UK: VAT Focus – A Round-up Of Recent VAT-related Developments, March 2007

Special partial exemption method for hire-purchase agreements

A recent VAT Tribunal concerned hire-purchase agreements entered into by the Lombard Finance Group (part of the appellant’s VAT group) with its customers.The bank had applied a VAT recovery rate of 15%, as negotiated back in the 1970s between HM Customs & Excise and the Finance Houses Association. This method was subsequently thought to be no longer appropriate and the taxpayer proposed a transaction-based method arguing that each hire-purchase agreement should consist of two supplies: goods and credit. HM Revenue & Customs’ (HMRC) policy however was to accept nil recovery, apparently on the assumption that most of the bank’s efforts and costs were used in connection with granting credit. The officer giving evidence did not support this, but nor did he regard the proposed recovery rate of 50% as fair and reasonable. The Tribunal agreed with the taxpayer on the basis that the proposed method was fair and reasonable and the previous method of recovering 15% was not.

What next?
Although HMRC might appeal this decision, businesses involved in hirepurchase transactions or similar arrangements should review their VAT recovery. If you have any questions or wish to discuss this, please call your usual Smith & Williamson VAT contact.
[The Royal Bank of Scotland Group plc, V19983]

In a new brief, HMRC has attempted to clarify the VAT treatment of forex and other financial instruments transactions on the back of the Willis Tribunal decision. Generally, forex transactions, where the business receives a spread from selling and buying currency over a period of time, are exempt supplies. In considering the Willis case, the Tribunal decided in favour of the taxpayer. It said the forex transactions did not qualify as supplies for VAT purposes and suggested the same arguments might also apply to interest rate swaps. Despite ongoing discussions on the VAT treatment of a number of financial instruments, HMRC says the case does not mean it needs to revise its existing policy. Smith & Williamson is closely involved in these talks and will keep clients informed as they progress.

What next?
If you are involved in financial transactions that you think might not qualify as supplies for VAT purposes and would like to discuss this, please speak to Martin Sharratt or your usual Smith & Williamson VAT contact.

Medical services exemption

HMRC has recently announced changes to the exemption for medical services. The changes relate to services provided by health professionals to a third party, e.g. expert witness reports or reports for fitness certificates. Following the European Court of Justice (ECJ) decision in d’Ambrumenil, from 1 May 2007, such services will be treated as subject to VAT. Where the purpose of the service is to ‘maintain, protect or restore’ health then services will continue to be exempt.

The rule changes may not affect services provided to insurance companies as some insurance-related medical services could be treated as exempt insurance services even where they are no longer exempt under the ‘health exemption’. This follows from the Tribunal decision in Morganash Limited, subject to any changes of the UK exemption for insurance services.

What next?
Businesses involved in providing or receiving expert medical opinions enabling them to provide services to customers should review existing arrangements to ensure the services are being treated correctly for VAT from 1 May 2007. Businesses should consider the impact this change could have on input VAT recovery and partial exemption. If these changes affect you, please call your usual Smith & Williamson VAT contact for more information.
[HMRC Brief 06/07, 30 January 2007]

The case of Baxi Group Limited (Baxi) concerned a boiler manufacturer which operated a reward scheme for boiler installers. The scheme was outsourced to another company called @1. Installers selling a Baxi boiler could collect points and redeem them against rewards listed in a bespoke Baxi catalogue. The rewards were provided by @1 to the installer and invoiced to Baxi.

Baxi argued that the VAT on the @1 invoices should be recoverable as input tax as it related to marketing services provided to Baxi by @1. HMRC contended that the input tax would only be recoverable as far as it related to the service element, which would be the margin between @1’s buying and selling price for the rewards. The Tribunal found that Baxi could recover the input VAT relating to the goods, but had to account for output VAT under the business gift rules.

The High Court basically agreed with Baxi in holding that the taxpayer was receiving a single indivisible service, which included the provision of goods to the installers. The input VAT recovery was hence allowed.

What next?
The variety of opinions between taxpayer, HMRC, Tribunal and High Court about what the actual supply chain was shows how this can be a difficult area in which to operate. Businesses operating or entering into reward and loyalty schemes should consider such arrangements very carefully.
[Baxi Group Limited [2006] EWHC 3353 (Ch)]

Exemption for fee-paying education

Hertfordshire International College of Business and Technology (HIBT), a profit-making limited company, supplied fee-paying educational courses to overseas students at the University of Hertfordshire’s campus in Hatfield. HMRC issued a ruling refusing exemption for HIBT’s supplies citing that HIBT was not an ‘eligible body’. The college appealed to the VAT Tribunal, arguing it should be treated as a college of a university and thus as an eligible body in providing education, as it had entered into a recognition agreement with the university for which it was afforded associated college status. In reaching its conclusion the Tribunal considered three pertinent questions. First, was there a supply of education? Second, was there a supply of university education? And finally, was the supply by an eligible body? The Tribunal concluded that there was a supply of university education and that HIBT could be treated as a college of the university. Therefore the appeal was allowed and HIBT was able to exempt its supplies.

What next?
This decision acknowledges that the provision of education has evolved in recent times, reflecting the increasingly commercial demands put on universities and higher education bodies. It also highlights the fact that education provided on a fee-paying basis does not automatically lead to an exclusion from VAT exemption. It remains to be seen whether HMRC will appeal this decision. Meanwhile, other universities around the country will be considering their options.
[HIBT Ltd (t/a Hertfordshire International College of Business and Technology), V19978]

The evidence required for zero-rating intra-community supplies of goods still appears to be a grey area. The fact that the ECJ’s Advocate General (AG) delivered her opinion in three similar cases on the same day shows that suppliers are not prepared to accept the onus placed on them in case their customers behave fraudulently. With many member states now focusing on combating VAT fraud, the authorities appear to turn to the supplier for recourse, even if the supplier claims to have evidence for an intra-community supply and to have carried out necessary and reasonable checks. The cases concerned the following questions on zero-rated supplies of goods.

• Whether and when the supplier can be held liable for output tax if irregularities on the purchaser’s side mean that the supply does not meet the requirements for zero rating.

• Whether the tax authorities in the state of origin are required to obtain information from the state of destination if the supplier is not able to prove the requirements for zero rating because the purchaser has not provided the required information.

• Whether zero rating can be refused solely on the grounds that the supplier did not produce the prescribed accounting evidence regularly and immediately after completion of the transactions.

What next?
First of all it remains to be seen whether or not the ECJ follows the recommendations of the AG but, in any case, it is more likely that the ECJ will set out principles rather than issue reliable guidance to assist suppliers in doubt. In the current climate, businesses involved in intra-community supplies of goods should review their evidence extremely carefully, especially if trading with new customers established abroad.
[Opinions: Teleos plc and others, C-409/04; Twoh International B.V., C-184/05; Collee, C-146/05, all 11 January 2007]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.