Name of presentation

Name of presentation

VAT update Helen Elliott September 2016 Agenda 1. VAT implications of Brexit 2. Three new VAT refund schemes 3. Zero and reduced rate reliefs 4. Non-business and exempt activities 5. Cross-border VAT developments 6. Cases 2

1. VAT implications of Brexit The EU VAT Union is restricted to EU member states, but with territorial adjustments e.g. the UK excludes the Channel Islands but includes the Isle of Man So if the UK leaves the EU, unlikely the UK will be able to stay in the VAT Union, as the UK is not a territorial adjustment to another EU state 3

1. VAT implications of Brexit If the UK leaves the VAT Union, UK would almost certainly maintain the current UK VAT system, at least initially But divorced from EU VAT law and thus with more flexibility to set VAT reliefs, rates and rules Not yet clear how the divorce would happen 4 1. Brexit: cross-border supplies What is currently:

an acquisition of goods from an EU supplier Will become: an import of goods from a non-UK supplier a dispatch of goods to an EU customer an export of goods outside the UK

A purchase of services from an EU supplier a purchase of services from a non-UK supplier a supply of services to an EU customer a supply of services to a non-UK customer UK acquisition VAT due

UK zero-rated if conditions met UK reverse charge if conditions met EU reverse charge if conditions met UK import VAT due UK zero-rated if conditions met UK reverse charge if conditions met

Outside the scope if conditions5 met 1. Brexit: VAT reliefs for charities UK VAT reliefs for charities also apply to charities in the EU and EEA states: Norway

Iceland Lichtenstein from 31 July 2014 But charity VAT reliefs may be restricted to UK charities after Brexit E.g. supply of advertising to a UK branch of a French charity would no longer be zero-rated 6 2. VAT refund schemes

1. S33c/s33d new VAT refund scheme for qualifying charities from 1 April 2015 2. S33e new VAT refund scheme for specified persons from 1 April 2016 3. S33a VAT refund scheme for museums and galleries is extended from 16 March 2016 7 2 Refund scheme for qualifying charities Refunds VAT incurred in non-business activities: Palliative care charities (hospices) Air ambulance charities

Search and rescue charities (SARCs) Charities that support a SARC Medical courier charities Charities that support a medical courier charity 8 2 Refund scheme for qualifying charities Still no official HMRC guidance on how refund schemes interact with Capital Goods Scheme rules E.g. does non-business use count as taxable use for CGS?

9 2 Refund scheme for specified persons Specified persons will be named government departments and non-departmental public bodies (e.g. some national museums/galleries) Scheme will refund VAT incurred as a part of shared services arrangements used to support their non-business activities Aims to ensure that what would otherwise be irrecoverable VAT does not deter public bodies from sharing back-office services

10 2 Refund scheme for museums & galleries Refunds VAT incurred in providing free admissions Museum/gallery must be listed in a Treasury Order and approved by a relevant govt dept (e.g. DCMS for arts, MoD for military museums) Previously only applied to national museums and galleries From 16 March 2016 extended to local museums and galleries

11 2 Refund scheme for museums & galleries From 16 March 2016, new applicants must: be open to the general public for at least 30 hours per week, without exception offer free entry, without prior appointment hold collections in a purpose-built building display details of free entry and opening hours on the museum website apply to and be approved by the relevant

govt department and govt ministers 12 3. Zero and reduced rating reliefs Energy saving materials Womens sanitary products Hospice buildings Village halls Electronic publications 13

3. Energy saving materials The supply and installation of some ESMs in residential property is reduced rate (5%): Some insulation, lagging and draught stripping Heating system controls, thermostatic valves Solar panels Wind and water turbines Ground and air source heat pumps Boilers fuelled by wood, straw and similar 14 3. Energy saving materials In 2014 the CJEU decided that the UKs

reduced-rate relief for ESMs is too broad and must be restricted to housing that meets a defined social policy Pre Brexit the UK proposed to restrict the reduced rate to certain types of housing and to remove solar panels, wind and water turbines 15 3. Energy saving materials However the proposal to restrict the reduced rating has not been included in Finance Act 2016

Appears to have been dropped So looks as if the UK will carry on as previously 16 3. Womens sanitary products From an as yet unspecified date these will move from being reduced rate to being zerorated Date to be appointed by Treasury Order following Royal Assent of Finance Act 2016 Not earlier than 1 April 2017

17 3. Hospice buildings The construction of a building intended for use solely as a hospice qualifies for zero-rating as relevant residential purpose (RRP) HMRCs position was previously that this is limited to construction of a 95% or more residential building But HMRC now accepts that will be a residential building as long as it provides some residential accommodation, such as beds for patients

18 3. Village halls Charities can zero-rate the construction of a building intended for use as a village hall or similarly in providing social or recreational facilities for a local community Can apply to village halls, community centres, scout and guide huts and similar HMRC has always held the building must be owned and managed by a board comprised of representatives of the local community

19 3. Village halls But in the Caithness Rugby Club case the Upper Tier Tribunal has rejected this It allowed zero-rating of a rugby club clubhouse run by a rugby club board but which is used a village hall Being owned and managed by representatives of the local community is a factor indicating the relief applies, but not essential

20 3. Electronic publications The European Commission has launched a consultation on allowing EU states to align the VAT treatment of paper and electronic publications The consultation seeks views on the definition of electronic publications If implemented in the UK would mean qualifying electronic publications being zerorated

21 4. Non-business and exempt activities DFID funding The Friends of the Earth case The Life Services case VAT efficient welfare schemes 22 4. DFID funding In Sept 2015 CTG announced HMRC informal

ruling that DFID funding is non-business, whatever the form of the contract This approach can be applied all the way down a supply chain (where the work is subcontracted to named partners) The key point is whether it is satisfying the UK overseas aid programme But no formal announcement from HMRC 23 4. Friends of the Earth case Persons who agreed to donate more than 3 p.m. obtained the following benefits:

Earthmatters magazine, 28-36 pages via post 10% discount from the FoE online shop One free download from FoEs Fairshare site A discount on organic wine from Vinceramos Membership card 24 4. Friends of the Earth case In the past HMRC had accepted in writing could be treated as zero-rated on the basis the donations were for the magazine This allowed VAT recovery on costs of benefits and fundraising

But HMRC then decided the donations are not for the magazine and are outside the scopeand backdated assessment for VAT recovered So VAT only partly recoverable under Childrens Soc principle (costs of raising donations) 25 5. Friends of the Earth case FTT agreed with HMRC on the basis the donations were not for the benefits Donors donated and were then asked if they wanted to receive the benefits So no bargain, at the time of payment, that the payment is wholly or partly for the

benefits Principle established in Kuwaiti Petroleum case (free gifts with petrol) and Childrens Society case (newsletters for committed 26 5. Friends of the Earth case But if offer substantial benefits to donors in return for a minimum donation, so there is a bargain at the point of donation, the donation is for the benefits, and within the scope of VAT:

Tron Theatre case Serpentine Gallery case 27 4. Life Services case Welfare services supplied by a public body, charity or state regulated private business are VAT exempt State regulated means the welfare services are regulated by CQC, Ofsted etc. Exemption also covers welfare services provided by private businesses that are

exempted from state regulation these are deemed to be state regulated 28 4. Life Services case Life Services is a private profit making welfare business providing un-regulated offsite day care for adults with disabilities Often paid via personal budgets So Life wants VAT exemption to reduce the cost to the budget holder

29 4. Life Services case Life argues: 1. It is exempted from regulation and so is deemed to be state regulated, or 2. It is regulated by the local authority and so state regulated, or 3. UK law breaches fiscal neutrality in allowing exemption for any welfare supply by a charity, but only state regulated welfare supplies by private business 30

4. Life Services case 1. Exemption from state regulation This type of offsite adult day care is not covered by CQC or OFSTED regulations FTT decided this is not the same as being exempted To be exempted must be covered by the regulations but then removed by them Hence Life is not a state regulated provider on the first argument 31

4. Life Services case 2. Regulated by the local authority Life is registered with its local county council and monitored by them However FTT decided not the same as state regulated requires registration (or exemption from registration) under a general public act Hence Life is not state regulated under the 2nd argument 32

4. Life Services case 3. Breach of fiscal neutrality But Life won on the 3rd argument, UKs welfare exemption breaches fiscal neutrality Suggests that all supplies of welfare, whether by a charity or state regulated or non-state regulated provider should be VAT exempt But only a FTT decision not binding on HMRC Not yet clear if HMRC will appeal or if UK law 33

4. VAT efficient welfare schemes HMRC now arguing un-regulated day care services provided by state regulated providers is standard-rated HMRC back assessing affected providers for un-charged VAT But does not apply to charities, any supply of welfare services by a charity is VAT exempt 34 4. VAT efficient welfare schemes Some businesses are promoting VAT efficient

welfare schemes for charities providing local authority funded care Care is re-structured so the welfare exemption is not met becomes standardrated VAT is charged to local authority which can usually reclaim under s33 So VAT incurred in providing the care can be reclaimed 35 4. VAT efficient welfare schemes Scheme purports to work by providing care

via an un-regulated trading subsidiary But questions over whether such schemes really do work or if they are caught by VAT anti-avoidance (or exempt via Life case ) HMRC Policy Unit now looking into such schemes Local authorities may only accept a VAT charge for care if scheme has been approved by HMRC 36 5. Cross border VAT

Mini One Stop Shop EC VAT Action Plan 37 5. Mini One Stop Shop From 1 Jan 2015 the place of supply of B2C digital services is where the customer belongs E.g. sell a music download to a consumer in France Digital services include electronic services website access, downloaded products,

electronic publications, recorded podcasts etc. If a B2C consumer belongs in another EU 38 5. Mini One Stop Shop But can register for the Mini-One-Stop Shop return with HMRC Complete one VAT return and pay all EU VAT due on digital services to HMRC HMRC splits up the return and payment and sends to the relevant EU states

EU states do likewise for EU sales to UK consumers Non-EU suppliers must register for MOSS in an EU state can choose which 39 5. Mini One Stop Shop MOSS is a simplification measure. But has problems: 1. No registration threshold 2. Potentially captures hobby businesses very occasional sales

3. Substantial additional administrative burden for small businesses which are below the UK VAT registration threshold 4. What happens after Brexit? 40 5. MOSS registration threshold The EU is considering an SME VAT package Likely to include a pan-EU MOSS registration threshold But not clear how it would work And likely to be low (circa 5,000 10,000)

41 5. MOSS hobby businesses HMRC has started ejecting hobby businesses from the MOSS register A hobby is an activity carried out only on a minimal and occasional basis Not clear what criteria HMRC use But might apply to otherwise wholly nonbusiness charities E.g. all grant funding but occasional EU sales of electronic products

42 5. MOSS admin burden HMRC accepts the MOSS evidence requirements are relaxed for businesses that are registered for MOSS but not UK VAT registered These only have to retain one piece of evidence of customer location whereas normally requires 2 or 3 pieces of evidence 43

5. MOSS: Brexit After Brexit UK suppliers would still have to report and pay EU VAT on B2C EU digital supplies under EU law But HMRC would no longer be an approved tax authority for collecting and distributing EU VAT So UK suppliers might have to register with another EU VAT authority (e.g. Ireland) But may be possible for UK to agree HMRC can remain in MOSS system 44

5. EC VAT action plan For cross-border supplies of goods: Separate SME package to be unveiled in 2017 B2C e-commerce supplies of goods (e.g. goods ordered over the web) will be subject to VAT in the place of consumption i.e. like digital supplies now VAT will be charged by the supplier and dealt with through an extended MOSS system 45

5. EC VAT action plan MOSS will eventually be extended to all crossborder supplies of goods to a customer in the EU, including non e-commerce and B2B However compliant and VAT registered business customers will still self-account for VAT i.e. a reverse charge approach for B2B supplies The long term aim is to align the cross-border VAT treatment of goods and services But timetable as yet uncertain 46

6. Cases Longridge on Thames Philanthropic membership bodies Supplies closely related to education Wedding ceremonies Card processing fees CTG test case on agency temps 47 6. Longridge on Thames Charity provides subsidised sports courses

for young people (canoeing, kayaking etc.) Tax tribunals (FTT and UTT) both decided not a business activity Applying High Court cases Yarburgh Trust and St Pauls Community Project Based on UK business tests, in particular the predominant concern test 48 6. Longridge on Thames But Court of Appeal now appears to have over-ruled those decisions Suggests predominant concern test is now

out of date Instead rebuttable presumption that if supplies are made for consideration and permanent, then an activity is business In Longridges case, no relevant facts rebut that presumption 49 6. Longridge on Thames CoAs decision is arguably wrong: Confuses the concepts of supplies for remuneration and supplies for consideration

Misinterprets EC v Finland Ignores more recent CJEU case law But will have to wait and see what happens 50 6. Philanthropic bodies Non-profit making bodies with objects in the public domain and of a political, religious, patriotic, philosophical, philanthropic or civic nature can exempt membership subscriptions In 2015/16 have been three tribunal cases considering the philanthropic aspect of this

exemption: UTT United Grand Lodge of England FTT Hall Concerts Society FTT - Association of Graduate Careers Advisory Services

51 6. United Grand Lodge of England Masonic lodge subscriptions FTT rejected exemption on the basis all objects except minor or incidental ones must be political, religious, patriotic, philosophical, philanthropic or civic FTT decided not the case for masonic subs as some main objects were social or aims of self-improvement for members 52

6. United Grand Lodge of England Before the UTT UGLE argued the FTT adopted the wrong approach and should have examined UGLEs main objective, which was philanthropic The UTT has rejected UGLEs argument and approved the FTTs approach To qualify for exemption all objects must be political, religious, patriotic, philosophical, philanthropic or civic except for minor or incidental ones 53

6. Hall Concerts Society Hall objects are: the promotion of the study practice and knowledge of the art of music in the UK and elsewhere by the giving and arrangement of concerts and such other means as thought fit Members receive voting rights, annual report, publications, priority booking for Hall concerts and season tickets, and assorted minor benefits 54

6. Hall Concerts Society Decision is that this is philanthropic membership subscription Judge said If a wealthy benefactor wished to build or subsidise a library or a concert hall for the benefit of a town or city we would regard that as philanthropic. Likewise the setting up and funding of an orchestra to put on free or subsidised public concerts would also amount to philanthropy The FTT found that most concerts were subsidised

55 6. Association of Graduate Careers Advisory Services Professional body for university graduate careers services and advisors Objects are to promote the benefits and advance the education of students and graduates attending courses of higher education Members are primarily university careers advisory services and employees of these 56

6. Association of Graduate Careers Advisory Services FTT has rejected exemption: Philanthropic means promoting the wellbeing of mankind by serving ones fellow men Must be the stated aim as well as the real aim The activities of AGCAS are primarily to benefit the members so the aims are not wholly philanthropic 57

6. Supplies closely related to education The Brockenhurst College case is examining the scope of the exemption for supplies that are closely related to an exempt supply of education Can apply to catering, accommodation, study trips, books and course materials etc. Case involves fees for attendance at performing arts student concerts and fees for meals in a catering student practice restaurant

58 6. Supplies closely related to education HMRC argues the true beneficiary of the closely related supply must be person receiving exempt education, and here the true beneficiary of the supply is the concert or restaurant attendee Both the FTT and UTT have rejected HMRCs argument HMRC has appealed to the Court of Appeal which has now referred to the CJEU

59 6. Blue Chip Hotels - weddings Hotel books the wedding ceremony first, for an agreed fee, then customers later decide if they will also book a reception or accommodation Hotel exempts the wedding ceremony fee as hire of a dedicated ceremony room, but standard-rates reception & accommodation fees Q: If the customer also books a reception or accommodation, is this is a single supply or

multiple supply and if a multiple supply, is the 60 6. Blue Chip Hotels - weddings FTT has decided that in the circumstances the wedding ceremony is a separate supply but not a passive and exclusive right to use a room Not exclusive as the public are required by law to have access to a legal wedding ceremony Not a passive letting of a room provision of an official ceremony

So both supplies are standard-rated 61 6. Card processing fees In Bookit and NEC the CJEU has decided that card processing fees added to ticket prices are not for a separate VAT exempt financial service They are likely to be ancillary to the ticket But, if not, they are not exempt financial services anyway i.e. card processing fees are normally ancillary

to the supply they pay for and follow its VAT treatment 62 6. Agency staff Agencies providing temps charge the temps salary and a commission Is VAT due on both, or just on the commission? In the 2011 case Reed Employment the FTT decided VAT was only due on the commission But HMRC refused to accept this as a general principle

63 6. Agency staff CTG and Adecco ran a test case to force HMRC Case funded by some charities Adecco argued: 1. The temp provides their services directly to the client 2. As temp is unregistered no VAT due 3. Adecco acts as agent in collecting fees and paying the temp

64 6. Agency staff But argument rejected by FTT: FTT sees the supplies as following the contracts The temp supplies their services to the agency The agency supplies those services to the client That is both the contractual reality and economic reality

65 5. Agency staff So the agency makes a single standardrated supply of staff to the customer The temp makes a supply of their services to the agency If the temp is registered for VAT, the temp charges the VAT to the agency If the temp isnt registered for VAT, the temps charge is outside the scope 66 Contact details

[email protected] 67

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