VAT Update –…
VAT Update – October 2019
By Sean McGinness
We thought Brexit would be decided at the end of October, but at time of publication it seems that the UK will most likely not leave the EU now until January 2020. In other news, HM Revenue & Customs (HMRC) has announced a relaxation of the rules around digital links under Making Tax Digital (MTD), for businesses with complex systems. We also report on two construction cases in not-for-profit sector, with one win and one loss for very different reasons. Finally, the extension to the VAT grouping rules comes into force on 1 November.
Digital links: an extension to the 12-month soft landing period
HMRC has announced it will consider applications for further extensions for taxpayers, to give them further time to implement a VAT reporting process containing the required digital links under MTD. Businesses with complex or legacy IT systems, currently struggling with refining their VAT reporting process, will welcome this opportunity.
Digital links need to be in place by 1 April 2020 (or 1 October 2020 for those taxpayers whose entrance into MTD was deferred by six months), however this new application process offers the chance to extend that deadline. The onus is on the taxpayer to demonstrate why it is unachievable and not reasonable to have the required digital links in place by the stipulated deadlines.
Comment: This is a welcome potential relaxation but it remains to be seen where HMRC's line will be drawn in terms of what is 'unachievable and not reasonable' in this context. The revised MTD Public Notice provides some brief examples of what HMRC would consider to be so, but each case is going to depend on very specific circumstances.
The application process is quite involved and it will require some work by businesses wishing to apply. In some cases it will be necessary to submit a systems process map to HMRC as part of the application. HMRC is encouraging early applications so it is something to consider now rather than wait until the 2020 deadline (whichever applies) is looming.
Please get in touch with your usual Saffery Champness contact or Nick Hart if you wish to discuss this further.
Visit www.gov.uk for more information.
Cricket club given out in sports pavilion case
Can the construction of a sports pavilion be zero-rated, if it provides social or recreational facilities for a local community (similar to a village hall)? Yes, but not in the view of Upper Tribunal in Eynsham Cricket Club [2019] UKUT 286 (TCC), when it concluded the appellant could not be a charity and therefore the VAT relief on construction services was out of its reach.
The judgement, which has become very unpopular in charity circles, hinged on Community Amateur Sports Clubs (CASCs) being excluded from being a charity by virtue of a specific provision within charity legislation. In this case, Eynsham Cricket Club (ECC) was registered as a CASC and therefore the Upper Tribunal applied this specific provision to arrive at its decision. On this basis, ECC was not able to obtain VAT relief which is available to charities on certain construction services.
Comment: This is an interesting case with potential implications for CASCs seeking to obtain VAT relief and exemptions in respect of supplies they receive and also activities they undertake. There have been a number of similar cases where the charity relief is used for non-qualifying organisations.
It is recommended that CASCs review their current VAT position in light of this decision and in other cases where they are relying on charity reliefs to receive VAT-free purchases.
CASCs planning major expenditure on construction projects should also be mindful that VAT reliefs are likely to be unattainable, which will have an impact on costs, and budgeting will need to reflect that 20% VAT will be incurred and this may not be fully recoverable, depending on the circumstances.
Please get in touch with your usual Saffery Champness contact or Alison Hone if you wish to discuss this further.
EU quick fixes looming
The EU is preparing for its VAT 'quick fixes' to be implemented as the next phase of VAT reform across the single market. The quick fixes come into effect on 1 January 2020, and companies trading with the EU should take note of them. The measures cover the VAT treatment of chain transactions, providing a consistent approach with regards to removal evidence, the application of the call-off stock rules, and obtaining customer VAT numbers to become a critical part of treating an intra-community supply as exempt (or 'outside the scope' as we refer to it in the UK).
Whilst the Brexit express continues to hurtle along unchartered tracks, businesses that trade with the EU should not take their eye off these quick fixes, as they may need to adopt them from 1 January 2020. The EU has produced draft explanatory notes to provide some guidance on the quick fixes.
Comment: The quick fixes are the next step in wide-reaching EU VAT reforms to be implemented over the next few years. Whilst it is understandable that UK businesses have one eye on Brexit developments, if the UK does leave the EU with a deal, that will likely mean we are still operating under the EU VAT rules in 2020 and therefore it is important to ensure EU VAT reform is not ignored.
Explanatory notes on EU quick fixes.
Church succeeds in charity annex case
Obtaining VAT relief for the construction of an annex to be use solely for relevant charitable purposes is not an easy task, however in the case of Immanuel Church, it has succeeded in winning its First Tier Tribunal case against HMRC.
HMRC made life rather hard for itself, as the position it took in originally concluding that the construction of a building next to an existing church was not an annex but just an enlargement to the existing property, was based on a set of plans that did not actually represent what was ultimately constructed. Budgeting constraints meant the original plans that HMRC based their position on, were shelved and the construction was based on revised plans that HMRC overlooked. That being said, the appellant was still able to demonstrate the additional building did qualify as an annex, as it could operate independently from the main church building.
Comment: Disputes with HMRC over charitable annexes are common. In practice, HMRC is almost always ready to contest that zero-rating applies. There is a substantial amount of case law in this area and taxpayers are sometimes successful, but litigation is expensive and most charities want certainty at the budgeting stage and well before construction begins. Taking professional advice early can really pay dividends and add value to the project.
Please get in touch with your usual Saffery Champness contact or Alison Hone if you wish to discuss this further,
Immanuel Church v HMRC
VAT grouping rules extension comes into force on 1 November
In a long overdue announcement, the changes necessary to extend VAT grouping to allow individuals and partnerships to join or form VAT groups with their corporate subsidiaries finally come into force on 1 November 2019.
We reported on these changes back in 2018 and they are finally with us. We would recommend businesses take professional advice before forming or changing its VAT registration arrangements.
For advice regarding any of the issues raised here, please speak to your usual Saffery Champness partner.
Sean McGinness
Partner, Edinburgh
Alison Hone
Director, Bristol
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