VAT Newsletter July 2005

This month the VATease newsletter looks at recent developments for share issues, restaurant and hotel "no show" charges and mixed supplies.

Customs invite claims for denied input tax in respect of share issue transactions

In the stop press section of last month's newsletter we advised any business that has incurred VAT on fees relating to share issues to make a reclaim. Customs have now issued Business Brief 12/05 dated 15 June 2005 clarifying the position and inviting claims for refunds.

We recommend that advisors should be alert to the consequences of this Business Brief on their existing clients and would be well advised to review their Clients files to assess whether a claim for under claimed input tax should now be made, bearing in mind the 3 year limitation period applicable to such claims.

If you require any further advice on formulating such a claim VATease will be able to help you.

Landlord inducements to tenants entering leases

Also in the Business Brief 12/05, Customs announced their change of policy (their climb down) in respect of the VAT liability of inducement payments re the above. Customs now acknowledge that a payment to an in-coming tenant who is merely taking on the usual obligations under a lease is not consideration for a supply. Only where the payment is linked to benefits provided by a tenant over and above the usual obligations will there be a supply. Customs acknowledge that these situations will be very much in the minority.

Again there are invitations by Customs for claims for repayments of over-paid output tax. If you would like further information on how to formulate such a reclaim (in view of possible partial exemption implications) please contact VATease.

VAT due on restaurant "no shows" and hotel cancellation fees.

This could well be yet another chance to make a claim for a refund to HMRC for overpaid output tax. The case concerns a French business, which was referred to the ECJ on 18 May 2005. If the French taxpayer is successful in the case then up to 15% of the income on "no show"/cancellation fees could be saved.

In essence the taxpayers argument is that any "no show" and/or hotel cancellation fees merely compensate for losses flowing from the party not completing the contract. There is no consumption, therefore VAT cannot be payable. The outcome of the case is not expected for at least 2 years.

However it is important to protect your Client's position now, so that you can claim back VAT if the French taxpayer is successful (beware of the 3 year gap). Again if you need any further advice or help in this matter please contact VATease.

Paying VAT by Direct Debit

Businesses that have signed up for eVAT returns can now arrange to pay their VAT by direct debit instead of using BACS, CHAPS or Bank Giro Credit.

According to the announcement on the HMRC website, traders that take advantage of the direct debit facility should benefit from an extra 3 days cash flow. This is because HMRC state that they will get the extra 7 days to file their electronic return as usual and it will be then be a further 3 working days before payment is actually collected. However, those businesses who make annual returns and any business required to make payments on account will not be able to take advantage of this new facility.

Court of Appeal Hearing: Debenhams: Merchant Charges

The Court of Appeal heard the appeal by HMRC against the High Court judgment in the Debenhams (Merchant Charges) case over the 3 days, 8th to the 10th June 2005. This case relates to the degree to which VAT should be paid when consumers pay for goods using credit or debit cards.

There may be some delay in the release of this judgment until the European Court has commented on the "abuse of rights" principle in the Halifax case.

The Telewest case

The House of Lords has refused Customs leave to appeal against the Court of Appeals decision in the above case.

This is the case concerning the supply of a printed TV listings magazine to cable TV subscribers where the TV services and the magazines are supplied by different legal entities. Customs argued that, notwithstanding the existence of the two suppliers, the two supplies should be effectively fused together as a single standard rated supply of TV services to which the listings magazine was incidental.

The COA held that the contractual arrangements had substance and the two separate supplies thereunder could not be fused together for VAT supply analysis purposes.

"CD Books"

A VAT Tribunal heard a case recently involving the VAT liability of "CD books". Each CD book consists of a hardback cover, in which a plastic case for the CD is affixed, and 12 bound pages of written information.

The Appellant argued that the main purpose was the provision of an encyclopedia in book form to which the CD was not an aim in itself but a means of better enjoying the printed matter. Customs argued in effect the exact opposite.

The Tribunal preferred Customs argument and dismissed the appeal.

Comment: Yet another case on decided on principles established in the Card Protection Plan case.

Portugal VAT Increase

Portugal announced on 25 May that their VAT rate will be increased from 19% to 21%. This is a declaration of intent at this stage and the effective date for the rate increase has not yet been announced.

Comment: Readers of the June 2005 VATease newsletter may recall, as one of the topics, a potential increase in the Standard Rate of VAT for the UK. Again, watch this space.

Customs criticised again.

In an Edinburgh Tribunal case involving international car leasing, HMRC applied to stand over the case pending the release of the Halifax ECJ judgment. They also applied to be granted an order to obtain further "chapters" of disclosure and documents from the Appellant.

The Chairman of the Tribunal gave the application for stand over very short shrift.

With regards to Customs request for disclosure and documents, the harsh words of the Chairman make it clear that Customs "scattergun" approach (intended to unearth circumstantial evidence from contact with advisors) will not be condoned by any Scottish Court!

Catering and "on"/"off" premises consumption

Compass Contract Services UK Ltd provides all the catering facilities at the BBC Television Centre in Shepherds Bush. There is no dispute over the VAT liability of the supplies from the main restaurants or from the vending machines, but the dispute centred over the liability of the supply of cold foods from six units within the buildings.

The disputed matters included whether the supplies were made "in the course of catering" and whether food to be consumed "on the premises". The Chairman of the VAT Tribunal accepted the answer "NO" in both cases and allowed the appeal.

This case could have wide spread implications for those Clients involved in the catering trade.

Day nurseries and pre-schools-supply of carers-VAT liability

In a recent VAT Tribunal decision (K & L Childcare Services Ltd), the appellant employs staff and supplies them to private day nurseries, pre-schools and local education authority schools (collectively "kindergartens").

Customs ruled that the appellant was making standard-rated supplies, on the basis that the appellant itself was not state regulated but merely supplied staff.

The appellant is not itself regulated under any enactment; however all the carers work in kindergartens which are subject to regulatory regimes administered by HM Chief Inspector of Schools and the Local Authorities.

The Tribunal Chairman therefore accepted that whilst the Appellant is not itself subject to any regulatory regime, the carers that it employs and supplies to the kindergartens must work within the regulatory regimes applicable to kindergartens.

The Tribunal Chairman concluded that the appellant is "a state regulated" agency involved in the care or protection of children and allowed the appeal.

Comment: Here the services supplied by the appellant to the kindergartens were not directly regulated by the state but the operations of the kindergartens themselves were strictly so regulated. The Tribunal concluded from the facts that the appellant was "integrally connected, via its carers, with institutions to which such a scheme of regulation applies" and accordingly the appellant itself was indirectly controlled and therefore "state regulated".

Again if you have any Clients in this field it may be worthwhile reviewing the VAT liability in view of this case.

HMRC powers

HMRC has published a guidance note containing questions and answers about the legal powers of the new combined department, and the approach that compliance officers will adopt in their dealings with taxpayers. The main change from the draft version published for consultation last December is the addition of a new question on what to do if a visiting officer asks for information they are not entitled to request.