as a ‘dealing in money’ transaction.

HMRC appealed the FTT’s decision that the MAP is not an economic activity, nor is it an exempt supply. The UT dismissed HMRC’s appeal, further ratifying the FTT’s position that Pertemps was not carrying on an economic activity when operating the MAP. 

New rules for Adjustments to VAT following price changes for Goods or Services

HMRC Revenue and Customs Brief 6 (2019)

HMRC have recently released a new Revenue and Customs Brief explaining the new rules, in effect from 1 September 2019, regarding accounting for VAT after prices are altered. This brief applies to businesses that make adjustments to the price of their goods or services.

The new rules impose time limits for issuing debit and credit notes under Regulation 38 of the Regulations. The new rules state:

·        A price increase occurs when the change is agreed by both the supplier and customer

·        A price decrease occurs when a supplier makes a refund to a customer

When a price increase/decrease has occurred, the time limit for issuing:

·        A debit note is 14 days, starting from the date the price change is agreed with the customer. The supplier should account for the increase in VAT in the VAT period in with the change occurs

·        A credit note is 14 days, starting from the date the refund payment is made to the customer. The supplier must account for the decrease in VAT in the VAT period in with the change occurs, and the customer much reduce the amount of VAT claimed (by the same amount).