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The VAT world in 2018

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Despite the fact that 2018 saw little by way of new VAT law, it did see a number of groundbreaking VAT cases, including one clarifying the very nature of VAT and another shining new light on the scope of the reverse charge liability for entities carrying on business and non-business activities. Other news included changes to HMRC’s policy on notifications of options to tax and the publication of HMRC’s proposals for a reverse charge for construction services, as well as new rules for vouchers.

2018 saw many interesting developments in the VAT world. In this article, we will summarise some of the more interesting developments, dealing with a mixture of practical and more esoteric issues.
First things first. At the time of writing, the Brexit project is in total chaos, the ‘meaningful vote’ having been postponed at the eleventh hour. As there is very little that can be said with any confidence about the future trajectory of Brexit, this article will say nothing more. In the immortal words of Ludwig Wittgenstein, ‘Whereof one cannot speak, one must remain silent.’
In this article, we will review legislative developments, and briefly review some of the more interesting cases. We will then consider a point of HMRC practice, before casting our gaze towards what we can expect in 2019.

Legislative changes

Disclosure of tax avoidance schemes for VAT and other indirect taxes
On 1 January, the new disclosure of tax avoidance schemes for VAT and other indirect taxes (DASVOIT) regime came into force. The new rules primarily affect tax advisors, but there are also important obligations for taxpayers. DASVOIT replaced the old VAT avoidance disclosure regime, under which responsibility for disclosure rested with the user of VAT schemes. By contrast, DASVOIT applies to all indirect taxes and the responsibility for disclosure generally rests with the scheme promoter.
Introduction of VAT in Saudi Arabia and the UAE
The original plan was that 1 January 2018 would see the introduction of VAT in all of the countries in the Gulf Cooperation Council (GCC) region. In fact, only Saudi Arabia and the UAE implemented VAT on that date; the remaining GCC states (Bahrain, Kuwait, Oman and Qatar) claimed that they need more time. It is not yet clear when they will be ready to proceed.
The GCC VAT system broadly mirrors that of the EU, although the VAT rate is only 5%.

Case law developments

Zipvit: VAT recovery on supplies incorrectly thought to be exempt
Zipvit v HMRC [2018] EWCA Civ 1515 brought to light a fundamental revolution in our understanding of what ‘VAT’ actually is. The orthodox view has been that ‘VAT’ is the money which a supplier accounts for, or pays, to HMRC. By contrast, the money which the recipient of a supply pays to the supplier pursuant to a VAT exclusive clause is not ‘VAT’; it is merely an increase in the contractual price reflecting the amount of the VAT charged on the supplier. In other words, it is ‘an amount in respect of VAT’ but not actually VAT.
The Royal Mail had incorrectly treated some of its supplies as VAT exempt. Zipvit, a recipient of such supplies, claimed that the amount which it had paid to the Royal Mail had, unbeknown to the parties, included ‘VAT’. It argued that it should be allowed to recover such VAT as input tax; HMRC disagreed. It is worth noting that this is a lead case; similar claims by other business are estimated to total over £1bn.
Taking its lead from CJEU case law, the Court of Appeal has now confirmed that amounts paid by a recipient to a supplier in respect of VAT are actually ‘VAT’. The question was whether, on the facts, Zipvit’s payments to the Royal Mail included such ‘VAT’, in circumstances where nobody (supplier, recipient or indeed HMRC) thought, at the time of the supply, that VAT was chargeable on the supplies.
The Court of Appeal dismissed Zipvit’s appeal, deciding that Zipvit had failed to demonstrate that VAT (even on the new understanding of ‘VAT’ mentioned above) had been ‘due or paid’ by it to the Royal Mail. The court rejected Zipvit’s argument that the amounts that it had paid must, as a matter of VAT law, have included a VAT element. Moreover, the court held that the absence of any data about the VAT rate or VAT amount on the Royal Mail’s invoices was fatal to Zipvit’s claim for input tax recovery.
News Corp UK & Ireland Ltd: zero-rating for electronic newspapers
The VAT treatment of electronic books and newspapers has been long recognised as a problem with the current VAT system, both in the UK and at EU level. Arguably, the EU principle of ‘fiscal neutrality’ should apply, ensuring a level playing field between products which are identical or similar from the customer’s point of view.
The issue in News Corp UK & Ireland Ltd v HMRC [2018] UKFTT 129 was whether digital newspapers should be zero-rated in the same way as printed newspapers. Specifically, the case concerned the digital edition of The Times, which is substantially the same as the print edition; customers view the digital and print editions as being essentially the same product in a different format.
For VAT purposes, the sale of a printed newspaper is a supply of goods, whilst the digital version is supply of services. The FTT concluded that the zero-rating provisions for printed matter cover only goods, not services. The principle that VATA 1994 should be construed in a way that maintains its relevance (the ‘always speaking’ principle) could not, in this context, extend zero-rating to services.
The FTT also rejected arguments based on fiscal neutrality. The digital version of the newspaper (services) was different to the print version (goods) and therefore fiscal neutrality did not apply. The neutrality issue will hopefully be addressed by the EU in the coming months (see below regarding 2019 developments).
Ryanair: VAT recovery on fees for purchase of shares
The issue of VAT recovery for those involved in share dealings continues to generate litigation.
In Ryanair v HMRC (Case C-249/17), the CJEU was asked whether the taxpayer was entitled to recover VAT incurred on the costs of an aborted takeover of Aer Lingus. The CJEU confirmed that Ryanair was acting as a ‘taxable person’ in its attempt to acquire the shares, as, on the evidence, it intended to make taxable management charges to the newly acquired subsidiary.
The advocate general had entered into a wide-ranging discussion of various sub-issues, such as the importance, if any, of whether the professional costs outweighed in monetary terms the proposed management charges. The CJEU did not consider all of these points, and therefore there is still some room for doubt as to the relevant principles at a CJEU level.
Nevertheless, the case provides further confirmation that VAT recovery should normally be possible for companies in the same position as Ryanair.
The Wellcome Trust: reverse charge on services received by charity
The Wellcome Trust is a large charitable fund whose aim is to support medical research. In 1996, the CJEU ruled that, notwithstanding its size and the volume of its transactions, it was not carrying on a business for VAT purposes.
The Wellcome Trust is VAT registered on account of some small catering and property supplies that it makes. The VAT Act 1994 provides that the existence of the VAT registration means that the Trust must account for reverse charge VAT on inbound services provided by US managers who advise on its investment portfolio. The Trust argued, however, that it did not receive these services in its capacity as ‘a taxable person’ and therefore the reverse charge should not apply.
In The Wellcome Trust v HMRC [2018] UKFTT 599, the FTT ruled that the UK legislation fails properly to implement the relevant the EU VAT law, which is article 44 of the Principal VAT Directive (PVD). The PVD treats the supplies from outside the UK as taking place in the UK only if the recipient of the supply is a taxable person ‘acting as such’. Whilst the Trust was a taxable person, it was acting in a non-business capacity in receiving the relevant supplies. On that basis, the reverse charge did not apply.
This case demonstrates once again the subtle, but vital, point that one should never assume that the UK legislation properly implements the PVD.
Nestlé UK Ltd: strawberry and banana Nesquik are standard-rated
This is the question: given that strawberry flavoured milk and chocolate Nesquik (when sold as a powder) are zero-rated, should strawberry and banana Nesquik also be zero-rated? Nestle argued that zero-rating should apply, whilst HMRC disagreed.
In Nestlé v HMRC [2018] UKUT 29, the UT dismissed Nestlé’s appeal. It recognised that there is no coherent rationale for the zero-rating rules relating to food. This is clear from the somewhat arbitrary differences between, for example, the VAT treatment of potato crisps and turnip crisps. Strawberry and banana Nesquik, unlike chocolate Nesquik, therefore remain standard-rated.
The broader significance of this case is that it demonstrates, once again, the apparent illogicality of the current UK zero-rating provisions for food. There is not much that can be done to fix this regime whilst the UK remains in the EU; the future may provide more flexibility…

HMRC practice: notification of the option to tax

Over the past few months, HMRC has been adopting a more rigorous attitude to the requirement to notify an option to tax. This has culminated in new para 7.6 of Notice 742A.
The key change relates to the need to ensure that an authorised person signs the notification of an option to tax. Briefly stated, a valid notification must be signed and dated by someone who possesses the legal capacity to notify HMRC of the option. If the signatory is not such a person and has not had authority granted to them by means of an authorisation letter signed and dated by an authorised person, HMRC will henceforth reject the option to tax.
It is not clear whether HMRC will apply this standard for historic notifications. If so, then any buyer or tenant of an opted property should ensure that the notification was made by the seller or landlord according to the new standard. In the past, common practice was generally to accept that options were validly notified; going forward, more care may be needed.

What we can expect in 2019

Changes to legislation on face value vouchers
The treatment of face value vouchers will change from 1 January. Briefly, there will no longer be a supply of a voucher; rather a voucher will be treated as representing the goods or services to which it relates (see Information Sheet 09/18).
Specified supplies: anti-avoidance measure
Insurance intermediary services supplied to a person outside of the EU are ‘specified’ for the purposes of VATA 1994 s 26(2)(c), allowing input VAT recovery regardless of the location of the ultimate consumer.
On 1 March 2019, the definition of ‘specified supplies’ for this purpose will be amended to prevent input tax recovery for such services where the ultimate consumer of the insurance service belongs in the UK.
Making tax digital
Making tax digital for VAT requires VAT registered businesses with taxable turnover above the VAT registration threshold to keep records in digital form and file their VAT returns using software. The new regime will commence on 1 April.
Extended eligibility for VAT grouping
Currently, the UK VAT grouping legislation allows two or more bodies corporate (including LLPs) to register as a VAT group if each body is established in the UK and they are under common control.
The eligibility criteria will be extended to include non-corporate entities, such as partnerships and individuals, which have a UK business establishment and control a body corporate. The change will have effect on a date to be appointed by the Treasury.
Reverse charge on construction services
From 1 October 2019, the liability to account for VAT on certain construction services will fall on the recipient, rather than the supplier. Supplies to end users will continue to be subject to VAT.
As we approach the start date for the new regime, the parties to construction contracts should review and, if appropriate, revise their payment systems to ensure that the new rules are correctly applied.
eBooks: European Council paves the way for reduced VAT rates
The European Council has agreed to allow member states to apply reduced VAT rates to electronic publications, opening the door for alignment between the VAT rules for physical and electronic publications. It is not clear whether HMRC, which has been arguing in the UK courts that physical and electronic newspapers should be treated differently (see above), will follow the EU’s lead in this respect.