VAT Update | March 2017
VAT Update
This month sees HM Revenue & Customs (HMRC) tackling perceived avoidance
by users of the VAT Flat-Rate Scheme. The courts have been busy: finding film
screenings are not ‘cultural’ and universities are going to have to pay more tax
on attracting overseas students via agent’s commissions. There are also two
disappointing decisions for taxpayers operating business promotion schemes
and, finally, the UK government wants to hear from business if VAT is fit for
today’s economy and is looking for ideas to simplify it.
Changes to the VAT Flat Rate Scheme
HMRC has published its latest version of VAT notice 733: Flat
Rate Scheme for small businesses, which describes the new
rules which come into effect on 1 April 2017. The intended
changes were first announced in the Autumn Statement
last November, proposed to counter perceived abuse of the
scheme.
The VAT Flat Rate Scheme was designed to simplify records
of sales and purchases, allowing small businesses the option to
apply a fixed flat-rate percentage to gross turnover to calculate
the VAT due to HMRC. Currently, the flat rate is determined by
the business’ trade sector, and ranges from 6.5% for farming,
up to a 14.5% rate for businesses such as IT consultancy.
From 1 April 2017, businesses that use the VAT Flat Rate
Scheme must determine if they meet the definition of a ‘limited
cost trader’. This essentially represents a new category of
trader, with an ascribed flat rate percentage of 16.5% (the
highest rate in the scheme).
Comment: These changes are intended to target those
traders that HMRC perceives to be abusing the VAT Flat
Rate Scheme. There are a number of tests to determine if
a business is a limited cost trader, but essentially it appears
such traders are those who tend to supply services rather
than goods. If you believe you will be affected, please speak
to your usual Saffery Champness contact.
EU court holds that cinema screenings are
subject to VAT
The Court of Justice of the European Union (CJEU) has
released its decision in the case of the British Film Institute
(BFI), on whether cinema admissions were subject to VAT.
The BFI, a non-profit-making body, wished to reclaim VAT
it believed was overpaid on cinema admissions. This was on
the basis that film screenings should fall within the scope of
the cultural exemption, under the EU VAT Directive. HMRC
argued that film screenings were not a cultural service, but
entertainment.
Whilst BFI won at the First Tier and Upper Tribunals, the
Court of Appeal made a referral to the CJEU, to determine
what was meant by ‘certain cultural services’ under the EU
VAT Directive.
The CJEU stated in its decision that this term essentially
allowed each EU member state to determine which services
were cultural in their respective member state. As such, BFI
could not rely on the ‘direct effect’ of the EU VAT rules to
override the UK VAT rules. The UK was entitled to limit the
scope of the cultural exemption on these grounds.
Comment: This judgment will no doubt come as a
disappointment to the BFI and those businesses with claims
stood behind this case. If you are affected by this decision,
please speak to your usual Saffery Champness contact.
British Film Institute v Revenue & Customs Commissioners (CJEU)
UK universities liable to VAT charge on overseas
agent fees
A recent First Tier Tribunal (FTT) case considered the VAT
treatment of the services of overseas agents that were used by
the appellant, a UK university, to encourage overseas students
to enrol in its courses. The appellant paid a commission to
those agents upon the successful placing of students. As
the university was receiving agency services from non-UK
established agents, it would have been required to self-account
for VAT on the supply by means of the ‘reverse charge’ on its
own VAT returns if the services were subject to VAT in the UK.
The reverse charge means the recipient accounts for output
VAT, and recovers a proportion of that VAT amount as input
tax, to the extent that the expenditure relates to taxable
business activity. However, as universities are suppliers of VATexempt higher education, any recovery of the input side of the
reverse charge VAT would be heavily restricted or disallowed
in full. As such, the appellant contested its liability to account
for reverse charge VAT, using a number of arguments to try and
reduce the VAT liability or remove it altogether.
Firstly, the university argued that the services were received
jointly by both them and the student, and consequently that
any VAT liability would be shared. However, the evidence
presented indicated there was a single supply made to the
university that would be artificial to split. The university also
argued that there was no requirement to self-account for
VAT prior to a change in the VAT rules in 2010, and whilst the
tribunal acknowledged that was the correct treatment under
the previous rules, it nevertheless held that there would be a
charge to VAT under the current rules.
The tribunal held that reverse charge VAT was due, and that it
could not be recovered by the university on account of there
being no direct and immediate link between the agency fees
and any onward taxable supplies made by the university.
The first issue was whether the purchase of the invoices
was for business purposes and formed a cost component of
the appellant’s economic activity. If the vouchers were only
purchased to be given away for free, they would not be a cost
component of the appellant’s economic activity. The Court of
Appeal found that the appellant did purchase the vouchers as
part of its overall expenditure in the production and sale of its
newspapers, which the vouchers were intended to promote.
This was supported by the fact that the vouchers were only
provided to newspaper buyers.
The Court of Appeal also confirmed that the vouchers were
not given away for a non-business purpose, so as to cause an
output tax adjustment to be required at that point. The output
tax adjustment is required when business assets are used
for a non-business purpose. Here the vouchers were being
used by Associated Newspapers to fulfil its contract with the
buyer. The giving away of vouchers could not be divorced by
HMRC from the commercial scheme of promoting the sale of
newspapers.
However, the Court of Appeal then moved onto whether
Associated Newspapers could recover the notional VAT it was
charged on the purchase of the vouchers direct from retailers.
It found that the effect of the vouchers legislation meant that
the appellant did not incur input VAT but ‘notional VAT’. As far
as the court was concerned, the appellant had done no more
than purchase a voucher that was a means to pay for a separate
taxable supply. Thus, Associated Newspapers had not incurred
‘real’ input VAT available for deduction.
Comment: The decision will be a blow, not just for the
University of Newcastle, but also the large number of other
UK universities that have been assessed for VAT on similar
grounds by HMRC. It is not yet known whether the university
will appeal this decision, but it is possible given the amount of
VAT at stake. The VAT rules relating to international services
can be very complex. If you are affected by the outcome in
this case, please speak to your usual Saffery Champness
contact.
Comment: The decision may affect businesses purchasing
vouchers for use in promotion schemes. The notional VAT
charge on retailer vouchers was always thought to have been
recoverable. We recommend you review any arrangements
or promotion schemes involving the supply of vouchers to
establish any potential exposure to an assessment from
HMRC. If you have any queries, please talk to your usual
Saffery Champness contact.
University of Newcastle v Revenue & Customs Commissioners
(FTT)
Associated Newspapers Ltd v Revenue & Customs Commissioners
(Court of Appeal)
VAT not reclaimable on purchase of vouchers
Taxation of reward scheme payments
We reported in our December 2015 issue of VAT Update on
the dispute between Associated Newspapers and HMRC
concerning the VAT accounting on vouchers purchased and
given away as part of a business promotion. When purchasing
the retailer vouchers the appellant received invoices from the
suppliers, which included notional VAT. The Upper Tribunal had
previously found that Associated Newspapers was not entitled
to recover the notional VAT charged by the issuer of the
voucher, and was not required to account for output VAT on
the vouchers given away. The Court of Appeal has now heard
the resultant appeals. It upheld the Upper Tribunal’s decision
on both matters.
The FTT has found that the VAT liability of payments made
by the operator of a reward scheme, Marriott Rewards LLC,
to various participants (redeemers), including Whitbread plc,
were not payment for the supply of hotel rooms to individual
members participating in the reward scheme. However, the
FTT did not agree with Marriott or Whitbread on the nature of
the supply and so dismissed the appeals against HMRC’s VAT
assessments.
Marriott operates a rewards programme. Members could
earn points from stays at non-group hotels. The points were
awarded by Marriott. Once the member had earned enough
points, they could redeem those at participating non-group
hotels (the ‘redeemers’) and Marriott would make a payment to
the redeemer for the hotel accommodation provided. HMRC
refused a claim by Marriott to recover VAT on the payments
made to the redeemers between 2010 and 2014, as well as
refusing the claim by Whitbread to repay the output tax paid
over on payments received from Marriott between 1999 and
2005. In both appeals, the appellant had disagreed with HMRC
that the payment made by Marriott represented payment on
behalf of members for the hotel accommodation supplied. They
were divided though on what was the nature of the service
supplied between the two parties.
The first issue was whether the payments made by Marriott
represented consideration for a supply of services made by
the redeemer to Marriott. The FTT decided that the payments
made by Marriott were in respect of a service provided by
the redeemer and not the provision of the hotel room to the
Member.
The second issue was what was the nature of the service the
redeemer provided? Marriott contended it was a supply in
relation to land, which after 2010 was taxable in the UK. This
would have supported its input tax claim post 2010. The FTT
disagreed and found those supplies were outside the scope
of UK VAT, following changes from 2010 to the VAT place of
supply rules.
Whitbread argued it supplied advertising services between
1999 and 2005, which were treated as supplied to Marriott in
the US, such that output tax would not have been due. The FTT
again disagreed: Whitbread was providing services relating to
the operation of the scheme and not advertising. Therefore,
the services were subject to UK VAT under the VAT place of
supply rules in force prior to 2010.
The ‘simple’ tax
The Office of Tax Simplification (OTS) has released an interim
report and a call for evidence in respect of their review of
the VAT system in the UK. The review was requested by the
Chancellor at last year’s Autumn Statement, to understand
whether the current VAT system is working appropriately
for today’s economy, and understand if there are any
opportunities to simplify the tax.
As part of the review, the OTS will focus on eight different
areas, including special accounting schemes, complex issues
such as partial exemption and the Capital Goods Scheme,
as well as administrative issues, the ruling process, and the
impending digitisation of VAT.
The OTS is keen to hear from businesses, to provide evidence
of how the areas identified in this report have caused problems,
to provide ideas on how to improve matters, and whether
there are any further areas for simplification that the OTS has
overlooked at this stage.
The deadline for submitting ideas and feedback is 30 June
2017. The OTS aims to publish its final report this autumn.
The Office of Tax Simplification – Progress report and call for
evidence (February 2017)
For advice regarding any of the issues raised here, please
contact your usual Saffery Champness partner or contact David
McGeachy, VAT Partner: T: +44 (0)20 7841 4000 or
E: [email protected].
Comment: The VAT deduction of supplies between the
parties in the promotion scheme here was affected by
interaction with the relevant VAT place of supply rules.
However, the taxpayer was successful in arguing that the
payment was not third party consideration for the supply
made to the reward scheme member. If you are affected by
the issues raised in the case, please contact you usual Saffery
Champness contact.
Marriott Rewards LLC & Whitbread Group plc v Revenue &
Customs Commissioners (FTT)
T: +44 (0)20 7841 4000 E: [email protected] www.saffery.com
Saffery Champness’ VAT Update is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain.
Professional advice should always be obtained before applying the information to particular circumstances.
J6848. © Saffery Champness March 2017.
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