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This week’s edition begins with the pick of the VAT announcements from last week’s Budget which included an extension to the reduced rate for tourism and hospitality. This came as no surprise to the sector which had lobbied long and hard for an extension, given the relief has been of little use in the last three months while most qualifying outlets have either been totally shut so making no supplies, or else trading in a much reduced manner. What was a surprise was the six months at 12.5% which follows the extra six months at 5%. The Government seems to have learned from SDLT and sought to avoid a cliff edge by tapering and this is to be welcomed.  However, this is a rate we have not seen in the UK since 1976 and systems may struggle to cope with it and the impact of three VAT rates on the same supplies in a year, assuming the 20% rate will apply to these supplies again from 1 April 2022. There has been no indication that HMRC will apply anti forestalling rules when the rates applicable to these supplies change. HMRC has said the relief will remain unchanged during the extension period, however clarity is being sought from HMRC about what is included within the meaning of ‘admissions to attractions’.  Businesses will no doubt be perusing the details of the proposed new late payment and late submission penalty regime, which, while it should be fairer than the current default surcharge regime, as it is more lenient on those who make the occasional slip up, is certainly much more complex. The alignment of the VAT interest rules with other taxes will also be welcome.

The freezing of the registration threshold to April 2024 will bring more businesses into the VAT net due to fiscal drag, but suggests that the Chancellor is not minded to reduce the threshold significantly. This was one of the options for taxing the gig economy where many of the underlying service providers make supplies that are under the threshold and so do not declare VAT on their sales or reverse charge VAT on the fees charged by overseas platforms. This was covered in a recent consultation on the topic. 

Next this week we look at HMRC’s updated manual on Imports including new guidance on the meaning of ownership. This is important because the policy is that, as a general rule, (with some exceptions, naturally), only the owner of imported goods can recover the import VAT. So you can now be the owner of goods as far as the right to recover import VAT is concerned, without actually having title to them at the time of importation, as long as it is envisaged title will pass. This is certainly a welcome softening of the previous view. 

Finally this week, we look at the Frenetikexito (C-581/19) judgment concerning a nutrition service supplied with a fitness service, by a fitness studio. As well as looking at the liability of this service, (deciding that the service does not meet the primary purpose test and so is not exempt health care), the Court also considers whether there is a single or multiple supply. The most interesting part of this decision was the acceptance by the ECJ of the AG’s view that a service which amounted to 40% of the total charge could not be ancillary to the other elements, as this is not an approach we have tended to see the ECJ take in the past. Ancillary has been defined more by the purpose of a particular element (is it for the better enjoyment of the main element rather than an aim in itself) rather than by the proportion of the price paid that is for it. So the outcome here was that there were two supplies as the taxpayer had suggested, but, contrary to the taxpayer’s submissions, the nutrition service was not exempt as it was more advisory rather than having any therapeutic aim, meaning both supplies were taxable. 

Budget 2021

Last week the Chancellor delivered the UK’s Budget. The main links to resources are:

  • Budget page - here
  • Budget documents – here
  • Overview of tax legislation and rates (OOTLAR) – here
  • Notes on Finance Bill 2021 – here

All references below are to the OOTLAR. The main VAT related announcements are as follows:

1.40 VAT reduced rate for tourism and hospitality [extended] – The temporary 5% VAT rate for hospitality, hotel and holiday accommodation and admission to some attractions, due to expire on 31 March 2021, has been extended by 6 months to the 30 September 2021. The Budget announced a further six-month period from 1 October 2021 when the VAT rate on these supplies will be 12.5%, so that the normal rate of 20% will not apply to them until 1 April 2022. HMRC also released Revenue and Customs Brief 2 (2021): temporary reduced rate of VAT for hospitality, holiday accommodation and attractions here and a Tax Information and Impact Note on the ‘Introduction of a new reduced rate of VAT for hospitality, holiday accommodation and attractions’ here.

1.68 Interest harmonisation and reform of penalties for late submission and late payment of tax – Two papers have been issued by HMRC outlining a new points-based penalty regime for regular tax return submission obligations, which replaces the default surcharge regime for VAT. This measure will affect those who are required to submit a VAT return and fail to submit returns on time.  A taxpayer will receive a point each time a submission threshold is missed and once a certain number of points have accrued, a £200 penalty will be due. Another penalty will be due for each subsequent failure though no more points will accrue. Points will have a lifetime of two years but will not expire once the penalty threshold is reached meaning a period of good compliance is needed in that case to reset the points total to zero.  

Late payment penalties of 2% or 4% of the outstanding sum will also be due depending on how late the payment is, (unless time to pay has been proposed to HMRC by day 15 after the due date and is then agreed) with a further 4% per annum becoming due once the debt is more than 30 days old.  The impact of proposing TTP that is then agreed is that the tax is treated as though it was paid on the date of the TTP proposal though interest will still be due.  

The VAT interest rules will also change and will be similar to those that currently exist for ITSA. The measure will make the following changes to interest payments in VAT:

  • when an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that payment was due, until the date the payment is received
  • HMRC will pay repayment interest on any overpaid tax and/or tax refunds due to be repaid

The penalty reform and changes to interest rules will come into effect for VAT taxpayers for accounting periods beginning on or after 1 April 2022.

Click here for policy paper on Penalties for late payment and interest harmonisation and here for policy paper on Penalties for late submission.

1.60 Extending MTD for Value Added Tax to all VAT registered businesses from 1 April 2022 This will enable the scope of Making Tax Digital for VAT to be extended to all VAT registered businesses with effect from 1 April 2022. Tax Information and Impact Note ‘Extension of Making Tax Digital for VAT’ – click here.

2.6 VAT: No change in registration and deregistration thresholds – The VAT registration and deregistration thresholds (£85,000 for registration and £83,000 for deregistration) will not change for a further period of two years from 1 April 2022. There will be no revisions to existing legislation and no new legal provisions will be introduced. Therefore, legislation will continue as follows: The further 2-year period ends on 31 March 2024. For the Tax Information and Impact Note ‘Maintain VAT thresholds for 2 years from 1 April 2022’ – click here

2.15 Electronic sales suppression – The new electronic sales suppression-specific powers will make offences of the possession, manufacture, distribution and promotion of electronic sales suppression software and hardware. There will also be electronic sales suppression-specific information powers allowing HMRC investigators to identify developers and suppliers in the electronic sales suppression supply chain and to access software developers’ source code and the locations of code and data. The government held a call for evidence on ESS and published its response in June 2020. The government will legislate in Finance Bill 2021 to 2022 and the measure will take effect from Royal Assent.

Importance? Clearly the extension of the reduced rate for tourism and hospitality will be welcomed as such sectors have been severely impacted and unable to benefit from the reduced rate whilst in lockdown. 

HMRC Manuals – Imports – VAT Input Tax basics: recipient of supply

HMRC has updated its guidance relating to imports. To access the updated guidance, click here. On ‘Import VAT – Deduction of Input tax’ there have been substantial changes. The main change is a new section as reproduced below. It includes HMRC stating that essentially as long as ownership passes in the future then title does not need to have passed at an earlier point for someone to be the owner. This is important due to the rules about who can recover import VAT. The other main changes are the inclusion of guidance in HMRC’s earlier Briefs.

Meaning of Ownership

When we refer to the owner as having ownership of the goods, this needs to be seen specifically in the VAT context of ownership being ‘the right to dispose of goods as owner’. It is accepted that, as long as the contract of ownership envisages that title will pass at some future date (usually on payment), title does not need to have passed at that earlier point. Typically, contractual arrangements will often allow the ‘owner’ to use and dispose of the goods as they see fit.

So, for example, where goods are imported into a customs warehouse, and ‘ownership’ passes in warehouse (subject to title typically passing later on payment), then the ‘owner’ of the goods will be in a position to dispose of those goods as owner, to use and/or sell those goods. Any import VAT paid by the ‘owner’ of the goods in such circumstances can be deducted by them as input tax, subject to the normal rules, irrespective of whether title has passed at that point.

Importance? This follows HMRC Briefs 02/19 and Brief 15/20 on the issue of Import VAT deducted as input tax by non-owners. However, this guidance on the meaning of ownership will not affect Toll Operators as they will never take ownership of the goods. 

Frenetikexito (C-581/19) – Judgment – nutrition service – whether separate supply – yes – whether exempt – no – taxpayer loss

The taxpayer operates a fitness studio. As well as fitness services and programmes, the taxpayer offers other services including nutrition services. The customers have the option to subscribe to nutrition advice in addition to their fitness plans. The taxpayer also offers nutrition advice to external customers as a standalone service without the fitness service. The taxpayer accounts for output tax on the fitness services. However, the taxpayer considers that the nutrition advice service is an exempt independent, supply of medical care under Article 132(1)(c). The earlier AG was of the view that the two supplies are independent, separate supplies for VAT purposes. However, on the liability point, the AG agreed with the Commission that it is rather doubtful that such general nutrition service falls within the exemption. The concept of medical care covers only services that have as their aim the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders – the necessary condition for exemption is a therapeutic aim which appears not be the case here.

The Court has agreed with the AGO, albeit starting with the exemption issue first. The Court noted that there was no dispute that the services were supplied by medical and paramedical professions as defined by the Member State. However, the other requirement of Article 132(1)(c) is that there is a supply of medical care. Citing cases such as Future Health Technologies (C‑86/09) and Peters (C‑700/17) the concept of medical care is intended to cover services that have as their purpose the diagnosis, treatment and, in so far as possible, cure of diseases or health disorders. The Court did not dispute that a nutrition monitoring service may be a tool to prevent certain conditions, such as obesity. Such a service therefore, in principle, has a health purpose but not a therapeutic purpose. The Court added where there is no indication that the service is provided for purposes of prevention, diagnosis, treatment of a condition or restoration of health, the services does not fulfil the criterion of an activity in the public interest common to all the exemptions laid down in Article 132 and does not fall within the scope of the exemption laid down in Article 132(1)(c).

At para 35 the Court turns to the single v multiple supply issue. The Court referenced a number of previous cases although the application of some of these to the current case is not precisely clear. Where the Court was clear was its application of Madgett & Baldwin (C‑308/96) and (C‑94/97) in para 48. The Court observed that the 40% cost being attributable to the nutritional advice could not be described as minimal or marginal meaning the nutrition element could not be ancillary and take the liability of the main element, if there was a single supply. This was however irrelevant as the conclusion was there were two supplies, it was just that neither was exempt. To access the judgment, click here.

Importance? The Court’s application of Madgett & Baldwin (C‑308/96) and (C‑94/97) is interesting as the ECJ is supporting the view that an element of a supply cannot be ancillary to the main element if it is a large proportion of total value. From an ECJ perspective this approach has not been followed significantly as the case law on single supply has developed. From a UK perspective it has also largely not been followed for many years. Case law on single supply is widely accepted in the UK to have been reset by CPP. This value approach is not referenced in The Honourable Society of Middle Temple UT decision whose principles around not artificially splitting the indispensable and inseparable elements of a single economic supply, irrespective of value, as derived from ECJ cases, have been followed and referenced in the UK. 

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