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VAT has been busy since we did our last update six months ago.
There have been some big cases: the Mercedes-Benz case may change the way the whole of Europe will treat the supply of cars bought on PCPs; the European Advocate General decided that Bridge is a sport, before being trumped by the Eurpean Court, who decided it was not and most recently the Supreme Court saved HMRC £17 billion in the Littlewoods case on compound interest.
We now know that MTD will start for VAT registered businesses from April 2019.
We do not know what will happen to VAT in the future, though changes are on the horizon if the Office for Tax Simplification or European Commission reviews are anything to go by.
Here we summarise the latest changes, upcoming changes, and update you on a number of new guides we have produced in the last six months.
What's new?
VAT disclosure of schemes regime (VADR)
- Finance (No 2) Act 2017 introduced the new disclosure regime for tax avoidance involving VAT. These largely take effect from 1 January 2018, though some of the rules affect transactions from date of Royal Assent, 16 November 2017.
- The new regime focusses on 'VAT advantages' obtained through defined 'notifable arrangements'.
- The Finance (No 2) Act 2017 also introduced a penalty for participation in VAT fraud.
Place of supply of services
- Telecommunication services supplied to consumers, as opposed to businesses, will now be treated as taking place in the country in which the consumer 'belongs'.
- Typically, this will be the country in which the person's usual place of residence or permanent address is.
- The new rules apply from 1 November 2017. See Place of supply: services.
Upcoming changes
Autumn Budget 2017
- The VAT threshold will not be changed, contrary to pre-budget 'leaks'. The Chancellor says it will remain at £85,000, the highest in the EU and OECD, for the next two years.
- It seems that the threshold could commence just when Making Tax Digital: VAT commences in April 2019. That would be unpleasant for many small businesses. See Registering for VAT.
From 1 April 2018
- A new due diligence scheme for UK fulfilment houses will apply following an earlier consultation.
- Three Extra Statutory Concessions will be removed from 1 April 2018:
- Zero-rating of central processor – Notice 701/7 (VAT)
- Composite rate of VAT for computer systems – Notice 701/7 (VAT)
- Affiliation fees for sports clubs – Notice 701/45 (VAT)
Making VAT Digital
- VAT registered businesses will be required to report VAT via HMRC's Making Tax Digital of business service from April 2019.
- Digital bookkeeping will become mandatory, unless you are digitally exclused. No transactional date will be submitted initially, just the same nine totals as on the current VAT return.
- Spreadsheets are regarded as digital record keeping applications.
- See Making Tax Digital: VAT.
E-books
- Following a vote, EU Member States will be able to charge VAT at less than the standard rate for e-books.
- Currently, e-books must be subject to a minimum standard rate of 15% under EU rules.
- The change is to allow Member States to bring e-books into line with paper books, which in the UK are zero rated.
Consulations and VAT reviews
VAT groups
- HMRC are analysing feedback in relation to a consultation on the Scope of VAT Grouping: consultation which ran until 27 February 2017.
- The consultation was a reaction to the CJEU decision in Larentia + Minerva (C-108/14) and Marenave (C-109/14).
- The consulation looks at extending VAT groups to non-corporate bodies.
- See VAT Groups.
Office of Tax Simplification (OTS) review
- The OTS completed its first review of VAT in November 2017.
- It has recommended a review of the VAT registration threshold, penalties on voluntary disclosure, the Capital Goods Scheme, Partial Exemption, and Option To Tax.
- The Chancellor will now review the recommendations and decide how to proceed.
EU review
- The European Commission (EC) released its own latest report on simplifying VAT for cross-border transactions in October 2017.
- The EC is now seeking agreement from Member States that will result in:
- VAT being charged on cross-border transactions
- More Mini One Stop Shops
- VAT rate will be determined by country of final consumer
- EC Sales Lists will not be required.
See OTS and EU conduct separate reviews of VAT simplification.
Paying HMRC
There have been a number of changes recently affecting how business can pay their VAT to HMRC:
- If a VAT direct debit is inactive for 13 months, it will automatically be cancelled under the Dormancy Period rules. This will be of particular interest for clients using the Annual Accounting who may get a refund in one year but normally have a DD setup.
- From 15 December 2017, the Transcash service at the Post Office can no longer be used to pay HMRC.
- From 13 January 2018, HMRC will no longer be able to accept personal credit card payments. Commercial, corporate and business credit card payments will still be accepted.
Top recent cases
- In HMRC v Mercedes-Benz Financial Services UK Ltd [2017] C-164/16, the Court of Justice for the European Union (CJEU) have issued a preliminary ruling, stating that a Personal Contract Purchase (PCP) will be a supply of services not goods, unless the “only economically rational choice that can be made” is to pay the final payment rather than pass the car back or refinance. This is likely to mean that PCPs will be subject to VAT on the monthly payments and not in full upfront as a transfer of goods.
- The Supreme Court brought the 10 year battle on interest to an end in Littlewoods Limited and others v HMRC [2017] UKSC 70. They concluded that a refund of the VAT plus simple interest was adequate indemnity for Littlewoods in relation to an error by HMRC. Littlewoods were after £1.25 billion in compound interest and the decision is though to have saved HMRC around £17.5 billion in total.
- In Brabners LLP v HMRC [2017] UKFTT TC06093, the First-Tier Tribunal (FTT) decided that search fees charged to customers were not disbursements and they are part of the overall supply of conveyancing services. This means that VAT must be charged on the search fees recharged to customers.
- In a surprise decision the FTT decided, in G & C Belcher v HMRC [2017] UKFTT TC05891, that despite the husband and wife filing a partnership return and sharing profits from both GB’s barber shop and CB’s salon 50/50, they were separate businesses for VAT purposes and HMRC could not issue an aggregation direction.
Other interesting cases
- Not a VAT case, but Uber B.V. Uber London Ltd and Uber Britannia Ltd v Mr Y Aslam Mr J Farra Mr R Dawson and Others [2017] UKEAT 0056, paves the way for a possible substantial VAT bill for Uber. The Employment Appeal Tribunal found that the individual drivers are workers for employment law purposes. There is an argument that this means Uber should be treating all income from the drivers as its own and they would therefore have to charge VAT on that income. It is understood that HMRC have not yet issued an assessment as they are not sure about whether Uber are acting as Agent or not. See Agent and principal.
- The case of Queen’s Club Limited v HMRC [2017] TC06119, may see a shift in how sports clubs recover VAT on refurbishments of bars, cafés, restaurants etc. Here the FTT found that the VAT was fully recoverable as there was no direct and immediate link to exempt membership subscription income, despite access to the bar and restaurant being restricted to members and their guests.
- Farmers should not be blocked from using the Farmers’ Flat Rate Scheme for VAT just because they are better off than when using the normal VAT scheme. That was the decision of the CJEU in Shields & Sons Partnership v HMRC [2017] C262-16, and HMRC were told they could not withdraw the partnership from the scheme.
- In an unusual turn of events, the CJEU diverged from the opinion of the Advocate General in The English Bridge Union Limited v HMRC [2017] C-90/16, and decided that Bridge was not a sport for VAT purposes as it only had a negligible physical element.
Our new guides
These are our latest guides, which cover a variety of frequently asked questions:
Reverse charge & place of supply
UPDATE: a comprehensive re-write to our guide, dealing with the rules for when a supply is subject to the reverse charge and how the place of supply of services is determined.
Agents and principals
NEW: when is an agent treated as making a supply to a principal and when is the supply ignored?
Disbursements
NEW: when can a recharge to customers be treated as a disbursement and left outside of the scope of VAT?
VAT reclaims and unjust enrichment
NEW: a guide on when overpaid VAT can be reclaimed from HMRC, how the repayments can be blocked by HMRC under unjust enrichment and when you will get repayment supplements and interest.
Correcting VAT errors
NEW: how you correct a VAT error, when you have to do this by, how you should notify HMRC and what is not treated as an error.
Time of supply
NEW: our flowchart works through the general time of supply rules for goods and services and the guide covers continuous supplies of services, the construction industry, and the exceptions to the general rule.
Food: catering and takeaway
NEW: the ‘food’ zero-rating group consists of general rules, which are subject to exceptions, which themselves are subject to overrides to the exceptions. Throw in a rule that everything that constitutes catering is standard rated, and it is easy to see why errors are common for cafés and similar establishments.