VAT Newsletter August 2004

Once again the past month has seen a large number of important changes in VAT legislation and administration. Some of these may present opportunities for taxpayers to reclaim VAT from HM Customs & Excise

Toasted baguette sandwiches / Paninis

2 sandwich shops sold toasted baguette sandwiches for consumption off the premises. HM Customs & Excise ruled that these were standard rated as hot food. The companies appealed arguing that the sandwiches were not toasted so as to be served warm but "to release the flavour of the ingredients and to make the bread crisp". The fact that they were warm when sold was incidental. The Tribunal agreed and ruled that the sandwiches are zero-rated.

Any businesses making similar sales may be entitled to submit reclaims for overdeclared VAT going back 3 years. VATease can assist with such claims.

Distance Learning

The Court of Appeal has recently ruled that a supply of a distance learning course including printed matter is a multiple supply of zero-rated printed matter and exempt or standard-rated education.

Taxpayers who have previously treated such supplies as wholly exempt may be entitled to recover additional input VAT. Those who have previously treated supplies as wholly standard rated may be entitled to claim back some output VAT from HM Customs & Excise.

Interest on Late Repayments

In a recent Tribunal case, HM Customs & Excise had delayed payment of an amount due to a taxpayer. In addition to repayment supplement, the taxpayer requested interest on the payment of 8%. Customs thought this to be excessive. The Tribunal awarded an interest payment of 6.25%.

This will be of particular interest to dealers in mobile phones who may currently have payments that are being excessively delayed whilst Customs undertake investigations.

Joining a partnership / Issue of Shares - whether a supply

The ECJ has ruled that a contribution to a partnership by an incoming partner is not a supply by the partnership upon which VAT is due. Where the contribution is cash there are therefore no VAT considerations. However, where the contribution is one of goods or services the incoming partner may be liable to account for VAT on a deemed supply.

The ECJ case was recently used to argue that the issue of shares (similar, it was stated, to a partner's contribution) is, therefore, also not a supply. This would greatly improve the issuing company's ability to recover VAT on the associated costs. HM Customs & Excise have issued a business brief refuting, in no uncertain terms, this argument.

Reform of Tribunals including VAT & Duties

Possible major reforms of the Tribunals have been announced. They will merge the VAT & Duties Tribunals with the General & Special Commissioners and the Section 703 Tribunal. There will be 2 tiers with appeals from the first tiers going to the second. Appeals from the second tier will go straight to the Court of Appeal. Complex appeals can be made straight to the second tier.

Business Entertainment Fishing Letters

Customs have recently issued a large number of letters to suppliers of "business entertainment" requesting details of supplies and customers. We understand that Customs' HQ Policy Division have been embarrassed by the nature of these letters and the way in which they were issued. VATease recommends that anyone receiving one of these letters does not respond.

VAT Grouping Requirements Changes

In tandem with the VAT Avoidance Disclosure rules detailed in our last newsletter and recent newsflash, there has been a change to the VAT Grouping eligibility requirements. The changes will only affect VAT groups with income of over £10 million and a group member that is owned or managed by a third party.

Details on the VAT Avoidance Disclosure rules can be found on the VATease Website at http://www.vatease.co.uk/news/vat-avoidance-schemes.htm.

HM Customs & Excise's new website

Customs has unveiled a new-look website at http://www.hmce.gov.uk. Unfortunately their internet servers are unable to cope with the load this has caused and the site has been extremely slow or unavailable recently. It would appear that addresses for pages on the old site are still valid if you replace the "www" on the old URL with "ww2", i.e. http://ww2.hmce.gov.uk/.

Mobile Phone and Computer Chips

To combat VAT fraud the Government introduced legislation last year that allowed HM Customs & Excise to hold anyone dealing in mobile phones or computer chips jointly and severally liable for the VAT due to be declared by their suppliers. Additionally, Customs can require any trader to provide a security equal to input VAT being claimed if they deem it necessary for the protection of the revenue. Both of these items of legislation are being challenged through the courts by the Federation of Technological Industries. Although the FTI recently won the right to challenge these rules in the European Court, the judges that referred the case made it clear that they did so because they believed an ECJ ruling would strengthen Customs' position in the fight against VAT fraud.

Children's' Clothing

Despite the recent press hysteria about a burgeoning obesity problem amongst the country's children, HM Customs & Excise and the Tribunal have refused to allow oversized children's clothing to qualify for zero-rating and confirmed current size guidelines.

Frivolous Appeals

A solicitor appealed against a VAT assessment by HM Customs & Excise but failed to turn up at the hearing. The Tribunal dismissed his appeal, decreed it to have been frivolous and ordered him to pay Customs costs of £2,300.

Option to Tax unit in Glasgow

The OTT unit in Glasgow currently has a significant backlog. It has issued guidance on how to submit certain items. If you are required to seek written permission from HM Customs & Excise before opting to tax a property, the OTT Unit insists that you request permission in separate correspondence and await approval before submitting the OTT notification.

If you are submitting an OTT as part of a request for VAT registration, the OTT Unit insists that you send the notification to the VAT Registration Unit together with your registration application.

Neither of these rules would appear to have any basis in law and may not be enforceable by Customs.

Magic Mushrooms

The mainstream press has been full of reports recently that HM Customs & Excise are insisting the sale of Magic Mushrooms, a fungus that can create a hallucinogenic "trip", is subject to VAT at 17.5%. Customs are arguing that the mushrooms are sold as a drug rather than as a zero-rated food. In truth, this would appear to be a ruling given to one taxpayer and may not be relevant to all sellers. The liability may depend upon how they are sold out for sale. At the same time, the Home Office has said that the sale of the mushrooms may be illegal which, if true, will mean they are not subject to VAT at all.