Graham Elliott summarises a selection of VAT changes that occurred in the year and examines their implications for other charities.
Rates and liabilities
I predicted last year that there would be a 19 per cent or 20 per cent standard rate of VAT by the end of 2010. I was more or less correct on that point, since the rate increased to 20 per cent on 4 January 2011. In my opinion this is a one-way street. I do not expect, for the remainder of my advisory career, to be advising clients about a lower standard rate of VAT. It may well have to go up further.
The 5 per cent rate for a very limited range of services was not increased however, and there have been only relatively small changes to the zero-rate reliefs as far as charities are concerned. The changes to the zero-rate of greatest interest involve payper- click advertising and the rules for zero-rated charitable buildings.
In the case of advertising, HMRC finally accepted that search engine sites which offer the opportunity to click through to a charity’s donation page, in return for payment by the charity, could be deemed to be an advertising service rather than merely an IT service, and consequently could be zero-rated. Where VAT has been charged on such services and related design services, this should be recouped from the supplier. If such services were imported, and VAT accounted for through the reverse charge, this can be adjusted directly with HMRC.
As regards the buildings, the news is rather worse, in that the long-heralded change from a 10 per cent effective de minimis for non-qualifying charitable use of a building to a 5 per cent de minimis took effect in July 2010. HMRC takes the view that the greater freedom of calculation available with the new 5 per cent approach makes it virtually equivalent to the former rigid criteria for 10 per cent, but only time will tell how often that is the case.
There have been some relatively subtle changes as regards the scope of the exemption from VAT of services.
Following the TNT decision by the European Court of Justice (ECJ) the Royal Mail is unable to exempt all of its services (effective from 31 January 2011) and must charge VAT on services that fall outside the “universal postal service”. Although it remains to be seen just how this impacts on the overall cost to certain charities (it is a subtle financial calculation), it is not regarded as good news overall.
On the other hand, an exemption which ought to have existed within the UK legislation, under EU law, namely for shared services between two or more exempt bodies, is now on the agenda for HMRC consideration. They have promised to commence discussions with various parties as to how this exemption can be introduced with sufficient safeguards against avoidance. If these talks are successful, the result would be a major freeing-up of arrangements for closer co-operation between two or more charities, or movements towards merger on their part. I have more to say on staff sharing below.
The international dimension
The effective scope of VAT seemed to increase with effect from January 2010 with the introduction of the revised international service rules. In particular the circumstances in which the reverse charge bites on charities has increased, and (subject to certain ingenious countervailing arguments) any VAT-registered charity is subject to reverse charge on qualifying services irrespective of whether these are to be used for business purposes. In addition, certain categories of activity which were arguably within the reverse charge service rules prior to 2010, but might have been thought not to have been, fell unequivocally within that category from January 2010 onwards. Significant extra VAT therefore appears to be payable on services which were sheltered by that ambiguity, but which are now unequivocally caught. It was noted, in particular, that schools and colleges which used marketing agents to source students and pupils from abroad were subject to a reverse charge which did not apply prior to January 2010.
Other services, largely general management and administration, are now caught by the reverse charge whereas before 2010 they were not. The new rules also bring reporting requirements in the shape of European Sales Lists for services exported to EU-based customers.
HMRC has been forced to intervene with regard to an anomaly created by the new rules concerning freight transport taking place outside the EU. The new rules did not provide a zero-rate relief for such services when provided by a company administratively based in the UK to a UK charity. HMRC applied a sticking plaster to this anomaly with effect from 15 March 2010 by allowing the “use and enjoyment” rules to deem the supply to be outside the UK and thus free of VAT. This leaves a period of some 11 weeks in which tax technically arises on that supply, and also creates a concession which is in a direct contradiction of European law. It is an unhappy situation.
Looking forward, there will be minor changes to the place of supply rules for services related to exhibitions, conferences, and live performances. Charities operating in these sectors will want to obtain advice.
Another potentially unhappy situation relates to joint staff employment contracts. Despite the legal undesirability of joint employment contracts, these have increasingly been used by two (or more) charities which seek to co-operate in order to reduce costs without losing their identity in a full-scale merger. Commonly they will share their staff to rationalise their back office, and enter into joint contracts of employment so that the recouping of the bare staff costs does not generate VAT.
There was some concerning news, a few years ago, that HMRC were beginning to attack such arrangements where they did not exist merely within a corporate group, and we saw the result of this HMRC disapproval in the case of CGI (Europe) Limited where joint employment contracts had been used as between an IT service company and an insurance company in order, ostensibly, to remove VAT from the staff cost element of the IT outsourced service. The tribunal disapproved of this arrangement and decided that the service was fully subject to VAT.
Although that example is a far cry from charity sharing staff, the basis of the decision creates an element of risk for charities. Essentially, where one of the employers is controlling the staff and then utilises those staff on the affairs of the other employer, the joint contracts of employment relief is questionable. Accordingly, charities that share staff should go to some lengths to prove that the staff work at any one time under the direction of the charity on whose affairs it is working rather than under the direction of only one of the charities when doing all their work. At the time of writing HMRC has not commented further, but it would be helpful if they made a clarification.
Partial exemption deregulation continued in 2010 with a new simplified de minimis test which will be of help to only a small proportion of charities, but which is welcome nonetheless. We also saw the demise of Lennartz accounting for charities with effect from 22 January 2010, and Lennartz is to be phased out for all classes of taxpayer with effect from January 2011. It will be replaced with a capital goods adjustment scheme approach to non-business purchase VAT, thus increasing fairness but at the same time increasing complexity.
Charities, together with all classes of taxpayer, will be glad to hear that there is now a general presumption that the tax tribunal can hear cases relating to “legitimate expectation” arising from the conduct of HMRC. Up until 2010, it was generally thought that a tax tribunal could only decide a point of law and not consider the conduct of HMRC. This now appears universally to have been superseded, and makes it much more practical to take cases which are analogous to judicial review, but via the tax tribunal rather than directly to the High Court.
While not being a particularly dramatic year in this area, the Advocate General’s opinion in the leasing case (Weald) which was published during October looks likely to help define the sheer extent of an “abuse” in the context of avoidance planning. HMRC’s desire was that any leasing structure involving a captive leasing company providing leased goods to a partly exempt owner would be branded an “abuse”. The Advocate General thinks this goes too far. In his view there is no abuse simply in spreading VAT costs over time (HMRC take note!), but it is an abuse to arrange for sub-open market value leasing charges to deliver an overall reduced tax burden. As it happens, the Weald case involved precisely that. It was only HMRC’s desire to kill two birds with one stone that caused it to argue that leasing was abusive as such.
An opinion of this kind is not case law unless and until it is supported by the European Court. By the time you read this, we may know if the ECJ followed suit, but my prediction is that they will.
Electronic VAT return filing and payment became compulsory in April 2010, for all but the smallest organisations.
New penalties were introduced in April 2010. The old 15 per cent penalty for failure to register for VAT on time gave way to penalties geared to the degree of culpability in failing to do so. But the penalties are potentially a great deal higher. As regards other more general penalties that have applied since 2009, and which apply where an error has been “careless”, there has been insufficient evidence as yet to determine a working definition of “careless”. Many fear that HMRC will gravitate in the direction of demanding explanations in each case as to why an error is not actually careless. Charities that have undertaken unfamiliar activities can expect HMRC to look on any resultant errors as being “careless” unless they have either sought HMRC’s opinion or taken professional advice. Unlike the old mis-declaration penalty, voluntary disclosure does not preclude the penalty.
The mode of calculation of interest payable by HMRC in cases of official error is still uncertain following the referral by a UK court of the case to the European Court of Justice. The issue is whether the calculation should be on a compound basis or should be simple. The question seems simple, and the answer should be “compound”. But we wait to see.
It was perhaps inevitable that HMRC would commission research into the impact of the temporary 15 per cent rate of VAT which applied during 2009. Last year I commented that: “the benefit to the economy is unquantifiable, though many observers feel that there would be nothing to quantify”. Well, the official report basically substantiates that appraisal. Evidence of an impact on consumer buying habits, or any positive impact that has had on business, was extremely scant. No doubt that fact had an adverse impact on some charities but looking positively, it certainly made for cheaper purchases for the many charities which are unable to reclaim their VAT.
Overall this was a turbulent year for VAT developments and there is plenty that needs to be bedded down over the months to come. Will 2011 be any simpler? I shall let you know this time next year.