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2017 CPD Webinar Programme

Latest VAT News

Tuesday 11th July 2017

Presented by:

Neil Owen

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this document can be accepted by the author or 2020 Innovation Training Limited.

2020 Innovation Training Limited ● 6110 Knights Court ● Solihull Parkway ● Birmingham Business Park ●

Birmingham ● B37 7WY Tel. +44 (0) 121 314 2020 ● Fax +44 (0) 121 314 4718 ● Email: [email protected] ●

Website: www.the2020group.com

http://www.the2020group.com/

2020 Innovation Training Limited Latest Vat News And Developments

CONTENTS Page

1. Introduction ........................................................................................................................... 1

2. Brexit ..................................................................................................................................... 1

3. Pre-Registration Input Tax ..................................................................................................... 2

4. VAT Registration ................................................................................................................... 4

5. The FRS Changes ................................................................................................................. 4

6. Colouring and Dot-to-Dot Books ............................................................................................ 6

7. VAT Enquiries and Error Corrections ..................................................................................... 6

8. Repayment Supplement ........................................................................................................ 8

9. Alternative Dispute Resolution ............................................................................................... 8

10. Charity Non-Business Activities ............................................................................................. 9

11. Antiques Fairs, Craft Fairs, Art Fairs, Etc ............................................................................. 11

12. Reduced-Rated Construction Services ................................................................................ 12 No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in this document can be accepted by the

author or 2020 Innovation Training Limited.

2020 Innovation Training Limited ● 6110 Knights Court ● Solihull Parkway ● Birmingham Business Park ● Birmingham ● B37 7WY

Tel. +44 (0) 121 314 2020 ● Fax +44 (0) 121 314 4718 ● Email: [email protected] ● Website: www.the2020group.com

http://www.the2020group.com/


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1. Introduction

1.1 VAT is a tax where it is all too easy to get things wrong. Working as it does according to its own rules – quite different to those applying to other taxes – it is an area where an experienced navigator can be especially helpful in demonstrating how to negotiate the minefield.

1.2 With this in mind, the aim of this session is to guide delegates through a number of recent developments and other topical areas where a precise knowledge of how the rules really work can make the difference between avoiding the pitfalls and falling into them.

2. Brexit

2.1 The implications of Brexit for the VAT system in the UK are not inconsiderable. For as long as this country has been a member of the European Union (European Community, EEC), it has been an absolute legal requirement that the UK VAT system follows EU legislation. This has left us in this country with very little discretion in terms of the broad framework of VAT, and has even interfered sometimes with minor tinkering around the edges of the VAT system.

2.2 A significant example of this is the rule which prevents the extension of the zero rate to any additional goods or services. Amongst other things, this provision has prevented the UK from broadening any reliefs for supplies by or to charities.

2.3 Not all that long ago, the reduced-rating for the installation of energy-saving materials in buildings used for charitable purposes was withdrawn as it was recognised that it was incompatible with the EU Principal VAT Directive. The reduced-rating for such installations in all residential properties was held in a case brought against the UK by the EU Commission in the European Court of Justice to be illegal and the UK has been dragging its heels making the necessary changes to UK law. Presumably, the law will not be changed at all now and perhaps the relief for charity buildings will be reintroduced.

2.4 The zero-rating of women’s sanitary products could be introduced with no need to obtain EU clearance, and the zero rate could be reapplied (if the UK government were to consider it appropriate) to domestic supplies of fuel and power.

2.5 A downside of Brexit, bizarrely, also stems from the fact that one further ramification of the UK’s membership of the EU is that the final arbiter in all matters relating to VAT has been the European Court of Justice. Decisions from the ECJ are not infrequently favourable to UK taxpayers and have sometimes had the effect of limiting the excesses of HMRC.

2.6 Departure from the European Union will put the UK in a position where the VAT system can be determined solely by the UK government. This is potentially a mixed blessing. That the UK government and HMRC will have unfettered control of all aspects of VAT law and practice is not a wholly positive development.

2.7 Other more subtle questions also arise, such as the extent to which case law, where is has derived from the ECJ or from EU jurisprudence, will or will not remain valid. Technically, of course, until the UK actually ceases to be a member state, EU law and ECJ judgments continue to hold sway.


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2.8 One near certainty is that, despite the fact that the introduction of a VAT system into the UK was a prerequisite for membership of the then EEC, we should not expect it to be abandoned on Brexit; in the intervening 40-odd years, it has become the global indirect tax, in force in over 100 countries, and it raises far too much revenue to be easily replaced with an alternative.

2.9 In practical terms, the biggest impact of Brexit will almost certainly be felt in the area of international transactions, most particularly those involving goods.

2.10 Sales of goods to EU countries will become exports with greater evidential requirements. But EC Sales Lists and Intrastats should become a thing of the past.

2.11 Even sales to consumers in member states of the EU will become exports and zero-rated subject to the evidential requirements. However, parcels despatched to member states will be subject to VAT, and possibly duty, on arrival, which may well be an impediment to swift delivery. Some mail order houses may relocate their warehouses, so that goods for EU customers can be despatched from the EU (obtaining a second VAT registration in the jurisdiction chosen).

2.12 Acquisitions will become imports, which will have a massive negative cash flow impact on UK purchasers of goods from EU suppliers (unless the UK reintroduces Postponed Accounting).

2.13 Triangulation, where the UK business is the middle party and the goods do not leave the EU, will become very tricky. Boxes 2, 8 and 9 will disappear from the VAT return. Those registered for MOSS will have to find another member state in which to do the reporting (presumably Ireland for most of them on account of the common language).

2.14 Tour operators will have a much reduced VAT liability on EU tours; maybe the TOMS will be abandoned altogether.

2.15 Some of this is speculation, some fairly clear and obvious implications. Now is not the time for detailed analysis, which will follow as the timescale and mechanics of Brexit become clearer over time. This subject is certain to be revisited on future occasions.

2.16 In this context, the words of the apocryphal Chinese proverb (said to be a form of curse, but in fact never traced to a genuine eastern source) may come to mind: “May you live in interesting times”!

3. Pre-Registration Input Tax

3.1 VAT incurred on certain purchases made before registration may be claimed on the first VAT return of a taxable person. This facility should not be overlooked by any newly registered business, even those joining the Flat Rate Scheme from the date of their registration. Failure to make the claim on the first return does constitute an error, requiring correction by way of a voluntary disclosure. Thus, if the amount is greater than £10,000 and has not been entered on the first return, it can only be recovered by way of a claim submitted to the error correction unit, which has recently moved from Liverpool to Euston.

3.2 Claims can be made in respect of goods purchased within the preceding four years, provided that those goods are still on hand at the date of registration. Claims can be made on services received within the preceding six months, unless they have been absorbed into specific supplies made before the date of registration.


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3.3 The distinction between goods and services is important and does not correlate to the distinction between capital costs and revenue costs (to use terms not really applicable to VAT), as can occasionally be misunderstood. This was conformed in 2015 in the case of Sam Smith t/a Heliops UK (TC04237), where VAT incurred more than six months before registration on helicopter pilot training could not be claimed, the purchase being one of services, notwithstanding it might be seen as an intangible asset.

3.4 As regards goods, it has historically been the case that the VAT originally incurred can be claimed in full, regardless of the length of time since purchase. However, more recently it has become apparent that HMRC have been routinely seeking to reduce claims to allow for depreciation. That is to say, for example, if the asset should be seen as having a five-year economic life and was purchased three years before registration, only 40% of the VAT should be claimed.

3.5 This new policy, which HMRC claimed has been in force since 2011, was controversial. Whilst it is entirely possible to see the rationale for it, or even to accept that it is potentially fair (VAT on deregistration being due on the depreciated value, for example), there are many in the VAT world who considered that the law did not permit HMRC to restrict claims in this way.

3.6 Indeed, most advisers considered throughout that VAT should continue to be claimed in full, not least because, as a result of lobbying from representative bodies, HMRC appeared belatedly to acknowledge that their new policy was at least questionable, and agreed to desist from raising assessments until the matter was properly resolved.

3.7 Finally, without apology, HMRC in Revenue & Customs Brief 16(2016) announced that such VAT is claimable in full. That is to say, they have backed away completely from their revised position (without any explanation for, or even proper acknowledgement of, that policy). They state that anyone who have restricted a claim themselves or been subject to action from HMRC in this regard can now make a claim for the amount of VAT not previously deducted.

3.8 As regards services it is customary to claim VAT on all of them, with the exception of those which are specific to particular supplies made before registration (e.g. cutlery and crockery hire purchased by a caterer for specific events invoiced before registered). VAT on less directly attributable overheads, such as accountancy fees, rent and telephone bills, is generally regarded as claimable (indeed, there was once a tribunal case on rent, Jerzynek, won by the appellant).

3.9 In the case of a company newly registered for VAT, these rules extend the ability to claim VAT on qualifying pre-registration costs to those incurred prior to its formation by those in involved in setting up the company. Subject to the same conditions as set out above, such VAT can be claimed, provided that (a) the goods or services were obtained or imported by a person who became a member, officer or employee of the body, (b) that person was reimbursed for the full cost, and (c) that person was not a taxable person (i.e. registered for VAT or liable to be so) at the time of the supply or importation. Such VAT is known as pre-incorporation input tax.

3.10 Despite the commonly used terminology, VAT incurred before registration is not in law input tax; these rules allow for it to be claimed as an effective concession. It follows from this, amongst other things, that any VAT incurred before registration that relates to the making of exempt supplies cannot be claimed at all, however small an amount – there are no de minimis provisions before the date of registration.

3.11 As a footnote to this issue, it is worth a reminder that, when a person registers for VAT, they have a choice of registration date, and may opt for any date up to four years prior to the time of application (unless the basis of registration is an option to tax, in which case the backdating is effectively limited to 30 days), which often allows considerably more input tax recovery (although for a business that has already made sales, the potential output tax must also be considered).


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4. VAT Registration

4.1 One specific issue has recently arisen in connection with VAT registration. Something which has been encountered on an occasion basis over many years has apparently become more widespread and is worth noting. Haphazardly in the past, but seemingly to some extent now more routinely, HMRC have been reviewing income and corporation tax returns, and the accounts on which they are based, with a view to identifying businesses with a turnover above the VAT threshold for which they can find no VAT number.

4.2 Once identified, such a business will receive a letter from HMRC asking why they are not VAT-registered. There may of course be a perfectly valid reason (sales are VAT exempt or outside the scope of UK VAT, the company is in a VAT group, etc), but the knowledge that these reviews take place is valuable. It ought to act as a further incentive for businesses that have exceeded the VAT threshold and failed to register on a timely basis to waste no time in notifying HMRC, lest by delaying they allow HMRC to find out and approach them before they have done so, depriving the business of the opportunity to minimise the late registration penalty by making an unprompted disclosure.

5. The FRS Changes

5.1 In his Autumn Statement 2016, the Chancellor announced a major change to the operation of the Flat Rate Scheme (FRS). According to HMRC, this change was necessary to counter “aggressive abuse” of the scheme. The change takes the form of a new 16.5% flat rate applicable in certain circumstances. Bearing in mind that the “flat rate” for a business using the normal method of VAT accounting and making standard-rated supplies is 16.67%, this is as good as removing the scheme altogether from businesses required to use the new rate.

5.2 It is not impossible that two thirds of users of the FRS will be affected by the change and are likely to want to cease using the scheme. Indeed, such is the impact of the change that it might have been simpler and easier for the Chancellor to have abolished the FRS altogether. The new rate of 16.5% applies not to businesses in a given sector, as all the others do, but to businesses with a certain trading profile. A new concept of a “limited-cost business” has been introduced. This means any business which has minimal expenditure on goods purchased for use in that business.

5.3 Any business purchasing goods (gross of VAT) to a value of less than £1,000 in a year, or less than a sum equivalent to 2% of their FRS gross turnover if this is a higher amount, must use the new rate. In this context, “goods” has its normal meaning – that is, physical, tangible items (including gas and electricity which are goods in VAT law). No purchase of any type of service will fall under this definition.

5.4 To complicate matters further, a business is not entitled to include in the value of goods counting towards the 2% or £1,000:

• any food or drink for consumption by the registered person or their employees;

• any cost relating to motoring (fuel or car parts, for example) unless the business is classified for FRS purposes in the transportation category;

• any goods purchased for resale or hiring out unless the resale or hire of goods is the main activity of the business;


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• goods for disposal, such as promotional items, gifts or donations; and

• any purchase of “capital expenditure goods”.

5.5 “Capital expenditure goods”, according to the existing FRS legislation, means “any goods of a capital nature” unless they will be consumed within a year, or leased, let or hired to third parties. Items such as laptops, printers and mobile phone handsets seem to fall into this definition, as potentially might a calculator or a stapler.

5.6 Effectively, to be eligible for inclusion under the new rule, goods must be purchased for resale or hiring out by a business for which this is the main activity, or be consumables, such as photocopier paper or printer cartridges, gas, electricity, or cleaning materials. There is no requirement for the goods purchased to be subject to VAT.

5.7 The upshot of this is that, in order not to fall into the new classification of limited-cost trader, a business must spend a reasonable amount each year on qualifying goods. For a business dealing in goods, where this is the main activity – e.g. a retailer – this will not be difficult, but for a business dealing in services, it may well be very tricky.

5.8 A service-based business, no matter how high the value of purchases of services it makes, will be obliged to apply the new 16.5% rate unless it either has or can arrange purchases of qualifying goods (see paragraph 9.4 above) in an amount of at least 2% of gross FRS turnover or £1,000 p.a., whichever is the greater. Many businesses will fall well short of this.

5.9 Not only that, but the test must be applied on a pro rata basis for each VAT period, so that the expenditure on qualifying goods must exceed the limit in every period for a flat rate other than 16.5% to be continuously used. It is likely that most service-based FRS businesses will be effectively forced to cease using the scheme.

5.10 Not only is it inconvenient to have to review the percentage that must be used quarter by quarter, but also the normal method of accounting will in many cases now be more beneficial on account of the ability to claim conventional input tax. For some service-based businesses on the FRS, the amount of conventional input tax may be quite significant.

5.11 Regrettably, HMRC have found it impossible to gear the use of the new rate to the amount of purchases of both goods and services, but have linked it only to goods. The reason for this is derived from the abuse that HMRC considered they had identified. This took the form of agency workers, often in the construction sector, being encouraged by certain advisers to register for VAT on a voluntary basis and to join the FRS with no other aim than to make a financial gain. The advisers in this scenario charge an ongoing fee for their services of preparing and submitting the VAT returns, which is of course a standard-rated service.

5.12 Almost certainly, therefore, most service-based businesses (consultants, solicitors, accountants, actors, technicians, authors, journalists, architects, estate agents, etc, etc, etc) may find themselves obliged to cease using the FRS. HMRC estimate that about 30% of FRS users will be affected by the change, although experience suggests that it could be considerably more.

5.13 HMRC have also updated VAT Notice 733, section 4, to reflect these new provisions. Businesses deciding to leave the FRS from 1 April 2017 as a result should not forget the requirement to notify HMRC in writing that they are doing so (see paragraph 12.1 of the notice). Whilst this should ideally be done at or before the date of ceasing to use the FRS, HMRC have not historically been strict on this point, meaning that notifications can almost certainly be safely made at least up to the date of submission of the first VAT return completed wholly or partly on the normal basis. This can be done by letter to the FRS Unit in the VAT Registration Service


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office in Grimsby, or by email; the address to use for the latter is [email protected].

5.14 For any business affected, the change of rate will take effect on 1 April regardless of their VAT periods. There is no impediment to leaving the FRS in the middle of a VAT period.

5.15 The rules for leaving the FRS are contained in VAT Notice 733. One aspect is worth a specific mention. If a business on the FRS and using the cash basis of calculating turnover leaves the scheme and immediately moves on to cash accounting, having debtors as at the date of ceasing to use the FRS, they can continue to apply their original FRS percentage to any income arising from those debtors as they receive payment. That is to say, they should apply the flat rate that applied at the time the sale was made and are not obliged to account for the full VAT under cash accounting (or 16.5% even if they would by then be a limited-cost trader).

6. Colouring and Dot-to-Dot Books

6.1 Whist on the subject of announcements made in late 2016, mention ought perhaps to be made of a Revenue & Customs Brief (17(2016), dated 13 December 2016), covering the important subject of adult colouring books, etc.

6.2 These books are not zero-rated under the heading of “books” in the VAT legislation as this is generally considered to apply only to items which are designed to be “read or looked at”. According to HMRC these “books” are not so designed but intended to be “completed”. Presumably they believe that no-one, having completed the colouring, will then look at the book!

6.3 Such publications are also not “children’s picture and painting books”, which are separately eligible for zero-rating. In principle therefore they must be standard-rated, unless they are suitable for children under the age of 18 years (the threshold is 14 for children’s clothing!). It is HMRC’s view that if they are described as “adult colouring books” etc, then they are held out for sale in such a way as to fail the test of suitability for children.

6.4 For sales up to 31 March 2017, they will accept zero-rating regardless of how the product was marketed as long as the books were suitable for children. From 1 April 2017, they will accept zero-rating for all such books unless:

• they are marketed as suitable for adults or grown-ups;

• they are held out for sale in retail shops with other adult books not suitable for children (or are not identified as also suitable for children on any website); or

• they contain images reflecting profanity, pornography, violence or illegal acts.

7. VAT Enquiries and Error Corrections

7.1 Over recent years, HMRC’s approach towards the monitoring of compliance has changed quite drastically. There are many fewer VAT visits as such and more desk-bound enquiries regarding single VAT returns (especially if a significant VAT claim has been made and this is not customary for the business concerned).

7.2 VAT visits or inspections were for many years known as “control visits” and this terminology is still widely used, even in HMRC, despite the official change of title some years ago to “assurance visits”. However, the number of visits undertaken annually has been drastically reduced in recent years. Newly registered businesses may now have to wait several years after registration before

mailto:[email protected]


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the first visit takes place, if indeed one takes place at all. It is not unusual for a business to go without a visit for ten years or more – indeed, the situations now such that many businesses will never be visited, such is the reduction in staffing that has taken place.

7.3 Visits were in the past frequently triggered when VAT returns were submitted showing large or unexpected repayments. Today, few visits take place in such circumstances; whilst HMRC’s computer will automatically “bounce” these claims and send a reference to a VAT office (which may or may not be local to the business) to arrange a check of the accuracy of the return submitted. This is often the first contact that a newly registered person will have with HMRC, since first VAT returns are often net claims. Contact has almost always been made by telephone, although there are very recent signs regrettably that standardised letters may be being more widely used.

7.1 Such checks, where they are made before the refund claimed has been released, are known as pre-repayment credibility queries (“pre-creds” for short). In view of this, where any business submits a return claiming money back, where they would usually pay VAT, it is advisable to write to the VAT Written Enquiries Office in Southend-on-Sea explaining the reason for the unusual return and enclosing copies of the larger purchase invoices. It has become apparent more recently that HMRC now always want to see a complete breakdown of the VAT claimed as input tax in box 4 of the VAT return, meaning that a purchase listing should also always be enclosed along with the invoices.

7.2 Historically, this has in the majority of cases answered HMRC’s queries when the “pre-cred” reference arrives at the checking office with the result that the payment has been authorised without further delays resulting from enquiries made of the business.

7.3 The value of such letters may have been reduced by a recent change in procedures at HMRC. Many pre-cred enquiries are now dealt with by the issue (in the second-class post!) of a standard letter, requesting a whole raft of information, much of which may not be appropriate to any given case. Responses to these letters can be made by email (the address will be on the letter and will vary according to which office has sent it out).

7.4 If an explanatory letter has been sent to HMRC, as described above, at the time of submission of the return, then the email to HMRC can draw attention to it and request that any specific queries not addressed by it are communicated to the business. Alternatively, the email response to HMRC can be in roughly the same format as the letter would have been if a decision has been made not to write to them when the return was submitted. Importantly, it is clear that the refund will not be refused if the business does not send all the documentation listed in the query letter, provided that what is sent is an adequate explanation of the unusual return.

7.5 It is worth noting that a much reduced payment on a return (e.g. net payment one quarter of £10,000 when the normal amount is in the region of £100,000) does not have the same effect on HMRC’s computer and very rarely gives rise to any query.

7.6 The submission of an error correction to the Error Correction Unit in Euston can also trigger queries, especially requests for substantial repayments. It was for many years after the introduction of the current error correction rules possible to say that any notification of VAT due to HMRC (i.e. an underdeclaration) would never prompt a VAT visit, except if it were quite exceptional – say, > £1m. This can no longer be asserted with such confidence, since on occasion now such a disclosure will result in an enquiry of some sort. It would appear that error corrections for sums greater than £50,000 are set aside for further scrutiny, which may result in correspondence from HMRC, or telephone queries. An actual visit remains fairly unlikely.

7.7 Error corrections below £10,000 appear to receive no scrutiny at all and may be processed without HMRC even checking any covering explanation or asking for one if it has not been


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provided (perhaps because such errors are capable of correction through a VAT return and if declared in that way would not receive scrutiny).

7.8 It remains best practice of course to provide a full explanation when submitting an error correction, and evidence to support a claim if the error consisted of an overpayment.

7.9 Form VAT652 can be used for error correction notifications, but is not compulsory; it is quite acceptable to advise errors by way of a letter or an enclosed schedule.

8. Repayment Supplement

8.1 Repayment supplement is in effect a penalty on HMRC for failure to repay tax due on a VAT return within a reasonable period. It should be paid by HMRC if repayment has not been authorised by them within 30 days of their receipt of the VAT return.

8.2 In the event that HMRC choose to make enquiries into the return prior to authorising repayment, any time taken to complete those enquiries is excluded from the calculation of the 30 days.

8.3 Whilst repayment supplement ought automatically to be calculated and paid by HMRC in circumstances where it is due, this does not always happen, so it is important to monitor the position in cases where delays appear to be arising.

8.4 In the light of HMRC’s current change in procedures for dealing with queries over repayment returns, it has become important to keep detailed notes of events, since delays are arising in HMRC’s dealing with cases and claims for repayment supplement may need to be made.

9. Alternative Dispute Resolution

9.1 There is a general feeling in the VAT world that HMRC are becoming more difficult to deal with, and seemingly more resistant to being challenged on technical grounds. It is certainly more often the case that there is an obvious reluctance to give proper consideration to detailed arguments put forward on behalf of the taxpayer.

9.2 The fact that the winner in a tribunal case is no longer entitled to claim their costs from the loser makes cost-effective appeals difficult or impossible, and also may be one factor influencing HMRC to continue with what often appear to be weak arguments.

9.3 Even the VAT Appeals & Reconsiderations Team, which in the past has taken quite a robust approach to internal reviews of decisions, appears not to be immune to this trend. One must also question whether or not they are in a position to carry out a properly independent review when a decision communicated to the taxpayer manifestly has its origin in a policy unit, whose approach no-one in HMRC is free to contradict.

9.4 In this context, a new procedure, known as Alternative Dispute Resolution (ADR) is both interesting and potentially helpful. Whilst not appropriate in every case, it does offer the possibility of exploring compromise and/or engaging in less confrontational dialogue with the case officer in any given situation.

9.5 ADR is not an alternative to formal appeal/review, so must be pursued in parallel with that. Experience indicates that it is producing some positive outcomes in a reasonably efficient manner.


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9.6 An application must be made for the case to be considered for ADR, which may or may not be accepted. If it is, the procedure will be managed by a specially trained HMRC officer, who acts as mediator/facilitator in discussions/negotiations between the case officer and the taxpayer (and, where relevant, the taxpayer’s adviser).

9.7 The ADR officer, who chairs the meeting, has been externally trained and is genuinely independent; their role is to prevent cases going to tribunal, which is costly for both parties, and they do not favour either party, The principal purpose of the meeting is to allow the parties to discuss the issues, and the aim is to reach an agreement on the day. Nothing is off the table and any notes taken during the meeting must subsequently be destroyed; no record of the proceedings at the meeting is retained anywhere in HMRC’s systems other than details of the action that has been agreed at the end.

9.8 The meeting, after introductions, starts with each side reading brief opening statement, after which discussions take place, punctuated if necessary by opportunities for the two sides to part company from time to time to discuss privately their response to points raised by the other side.

9.9 ADR is especially helpful where there is a middle ground and room for compromise, but even technical disputes may be allowed if it can be shown that a greater understanding of the opposing views could result in either party changing their position.

9.10 More on this can be found on the government’s website by searching for ADR (although care must be taken not to choose one of the other two subjects for which this is also the acronym, Adverse Drug Reactions and, rather less obviously, International Carriage of Dangerous Goods by Road!). The best place to start is: https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr

9.11 There seems little doubt that ADR should become a permanent part of the adviser’s armoury in handling disputes between clients and HMRC.

10. Charity Non-Business Activities

10.1 A key VAT case reached its conclusion in autumn 2016, which considered in detail what it means for a charity to be in business – or, more particularly, in what circumstances a charity can legitimately maintain that its activities are not carried on by way of business.

10.2 Historically, it had been tolerably clear that a business activity should be seen as taking place wherever supplies are made for consideration. Profit motive and commercial objectives (or the lack of them) were not seen as at all relevant. From this, it has followed that many charities have been regarded as being in business, even where the particular activities are not run on commercial lines (perhaps depending on additional sources of income, such as donations, to keep going).

10.3 This understanding was initially called into question some years ago by two important cases where it was explored and where a new definition appeared to be in the course of emerging, namely Yarburgh Children’s Trust and St Paul’s Community Project Ltd.

10.4 The judgments of the High Court in these two cases, which were not appealed by Customs & Excise (as they were at the time), are highly interesting. Both bodies are charities and provide – simplifying the facts for ease – childcare, often for disadvantaged children. Charges are made to the parents, but at a level which is below cost or merely covers costs. There is no attempt to compete with similar organisations that provide similar services on a fully commercial basis.

https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr

https://www.gov.uk/guidance/tax-disputes-alternative-dispute-resolution-adr


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10.5 Contrary to the then prevailing definition of business, both were successful in persuading the High Court that their activities did not amount to carrying on a business for VAT purposes, because they were not undertaken in a sufficiently commercial manner. The Court held that the intrinsic nature of the enterprise was not the carrying on of a business, but the provision of social welfare for disadvantaged children, in a manner which lacked commerciality.

10.6 Both companies were seeking zero-rating for the construction of a new building, and therefore benefited from a decision that they were not in business. In other contexts, such an analysis could of course be disadvantageous.

10.1 In not appealing (and stating that they regarded the decision as specific to the facts of these two cases) Customs refused to take the opportunity of clarifying the law at a higher level of court, potentially overturning previously established UK case law. This left the position very unsatisfactory, with much uncertainty, and resistance from HMCE/HMRC to any attempt to widen the principle. It took a long time for another case (Longridge on the Thames) to emerge, and this time to progress to a higher court, the Court of Appeal.

10.2 Longridge on the Thames runs an outdoor activity centre, concentrating mainly on water-based activities. It makes charges to those who participate, which are set to be affordable and sometimes even waived. All capital projects are funded from donated income, and many activities rely on the contributions of volunteer staff acting as instructors. There are clear charitable objectives in running the centre and the activities are entirely compatible with those objectives. The Upper Tribunal refused to disturb the decision of the First-Tier Tribunal that the charity was not in business.

10.3 The judgment of the Court of Appeal was released in early September 2016 and overturned the decisions of both the First-Tier Tribunal and the Upper Tribunal that Longridge was not in business. This will have come as a great disappointment to many.

10.4 In one sense, this outcome is perhaps helpful, as it makes it easier to decide when a charity should be seen as being in business, in many ways restoring the status quo ante, although with subtle differences as to the tests that should be used for the existence of what European case law calls “economic activity”. If there is a clear link between a payment received and a service provided, this must be seen as a business activity; profit motive or otherwise is not relevant.

10.5 To put this another way, the Court clearly stated that the position should not be determined by reference to the predominant concern of the supplier (the fulfilment of its charitable objectives, for example) or by the motive of the supplier, but by objective criteria.

10.6 Disappointing as this may be for many charities hoping for the opposite outcome, it is a much easier test to apply that that which would have arisen form a decision in favour of Longridge. If that had resulted, it would have been the case that every charity’s situation would have to have been considered on its merits, rather than measured against a relatively objective guideline.

10.7 There may of course also be some charities for whom a business analysis is favourable and who would therefore not have welcomed such a change.

10.8 This judgment to all intents and purposes restores the position to something very similar to the general understanding before Yarburgh and St Paul’s (albeit that, technically, the criteria by which the matter is judged are not quite the same). Indeed, there is a fairly clear implication of the Court’s decision that those two cases were in fact wrongly decided.

10.9 HMRC continue in the new version of VAT Notice 701/1 to placing emphasis on the much older (and arguably outdated) list of characteristics of business activities derived from earlier case law. In particular, they state in paragraph 4.1:


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The activity may still be business if the amount charged does no more than cover the cost to the charity of making the supply or where the charge is less than cost (However, please see paragraph 5.18.2 if the charity makes supplies of welfare.) If the charity makes no charge at all the activity is unlikely to be considered business.

10.10 Whilst the list of criteria may have to be replaced by a newer one, this will not make a material difference to the position and HMRC’s policy must be seen as broadly compatible with current case law.

11. Antiques Fairs, Craft Fairs, Art Fairs, Etc

11.1 HMRC have also increasingly been arguing that pitches at various types of fair do not constitute the letting of land (together with ancillary extras) but rather the provision of a composite service, effectively the provision of an opportunity to meet customers and make sales.

11.2 Historically, HMRC have accepted that pitch fees at such events qualify for VAT exemption. However, in recent times they have increasingly sought to argue that this is not a correct analysis and to impose VAT at the standard rate on pitch fees as well as admissions. Regrettably, they have had success in both the First Tier Tax Tribunal and the Upper Tribunal, effectively meaning that it must now be accepted that exemption no longer applies.

11.3 It is also tolerably clear that, at European level, the grant of a pitch at such an event would be unlikely to be regarded as falling within the scope of the exemption for the “letting and leasing of immoveable property”, since the licensee does not really obtain the right to exploit the land as if it were their own.

11.4 The two key Tribunal decisions in this area initially resulted in different outcomes. In the case of the pitch fees charged by Kati Zombory-Moldovan t/a Craft Carnival (TC04428), it was held that these were VAT exempt. In the case of International Antiques and Collectors Fairs Ltd (TC04538), it was held that the payments made by stall-holders for their pitches were standard-rated (on the basis that “the over-arching single supply [made] by the Company is not to be treated as a supply of a licence to occupy land, but rather a supply of participation as a seller at an expertly run antiques and collectors fair, one element of which is the provision of the pitch”).

11.5 IACF did not appeal to the Upper Tribunal, whereas HMRC did in relation to Craft Carnival. This was a high-risk decision on their part, since they had effectively won the more significant of the two cases (in terms of the size of the business concerned) and a decision of the Upper Tier adverse to them would have undermined that victory. In the event, their confidence turned out to be justified, since the Upper Tribunal overturned the FTT’s decision, setting legal precedent, something which for fair organisers of all kinds must take into account.

11.6 In this context it is important to make a distinction between those who own premises and grant rights to dealers to use parts of those premises for the purpose of their retail businesses (where the case for exemption remains strong – see the tribunal case of Antiques Within), and organisers who hire venues, perhaps for a day only, and sell pitches to dealers, also making charges to the general public for admission, who are the ones for whom the position is far less clear-cut.

11.7 It is also worth noting that something very similar has happened in the area of wedding venues (bespoke venues that have been adapted exclusively or largely for the purpose) where HMRC some time ago decided that the letting to the customer was not an exempt right over land but the supply of “wedding services”, which fall outside the exemption. There was no change to the law and no formal announcement of a change of policy. HMRC’s position became apparent only from a low-key and minor amendment to the wording of VAT Notice 742 and the fact that they


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began to take cases to the First Tier Tribunal (all of which they have won). See The Willant Trust in particular for an analysis of the Tribunal’s thinking on the subject.

11.8 There is as yet no Upper Tribunal decision setting legal precedent, but, with a string of First Tier decisions all concluding in the same way, it is difficult to hold to an alternative interpretation. Such wedding venues need to be aware of HMRC’s approach and make decisions as to how they will respond. (This problem does not have a bearing on any person who lets a room out without providing any supporting service – just, in HMRC’s terms, providing “a key to the door” – even where the person hiring the room or building chooses to use it to hold a wedding which they wholly organise themselves.)

12. Reduced-Rated Construction Services

12.1 Since 2001/2, the 5% VAT rate applies to various forms of building development. This provision is aimed at encouraging the use of existing property in favour of building on greenfield sites.

12.2 The types of development covered are:

• the conversion of a non-residential building to a dwelling or dwellings;

• the renovation of a dwelling not occupied as such for two years;

• work to a building which changes the number of dwellings within it (although not applicable in respect of any part of that building where an existing dwelling occupies an identical part of the property before and after);

• the conversion of a dwelling or dwellings into a “relevant residential purpose” building (e.g. care home) or a multiple occupancy dwelling (e.g. bedsits);

• the conversion of a “relevant residential purpose” building into one or more single household dwellings;

• the conversion of a multiple occupancy dwelling into one or more single household dwellings;

• the conversion of a non-residential property into a “relevant residential purpose” building;

• the conversion of a non-residential building into a multiple occupancy dwelling;

• the conversion of a “relevant residential” building into a multiple occupancy dwelling, or vice versa;

• the renovation of a “relevant residential purpose” building or multiple occupancy dwelling unoccupied for two years or more; and

• the construction of a detached garage in connection with a reduced-rated project.

12.3 “Relevant residential purpose” (often referred to as RRP) means use as: a children’s home; a home for the care of those requiring it by reason of old age, disablement, alcohol or drug dependency or mental disorder; a hospice; residential accommodation for students or schoolchildren (although student accommodation, if suitably configured – e.g. as studio flats – may also qualify to be seen as dwellings – see HMRC VAT Information Sheet 02/14); residential accommodation for the armed forces; a monastery, nunnery or similar; or an institution which is the sole or main residence of at least 90% of its residents.

12.4 A multiple occupancy dwelling is one designed for occupation by persons not forming part of the same household (roughly correlating to the planning designation “HMO”).

12.5 It must be borne in mind that the reduced rate covers construction services, not the subsequent disposal by the owner of the converted property. This will either be exempt or zero-rated


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depending on the circumstances; letting will be exempt in all cases. The application of the 5% rate therefore often offers an absolute saving equivalent to 15% of the net cost. Furthermore, it has the added benefit in some cases of bringing VAT on expenditure relating to exempt activities below the de minimis limits for partial exemption purposes, in which case a bigger saving arises.

12.6 It should be noted that the form of economic exploitation of the building after conversion is irrelevant. It may be sold, occupied for own use or rented out; the applicability of the reduced rate depends on the physical attributes of the building before and after conversion.

12.7 It is known that many building contractors are substantially ignorant of these rules, especially as they are not themselves the beneficiaries. Indeed, they may see the application of the reduced rate as a risk. Owners of properties affected by the changes should therefore ensure that the correct rate is charged to them on all relevant supplies.

12.8 This last matter is critically important. Whereas in the distant past HMRC did not usually (except in the case of DIY claims) bother to take the point where overcharged VAT was concerned (as long as they were satisfied that output VAT would have been accounted for by the supplier), their policy changed some years ago and they now routinely assess for overclaimed input tax and expect the customer to obtain a refund instead from the supplier. This is a significant nuisance and means that extra caution is required, even where VAT is claimable.

12.9 Once it has been established that the reduced rate may be in point, it is often helpful to consult HMRC VAT Notice 708 for confirmation that the project would be regarded by HMRC as eligible. Whilst this does represent their view, it is on the whole a reasonable reflection of the provisions and sets out the variety of conversions eligible (and some of those ineligible) in tabular form. This, together with some of the examples quoted, makes it a very useful source of information.

12.10 Where the result of a qualifying conversion is a “relevant residential purpose” building, reduced-rating is limited to contractors who work directly for the owner of the building, and then only where that owner has issued a certificate in the form required by VAT Notice 708 on the contractor confirming that they intend to put the building to a qualifying use. In such a circumstance, all subcontractors must charge VAT at the standard rate. In all other types of qualifying conversion, the reduced rate applies to any contractor or subcontractor.

12.11 Misunderstandings arise occasionally in relation to this last point and contractors may request a certificate in appropriate circumstances. It must not be used other than for RRP buildings. However, contractors are entitled to request some documentary evidence to support the reduced-rating, something to show to HMRC in the event of an enquiry into their VAT returns. It is therefore recommended that building owners or main contractors employing subcontractors provide a bundle of documents, such as planning consent, some basic before and after plans, evidence of more than two year’s non-occupation where that is relevant, etc to contractors/subcontractors.

12.12 The reduced rate will not cover absolutely all work performed on a qualifying conversion. It applies to all work to the fabric of the building, and to works within the site consisting of providing to the building water, power, heat, access (e.g. paths and drives), drainage, security (fences, walls, gates, etc) or waste disposal. All other works will be standard-rated.

12.13 Certain items are also excluded from reduced-rating. The list varies from one kind of building to another. As regards dwellings, the major items affected are:

• prefabricated furniture or materials for the manufacture thereof, unless they are

o kitchen units

• electrical or gas appliances, unless they are


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o designed to heat space or water or to provide ventilation, air cooling, air purification or dust extraction,

o a burglar alarm, fire alarm or fire safety equipment for summoning emergency aid, or

o a lift or hoist,

• carpets and carpeting material, and

• any item not ordinarily installed by a builder in a dwelling.

Whilst the services of installation (as distinct from the materials themselves) are eligible for zero-rating in a case of new build, they are standard-rated along with the items in a qualifying conversion. Thus supply and fit of the above items attract VAT at 20%.

12.14 Finally, for the purposes of these provisions, certain conditions must be met, before the building is considered to be a dwelling or a number of dwellings – if these conditions are not met, reduced-rating will not apply. Each dwelling must be self-contained, with no internal access to any other dwelling. It must be constructed in accordance with statutory planning consent which has been granted in respect of it. There must also be no prohibition under any covenant, planning consent or other provision on the separate use or disposal of the dwelling. This last is the one to watch for; it has the capacity to prevent reduced-rating in otherwise promising circumstances.

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