VATease VAT Newsletter August 2005

Debenhams Credit Card Handling Case

HM Revenue & Customs won an important case at the Appeal Court last month, a case that was referred to as the PITA ("Pain in the a**e") case by those attending court

You will likely have noticed when shopping at many large chains of stores that receipts include a statement similar to "I agree that 2.5% of the above value is payable to XXXX for card handling services. The total amount I pay remains the same." Debenhams and many other larger retailers had hoped to avoid paying VAT on that 2.5% by claiming it as payment for an exempt financial service.

The Appeal Court ruled that this statement did not alter the nature of the basic contract between Debenhams and the customer, namely that the customer purchased goods and services at the advertised price. The VAT amount payable was not therefore affected.

HMRC and organisations representing small businesses were pleased with this result as it removes an unfair advantage available only to large businesses and stops a potential loss to the Government of many millions of pounds.

It is not clear whether Debenhams will appeal this case further.

Fruit and Cereal Bars

A recent Tribunal Appeal brought by Organix Brands plc decided that fruit and cereal bars, in this case designed for young children and including oats, raisins and fruit juice concentrates, were not confectionary and could therefore be zero-rated. These particular bars were deemed not to fall within the definition of 'sweetened prepared food' because 'none of the products contained any processed or other added sugars or similar substances'. The inclusion of fruit juice concentrates did not amount to 'sweetening', and the products were not within the definition of 'sweetened prepared food'. This may have wider implications for other makes of cereal bar.

Intra-EU Services to private individuals

Currently, any EU company that provides services to private customers within another EU member state must account for VAT on those services within the country where the company belongs. This has led to distortion of competition with large companies choosing to supply the services from countries with low VAT rates.

The European Commission is proposing to make all such supplies subject to VAT in the country where the customer belongs. If affected, this will complicate VAT compliance for many businesses who supply services to private customers across the EU. However, it is intended that the change would come into force in parallel with the "One Stop Shop" rules that will allow a company to account for VAT in multiple EU Member States on one return.

Disclosure of VAT Avoidance Schemes

With effect from 1 August 2005 two additional schemes have been added to the list of notifiable schemes: one including the cross-border supply of face value vouchers and another where a tenant surrenders a lease but continues to occupy over 80% of the building. An additional hallmark of avoidance has also been dded; the issue of face value vouchers for consideration to "relevant persons" where it is expected that less than 75% of the vouchers will be redeemed within 3 years.

Belated notification of an Option to Tax

HM Revenue & Customs have issued a business brief to clarify policy regarding their discretion to accept a belated notification of an option to tax. In particular, it explains the distinction between a belated notification and a retrospective or backdated option.

HMRC Consultation on VAT exemption for insurance-related services

HM Revenue & Customs have announced a consultation exercise about the UK VAT exemption for insurance-related services. This follows the decision in a recent ECJ case about certain "back office" activities outsourced by insurance companies. In light of the decision these services will be subject to VAT with implications for the majority of the UK's insurance sector and companies supplying these outsourced services.

HMRC believe that, in the light of the decision, the UK's exemption legislation for insurance needs to be narrowed and is seeking views on the affects of this likely change.

Purchasers can appeal against VAT Ruling

HM Revenue and Customs issued a ruling to the English Hockey Association that it should charge VAT on affiliation fees payable by affiliated clubs. The EHA chose not to appeal this decision but 2 affiliated clubs appealed because they didn't wish to pay the increased fees. HMRC applied for the appeals by these clubs to be struck out because the clubs did not have sufficient interest. The Chairman refused to do so because "the fact that a decision that supplies are to be standard-rated has been issued to the supplier does not disqualify the recipient, who has to bear the tax, from appealing".

This is a very significant decision for many businesses, charities and individuals who may end up having to pay increased VAT costs due to a decision issued by HMRC to their supplier where their supplier doesn't wish to pursue an appeal.

The 2 clubs subsequently went on to win their appeal.

Reasonable Excuse for late payment of VAT returns

2 recent cases have helped to clarify what is a reasonable excuse for the late payment of VAT returns thereby negating the Default Surcharge issued by HM Revenue & Customs.

The first involved a company who had asked its bank to initiate payment to HMRC within the seven day extended time limit allowed for electronic payment but the bank had failed to do so. The Chairman asked HMRC what they would expect a competent businessman to do in that situation and allowed the appeal against the surcharge.

The second involved a business that was relying on a payment from the Inland Revenue in order to make its payment to HM Customs & Excise (as was). The IR payment was made late delaying the business' payment of its return. HM C&E argued that this did not constitute a reasonable excuse but was over ruled by the Tribunal.

Farmers' Single Payment Scheme

Guidance has been issued to clarify the VAT implication of payments made to Farmers under the Single Payment Scheme.

The Single Payment itself is not payment for a supply and is not subject to VAT. However as Payment Entitlement can be transferred it is possible that this transfer may be subject to VAT under certain circumstances.

VATease recommends that guidance is sought by any farmers who may be transferring their Payment Entitlement on its own, as part of a sale of land or as part of a sale of a business.

Evidence of Export

HM Revenue & Customs has issued a new version of Notice 703, Export of Goods from United Kingdom. Amongst other amendments it includes details of the new export evidence requirements for shipments declared through the New Export System.

Associated businesses with different VAT return periods

HM Revenue & Customs have announced that they intend to continue to use powers that allow them to force associated businesses to use the same VAT return stagger if the businesses have been using the misaligned returns to generate significant cash flow advantages.

Cultural Bodies income

Bournemouth Symphony Opera has a paid Managing Director who was a member of its board. HM Revenue & Customs ruled, and the High Court agreed, that this meant that it wasn't managed on an "essentially voluntary basis" and it therefore didn't meet the requirements for its admission income to be exempt from VAT. This will have knock on implications for other cultural bodies in similar situations.

Sponsorship

With the Olympics coming to the UK in 2012 businesses have started to ask VATease about the VAT implications of sponsorship payments.

The VAT liability of the payments will depend upon whether a supply is made in return for the payment. If payment is provided with no expectation of anything in return then it is outside the scope of VAT. If there is an expectation of or contract for something in return then the payment will be liable to VAT dependant upon the nature of that supply. Typically where this supply is advertising VAT will be chargeable at 17.5%. This may be deducted by the sponsoring company if it relates to taxable business activities.

Companies who provide goods for sponsorship instead of payment may not be entitled to recover VAT on the purchase of those goods or may have to account for output VAT on the supply of those goods based on the value of the supply.

VATease Newsletter Management

From this month VATease is using a new system to manage and deliver the monthly newsletter. Firstly, you will notice that the email is now delivered in HTML format (or text only if you can't receive HTML emails). Secondly, list membership can now be managed online. Anyone wishing to subscribe can do so themselves.

Newlsetter management and distribution is now done for VATease by Ezine Director.