Case Law Corner

VWFS Limited


VAT recovery - what is an acceptable partial exemption method for a Financial Services company selling assets under HP agreements?
It is apposite that, at the time VW is front page news, another of its brands has been under the VAT spotlight.
HP sales are something of a VAT oddity in that they involve two simultaneous supplies - one of an asset and also credit.
Under a HP agreement the finance co purchases and makes the onward supply of the asset to the final consumer - as opposed to simply  supplying credit to a consumer.
Because the standard partial exemption method is based on output values, the significant value of HP financed assets 
creates an unbalanced VAT recovery position for what is essentially an exempt finance company.
HMRC have never been happy with this and have sought to restrict recovery - at first by dint of an industry wide agreement and more recently via partial exemption special method  (PESM) approvals. 
In the instant case HMRC sought to argue that, because VWFS took no mark up on the vehicle sale, the business overheads had no 'direct and immediate link' to the taxable supply of the vehicle.  
Essentially, HMRC were saying that VWFS shouldn't enjoy any input tax recovery on overheads.
The Court of Appeal ruled otherwise and as such it s back to the drawing board for HMRC.
Bedale Golf Club

More partial exemption:  The golf club contended that input tax on the refurbishment of its club house was fully recoverable as it was wholly attributable to the sale of food and drink.
The Tribunal disagreed advising that the use of the clubhouse was in part a privilege in return for exempt membership subscriptions.  Consequently, the VAT on the works was only partly recoverable.
David Love Marketing Ltd 
The appellant operated a yacht business.  After a period of inactivity HMRC concluded that the business was no longer operating, cancelled its VAT registration and issued assessments for tax incorrectly recovered,
The appellant demonstrated successfully that although the business had been inactive, it had been as a result of the director's illness.  There was still an intent to trade. 
The Tribunal agreed.

SAS SVS La Martiniquaise

LM was a French company seeking to reclaim VAT incurred in the UK in 2012 under the EC Refund Scheme.

HMRC reversed its initial decision to reject the claim and repaid LM.  Misunderstanding, LM believed it was not entitled to make further claims. 

Later HMRC clarified its position and LM tried to submit additional claims for 2012 which were now 'out of time'.

The Tribunal expressed some sympathy but had no power to allow LM's appeal.
Please note that the time limits for such claims are 9 months from  the calendar y/e.

Xmas 2015
Season's Greetings to all our readers! 
A lot to report since our last newsletter, as usual what has been cut by the editor is available on our website's news pages.
EC  consultation on e-commerce payment rules
The Commission recently launched a public consultation on the impact of the new place of supply rules on e-commerce transactions. Legislative proposals will be introduced in 2016 once the consultation findings have been evaluated.

The EC is keen to introduce a threshold that would exempt smaller businesses from having to use the new MOSS scheme to account for intra EC e-commerce transactions.

This is partly a reaction to concerns voiced by small businesses, particularly those in the UK, that were until now not required to register for VAT because they traded under the UK VAT turnover threshold.

VAT Groups - treatment of overseas branches
HMRC have issued Revenue and Customs Brief 18/15 to clarify their position on the treatment of intra group transactions involving branches located in other member states following the judgment in Skandia.

Sweden and other EC member states treat the 'resident' branch of an overseas company as a separate taxable person even where that branch is VAT grouped with entities in that particular member state.

This means that, in some member states, supplies between an overseas company and a group which includes the overseas company's branch cannot be treated as intra-group transactions for VAT purposes.

The UK interprets VAT grouping on a 'whole entity' basis and as such the impact will not be felt where a group including the UK branch of an overseas company buys services from that company.  

Update on Sporting Services  (Golf club) claims

HMRC have published Revenue and Customs Brief 19/2015 which sets out their requirements for the consideration of claims by sporting members' clubs for VAT overpaid on certain supplies including Green Fees.

It appears HMRC are hoping that clubs will drop their claims for further VAT restricted under the unjust enrichment rationale if they are offered a sweetener now.

Bad debts and Insolvency Practitioners - ESC 3.20 withdrawal

ESC 3.20 ensures that Insolvency Practitioners don't become liable to repay VAT claimed as input tax in cases where an insolvent business has not paid for pre-appointment supplies.

The Treasury is seeking to make this ESC law following the Wilkinson judgment which questioned the appropriateness of many of the ESCs currently permitted by HMRC. 

A consultation is currently ongoing in respect of a number of ESCs.  Full details can be found by clicking the links below.

VAT on the ground
Loopy HMRC Group Registration Policy
Whilst retrospective VAT registration applications are commonplace, the possibility of backdating an application to join a VAT group has always been problematic.
The legislation does permit retrospection (beyond 30 days) for setting up or amending a VAT group registration but only at the discretion of the Commissioners. HMRC's internal guidance advises that 'discretion' should only be used where HMRC lose an application or cause unnecessary delays. The Tribunal has no power to direct HMRC on such matters and consequently ridiculous scenarios arise where HMRC officers, hamstrung by the guidance, refuse retrospection requests.
Despite recent criticism from the Tribunal on this issue (see the case of Copthorn) HMRC policy remains largely the same. 
A recent OMNIS case illustrates a common scenario.  A client mistakenly assumed that a new company within its corporate group was part of the existing VAT group. Newco's VAT had been brought to account for a number of periods through the group VAT registration before the error was discovered.
The most obvious solution, to admit the company to the group with retrospective effect, was refused by HMRC. Instead the group was forced to submit a voluntary disclosure to recover VAT 'overpaid' by the group,  register newco separately to manage the historic VAT position (i.e. pay the VAT repaid to the group).  Thereafter it was permitted to join the group.
I've no doubt that the policy also causes head scratching within HMRC.  In light of the recent criticism per unacceptable customer service delays, here is a one area where a common sense approach would benefit everybody.
A Tax on Restitution Interest?
The recent Autumn Statement highlighted new legislation, proposed in the latest version of the Finance Bill, to tax certain restitution payments made to taxpayers.  The proposal means that payments of interest (other than simple statutory interest) due on repayments of tax made to taxpayers in cases of official error will incur a 45% corporation tax charge at source!

This is a novel and bold way of limiting the impact on the Treasury of compound interest claims following the significant judgments in Sempra Metals and Littlewoods.  If enacted expect to see it challenged in the domestic and European courts!

If you need to discuss any of the above items please contact Nick or Alan.