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VAT briefing for January 2015

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HMRC has published two eagerly anticipated briefs on the VAT treatment of pension fund management. In Longridge, the UT held that a nuanced approach is required when deciding whether activities are being carried out in the course or furtherance of a business. In Lady Margaret Hall, the FTT held that a wholly owned subsidiary of a university college was acting as the college’s disclosed agent when supplying student accommodation. HMRC has published further guidance on the changes to the rules for digital services having effect from 1 January 2015 and a summary of responses to its consultation on prompt payment discounts.

VAT and pension fund management costs

HMRC has published its eagerly anticipated guidance on the VAT treatment of pension fund costs.

Brief 43/14

HMRC now accepts (on the basis of the CJEU judgment in PPG Holdings (C-26/12)) that there are no grounds to differentiate between the administration of a pension scheme and the investment management of its assets. HMRC’s previous position was that only VAT on costs relating to the setting up and administration of a scheme was potentially recoverable by its sponsoring employer. This means that there are circumstances where employers may be able to recover VAT in relation to their pension schemes, where they could not do so previously.

However, HMRC is also of the view that the employer can only recover the VAT on pension scheme costs if the services in question are supplied to the employer. (In HMRC’s view, this means that the employer is a party to the contract for those services and has paid for them.) This is potentially worse for employers than under the previous rules, where HMRC allowed them to recover the VAT on costs relating to the administration of the scheme even if the services in question were contracted and paid for by the scheme trustee.

Employers and scheme trustees will need to consider if and how they can meet this requirement while being compliant with the relevant pensions law (which provides that the trustee is responsible for the investment activities of the scheme).

If an employer receives a supply of services from a third party and recharges this to its pension scheme, it will be treated as making a supply to the scheme on which it must account for VAT.

Businesses may continue to apply the 70/30 split allowed by HMRC’s current guidance on invoices covering both investment and administration services for a transitional period until 31 December 2015.

Brief 44/14

HMRC now accepts (following the CJEU judgment in ATP PensionService (C-464/12) that where pension funds have all the characteristics set out below, they will be ‘special investment funds’ and the service of managing them is exempt from VAT:

  • they are solely funded (whether directly or indirectly) by persons to whom the retirement benefit is to be paid (i.e. the pension customers);
  • the pension customers bear the investment risk;
  • the fund contains the pooled contributions of several pension customers; and
  • the risk borne by the pension customers is spread over a range of securities.

In practice, most funds containing the pooled assets of defined contribution (DC) occupational pension schemes should be eligible for exemption.

For these purposes, ‘management’ includes the services of administering pension accounts, as well as the investment management and fund administration services that are already recognised as falling within the fund management exemption.

This change gives an opportunity for claims to be made in relation to VAT that has been overpaid in the last four years. Trustees of DC schemes should ensure that all appropriate claims are made.

Longridge: non-profit making activities

In HMRC v Longridge on the Thames [2014] UKUT 0504 (TCC), the Upper Tribunal (UT) upheld the decision of the First-tier Tribunal (FTT) that supplies made during the construction of a building were zero rated, because it was intended for use solely for a relevant charitable purpose (under VATA 1994 Sch 8 Group 5 item 2). The case concerned supplies made in the construction of a new training centre used for activities for schools, young people and adults (individually or by corporate use). The trustees set the prices below cost for young people, but prices could be above cost for adults to ensure Longridge’s operational costs were covered. The key question before both the FTT and the UT was whether that building could be said to be intended for use solely for a relevant charitable purpose, which includes use by a charity ‘otherwise than in the course or furtherance of a business’ (note (6) to Group 5).

On appeal, the UT found that the FTT had applied the correct test when evaluating the facts and that there were no grounds to disturb its conclusion. The UT held that Commission v Finland (C-246/08) was not authority for the proposition that any analysis of the prices charged, their method of calculation and their relationship to costs is impermissible, because it offends the principle that activities can be economic even if they are not pursued for profit. Instead, Commission v Finland and the decision of the Court of Session in Morrison’s Academy [1978] STC 1 both indicated a more nuanced approach, with a dividing line to be drawn between activities that are carried on as a business even though they are not aimed at profit, and activities which do not amount to a business even though payment is made for the services.

Why it matters

The case makes it clear that a nuanced approach is required when deciding whether activities are being carried out in the course or furtherance of a business. In this respect, it is important to ensure that, in any appeal, the FTT is provided with the fullest possible facts, as the UT noted that the FTT was well placed to evaluate whether activities are being carried on in the course or furtherance of a business, and that an appellate court should not normally interfere.

Lady Margaret Hall: disclosed agency

In The Principal & Fellows of Lady Margaret Hall v HMRC [2014] UKFTT 1092 (TC), the FTT considered whether a wholly owned subsidiary, LMHHS, of a University of Oxford college was acting as the college’s disclosed agent when supplying student accommodation. The college had granted LMHHS a licence of rooms and facilities on its premises, in return for a share of future turnover. LMHSS then entered into accommodation agreements with college students. The agreement between the college and LMHHS expressly stated that there was no agency relationship between the parties, and there was no separately identified remuneration for agency services. On the other hand, the college advertised the accommodation and created the demand for it by requiring its students to reside in college accommodation as part of its compulsory regulations. It also provided support staff, set the accommodation terms and controlled the price. On balance, therefore, the FTT found that the factors indicating an agency outweighed the non-agency factors, and so a disclosed agency relationship existed. It held that this was consistent with the economic reality (applying the tests in Newey t/a Ocean Finance v HMRC (C-653/11)).

Given the fact that the college imposed the accommodation requirement on its students and the broad meaning of ‘education’ in this context (following C&E Commrs v University of Leicester [2001] EWCA Civ 1972), the FTT went on to hold that the college’s supply of accommodation was closely related to education and VAT exempt (under VATA 1994 Sch 9 Group 6 item 4).

The tribunal also considered what the VAT treatment would be if it was wrong and LMHHS made the supplies to the students as principal. It held that, in this case, the supply would be exempt under VATA Sch 9 Group 1 item 1, because both LMHHS and the students had the necessary exclusive possession of the accommodation during term time. The exception to the exemption for hotel and similar accommodation in item 1(d) would not apply, given the purpose of the student accommodation.

Why it matters

The decision clearly shows the FTT’s thought process when applying the agency rules and testing them against the economic reality. The FTT rejected the appellant’s argument that the effect of the Supreme Court’s judgment in Secret Hotels2 v HMRC [2014] UKSC 16 was that it could only look beyond the contractual terms where there was artificiality or the contract was a sham.

VAT on prompt payment discounts

HMRC has published a summary of responses to the consultation on the changes to the VAT treatment of prompt payment discounts (PPDs), announced at Budget 2014. Instead of calculating the output VAT due on the discounted price, the changes require businesses to account for VAT on the consideration actually received. The new rules took effect on 1 May 2014 for telecommunication and broadcasting services and apply to all other supplies made on or after 1 April 2015.

In the published document, HMRC acknowledged the increased administrative burden that would be caused by requiring businesses to reissue invoices or issue credit notes once it is known whether a PPD applies. It was accepted that using a single invoice setting out the PPD terms, accompanied by supporting evidence of the price paid, was a sensible approach. An HMRC brief with guidance on PPDs will follow shortly.

VAT mini one-stop shop

In Brief 46/14, HMRC has provided additional guidance on the changes to the place of supply rules for business to consumer (B2C) digital services having effect from 1 January 2015 and the VAT mini one-stop shop (MOSS) registration.

The brief clarifies what supplies are subject to the new rules and discusses the meaning of ‘e-services that are electronically supplied’, i.e. automatically delivered over the internet where there is minimal or no human intervention.

The brief states that UK businesses which are currently below the UK VAT registration threshold and supply digital services to qualifying consumers in other EU countries can register for MOSS. HMRC will allow such businesses to split the UK and EU parts of their operations. For the UK part, they will not lose the benefit of the VAT registration threshold and will not be obliged to account for VAT on UK supplies falling below the threshold.

What to look out for

The Supreme Court has refused permission to appeal in the Esporta [2014] EWCA Civ 155 and Sub One (t/a Subway) [2014] EWCA Civ 773 cases. However, the Supreme Court will hear the appeal in Pendragon [2013] EWCA Civ 868 (on abuse of rights) on 11 March 2015.