The post-Brexit Taxation (Cross-border Trade) Bill 2017-19 progresses to report stage, but concerns remain over potential issues with cashflow costs of imports from the EU following Brexit. Meanwhile, the CJEU has again had the chance to reaffirm the general principle that a single supply will attract a single rate of VAT. The decision in Hastings Insurance addresses the question of when a separate entity may be treated as a fixed establishment of an overseas company. Lastly, there are two recent cases involving questions concerning the VAT treatment of membership subscriptions, including the application of agency principles and the single supply rules.
Memberships seem to be an in vogue VAT topic at the moment – whether it is membership subscriptions, membership (or rather non-membership) of the EU or, indeed, membership of a VAT group. As trailed in its December 2017 consultation response document, HMRC is continuing to explore with invited representative bodies the possibility of a limited extension of the VAT grouping rules to certain partnerships and individuals, whilst ensuring that any changes to the existing control test used by HMRC to determine eligibility should not be to the detriment of the certainty provided by the current test. Subject to this caveat, expansion of the scope of VAT grouping to other entities that have close financial, economic and organisational links would, in principle, be welcome. We continue to eagerly await the outcome of this long-running consultation process.
The Public Bill Committee has recently reported the Taxation (Cross-border Trade) Bill 2017-19 without amendment to the House of Commons. It will now return to the House for the report stage.
A particular aspect that merited debate was the application of the VAT rules to imports of goods from the EU following Brexit. Such imports are currently dealt with by way of acquisition VAT accounting, which is simply processed as part of the normal VAT return by a UK VAT registered business. Following Brexit, this would not automatically be the case, however. If no alternative provision is made, the normal import VAT rules would apply, which in principle require payment of import VAT at the time of the import. The issue was raised at the time of the November 2017 Budget and the chancellor promised that the government would look at options to mitigate the cash flow impact.
The matter was again raised during the Public Committee debate of the Bill, when opposition members put forward amendments to the Bill seeking to ensure that the position would be reviewed and to put in place an alternative duty deferment scheme. Whilst the amendment was defeated, the financial secretary to the Treasury, Mel Stride, did confirm that the government was sympathetic to the issue and would look to introduce a form of duty deferment or similar.
Why it matters
Although payment of import VAT would only be a cashflow disadvantage for a fully taxable business (which will be able to recover that import VAT on its next VAT return), it is clearly both a significant and administratively burdensome issue. It is clearly an issue that the government must get right, albeit much will depend on what (if any) customs arrangements the UK can negotiate with the EU.
In Hastings Insurance Services Ltd v HMRC [2018] UKFTT 27, the First-tier Tribunal (FTT) has held that a UK company (Hastings) carrying out client facing insurance selling and claims handling activities for a related Gibraltar insurer (Advantage) was not a ‘fixed establishment’ of that Gibraltar entity for VAT purposes.
Advantage had its own board and decided on what risks to insure and what prices to charge. It entered into policies with UK customers (through Hastings) and met claims made by insured customers. Hastings also had its own separate board and business functions. It dealt with the customer facing side of the insurance business for Advantage under commercially agreed contractual arrangements. It sold insurance policies to customers on behalf of Advantage and handled subsequent smaller claims. It was recompensed via commissions, together with performance related commission relating to claims handling. It also acted as a broker and claims handler for other insurers, though on a much smaller scale.
Hastings contended that the input VAT, which it incurred in relation to its supplies to Advantage was recoverable as it related to its insurance related supplies made to a taxable person outside the EU (under the input VAT recovery rules relating to ‘specified supplies’). HMRC argued that Hastings effectively amounted to a ‘fixed establishment’ of Advantage in the UK and that the input VAT was connected with exempt supplies made to the UK fixed establishment.
The FTT held that despite the close economic, commercial and operational links, the two entities had distinct functions and operated separately and independently, in such a way that it could not be said that Advantage had the required level of control over Hastings (or alternatively Hastings was not acting independently of Advantage) for Hastings to amount to a fixed establishment of Advantage. Whilst the totality of the functions required to operate the insurance business were essentially split between the UK company and the related Gibraltar entity, the two sides of the business remained separate and the UK company acted as a separate business with its own commercial aims.
Why it matters
The decision highlights the importance of having in place an independent management structure and contractual agreements which are negotiated on a commercial basis to avoid the implication that the UK service provider is a fixed establishment of an offshore supplier. Nevertheless, it seems likely that HMRC may choose to appeal the decision. This kind of ‘offshore loop’ structure, as HMRC refers to it, remains listed as a ‘hallmark’ in the recently revised disclosure of tax avoidance schemes for VAT and other indirect taxes rules, and has long been a target for HMRC.
The Court of Justice of the European Union (CJEU) has again confirmed that where there is a single supply, it is necessary to apply a single VAT rate to that supply. In Stadion Amsterdam v Staatssecretaris van Financiën (Case C-463/16), it was found that this remains the case even where it is possible to determine the price for each ‘concrete and specific’ element individually from the full price paid by the customer.
The decision was in response to a Dutch referral concerning payments made for a tour of AFC Ajax’s football stadium, which included, as an ancillary element, entry to the Ajax Museum of Football, the ‘World of Ajax’.
The taxpayer in this case argued that relying on the Talacre Beach (Case C-251/05) and Commission v France (Case C-94/09) cases the museum entrance was a ‘concrete and specific’ aspect of a single supply, which could attract a separate, lower rate of VAT.
Unsurprisingly, the CJEU noted that the Talacre Beach and Commission v France cases involved a very specific and limited exception to the general principle that one rate of VAT should be applied to all aspects of a single supply. The only exception to the general principle is where there are statutory provisions which very clearly, through specific language, have the effect of excluding the application of a single rate of VAT in respect of a particular element of the single supply.
Why it matters
Where a single supply, such as the one in this case, comprises two distinct elements – one principal and the other ancillary, which if supplied separately would be subject to different rates of VAT – the supply must be taxed solely at the rate of VAT applying to the single supply, based on the rate applicable to the principal element. That is the case even if the price of each element within the full price paid by the customer can be identified.
Recent decisions have highlighted a number of difficult issues that can arise in relation to the VAT treatment of membership subscriptions. In principle, the payment of a subscription by a member to an organisation will be consideration for a supply of membership benefits. It may then be significant to determine whether that is a single supply of a membership (likely to be standard rated) or a multiple supply of individual membership benefits (where the consideration must be apportioned). This question arose in relation to membership subscriptions made to the Harley Owners Group (HOG) in Harley-Davidson Europe Ltd v HMRC [2017] UKFTT 873.
On the particular facts, the tribunal considered that the individual benefits provided (particularly a magazine subscription and Harley-Davidson badges/pins) were too significant in themselves to allow the supply to be characterised simply as a single supply of membership. Indeed, many of the benefits were better described as designed to allow better enjoyment of Harley-Davidson bikes, but not better enjoyment of membership of HOG itself.
In the National Federation of Occupational Pensioners (NFOP) v HMRC [2018] UKFTT 26, the question was whether branches were persons independent from the NFOP for VAT purposes; and, if so, whether amounts received by NFOP but then transferred to those branches (branch rebate payments) were part of the consideration received by NFOP for supplies of membership benefits.
On the first question, the FTT held that the branches in this case were separate legal entities for VAT purposes from NFOP. The branches had their own rules, their own branch committees, their own identifiable set of members and their own funds. The branches were economically independent from NFOP for VAT purposes, as they had their own income and assets and were fully responsible for managing their own resources.
However, NFOP failed to show that it received the branch rebate payments as agent for the branches. The full subscription, including the branch rebate, was set by NFOP. NFOP’s regulations defined the ‘branch rebate’ as an amount paid to branches ‘from the subscriptions’ received by NFOP; and the Branch Guide equally described the branch rebate as an amount paid to assist in the running of branches. These arrangements and descriptions were only consistent with the payments being made by NFOP from its own resources rather than agency. Accordingly, the part of the membership subscription which funded branch rebate payments to branches was received by NFOP for supplies of membership benefits.
Why it matters
Cases concerning single supplies and tripartite arrangements are essentially fact specific. However, their VAT treatment can certainly be affected by advance identification of the issues. Highlighting where particular individual membership benefits are significant and can be enjoyed in themselves will make it more likely that those benefits will attract separate VAT treatment. The NFOP decision fits into a long-running series of cases dealing with tripartite arrangements, which depend heavily on the particular contractual arrangements. As such, proper contractual recognition of the branch rebates as amounts due to the branches and merely collected by NFOP in the organisational documentation may, in principle, have achieved a better VAT result, provided it also accorded with economic reality.
The post-Brexit Taxation (Cross-border Trade) Bill 2017-19 progresses to report stage, but concerns remain over potential issues with cashflow costs of imports from the EU following Brexit. Meanwhile, the CJEU has again had the chance to reaffirm the general principle that a single supply will attract a single rate of VAT. The decision in Hastings Insurance addresses the question of when a separate entity may be treated as a fixed establishment of an overseas company. Lastly, there are two recent cases involving questions concerning the VAT treatment of membership subscriptions, including the application of agency principles and the single supply rules.
Memberships seem to be an in vogue VAT topic at the moment – whether it is membership subscriptions, membership (or rather non-membership) of the EU or, indeed, membership of a VAT group. As trailed in its December 2017 consultation response document, HMRC is continuing to explore with invited representative bodies the possibility of a limited extension of the VAT grouping rules to certain partnerships and individuals, whilst ensuring that any changes to the existing control test used by HMRC to determine eligibility should not be to the detriment of the certainty provided by the current test. Subject to this caveat, expansion of the scope of VAT grouping to other entities that have close financial, economic and organisational links would, in principle, be welcome. We continue to eagerly await the outcome of this long-running consultation process.
The Public Bill Committee has recently reported the Taxation (Cross-border Trade) Bill 2017-19 without amendment to the House of Commons. It will now return to the House for the report stage.
A particular aspect that merited debate was the application of the VAT rules to imports of goods from the EU following Brexit. Such imports are currently dealt with by way of acquisition VAT accounting, which is simply processed as part of the normal VAT return by a UK VAT registered business. Following Brexit, this would not automatically be the case, however. If no alternative provision is made, the normal import VAT rules would apply, which in principle require payment of import VAT at the time of the import. The issue was raised at the time of the November 2017 Budget and the chancellor promised that the government would look at options to mitigate the cash flow impact.
The matter was again raised during the Public Committee debate of the Bill, when opposition members put forward amendments to the Bill seeking to ensure that the position would be reviewed and to put in place an alternative duty deferment scheme. Whilst the amendment was defeated, the financial secretary to the Treasury, Mel Stride, did confirm that the government was sympathetic to the issue and would look to introduce a form of duty deferment or similar.
Why it matters
Although payment of import VAT would only be a cashflow disadvantage for a fully taxable business (which will be able to recover that import VAT on its next VAT return), it is clearly both a significant and administratively burdensome issue. It is clearly an issue that the government must get right, albeit much will depend on what (if any) customs arrangements the UK can negotiate with the EU.
In Hastings Insurance Services Ltd v HMRC [2018] UKFTT 27, the First-tier Tribunal (FTT) has held that a UK company (Hastings) carrying out client facing insurance selling and claims handling activities for a related Gibraltar insurer (Advantage) was not a ‘fixed establishment’ of that Gibraltar entity for VAT purposes.
Advantage had its own board and decided on what risks to insure and what prices to charge. It entered into policies with UK customers (through Hastings) and met claims made by insured customers. Hastings also had its own separate board and business functions. It dealt with the customer facing side of the insurance business for Advantage under commercially agreed contractual arrangements. It sold insurance policies to customers on behalf of Advantage and handled subsequent smaller claims. It was recompensed via commissions, together with performance related commission relating to claims handling. It also acted as a broker and claims handler for other insurers, though on a much smaller scale.
Hastings contended that the input VAT, which it incurred in relation to its supplies to Advantage was recoverable as it related to its insurance related supplies made to a taxable person outside the EU (under the input VAT recovery rules relating to ‘specified supplies’). HMRC argued that Hastings effectively amounted to a ‘fixed establishment’ of Advantage in the UK and that the input VAT was connected with exempt supplies made to the UK fixed establishment.
The FTT held that despite the close economic, commercial and operational links, the two entities had distinct functions and operated separately and independently, in such a way that it could not be said that Advantage had the required level of control over Hastings (or alternatively Hastings was not acting independently of Advantage) for Hastings to amount to a fixed establishment of Advantage. Whilst the totality of the functions required to operate the insurance business were essentially split between the UK company and the related Gibraltar entity, the two sides of the business remained separate and the UK company acted as a separate business with its own commercial aims.
Why it matters
The decision highlights the importance of having in place an independent management structure and contractual agreements which are negotiated on a commercial basis to avoid the implication that the UK service provider is a fixed establishment of an offshore supplier. Nevertheless, it seems likely that HMRC may choose to appeal the decision. This kind of ‘offshore loop’ structure, as HMRC refers to it, remains listed as a ‘hallmark’ in the recently revised disclosure of tax avoidance schemes for VAT and other indirect taxes rules, and has long been a target for HMRC.
The Court of Justice of the European Union (CJEU) has again confirmed that where there is a single supply, it is necessary to apply a single VAT rate to that supply. In Stadion Amsterdam v Staatssecretaris van Financiën (Case C-463/16), it was found that this remains the case even where it is possible to determine the price for each ‘concrete and specific’ element individually from the full price paid by the customer.
The decision was in response to a Dutch referral concerning payments made for a tour of AFC Ajax’s football stadium, which included, as an ancillary element, entry to the Ajax Museum of Football, the ‘World of Ajax’.
The taxpayer in this case argued that relying on the Talacre Beach (Case C-251/05) and Commission v France (Case C-94/09) cases the museum entrance was a ‘concrete and specific’ aspect of a single supply, which could attract a separate, lower rate of VAT.
Unsurprisingly, the CJEU noted that the Talacre Beach and Commission v France cases involved a very specific and limited exception to the general principle that one rate of VAT should be applied to all aspects of a single supply. The only exception to the general principle is where there are statutory provisions which very clearly, through specific language, have the effect of excluding the application of a single rate of VAT in respect of a particular element of the single supply.
Why it matters
Where a single supply, such as the one in this case, comprises two distinct elements – one principal and the other ancillary, which if supplied separately would be subject to different rates of VAT – the supply must be taxed solely at the rate of VAT applying to the single supply, based on the rate applicable to the principal element. That is the case even if the price of each element within the full price paid by the customer can be identified.
Recent decisions have highlighted a number of difficult issues that can arise in relation to the VAT treatment of membership subscriptions. In principle, the payment of a subscription by a member to an organisation will be consideration for a supply of membership benefits. It may then be significant to determine whether that is a single supply of a membership (likely to be standard rated) or a multiple supply of individual membership benefits (where the consideration must be apportioned). This question arose in relation to membership subscriptions made to the Harley Owners Group (HOG) in Harley-Davidson Europe Ltd v HMRC [2017] UKFTT 873.
On the particular facts, the tribunal considered that the individual benefits provided (particularly a magazine subscription and Harley-Davidson badges/pins) were too significant in themselves to allow the supply to be characterised simply as a single supply of membership. Indeed, many of the benefits were better described as designed to allow better enjoyment of Harley-Davidson bikes, but not better enjoyment of membership of HOG itself.
In the National Federation of Occupational Pensioners (NFOP) v HMRC [2018] UKFTT 26, the question was whether branches were persons independent from the NFOP for VAT purposes; and, if so, whether amounts received by NFOP but then transferred to those branches (branch rebate payments) were part of the consideration received by NFOP for supplies of membership benefits.
On the first question, the FTT held that the branches in this case were separate legal entities for VAT purposes from NFOP. The branches had their own rules, their own branch committees, their own identifiable set of members and their own funds. The branches were economically independent from NFOP for VAT purposes, as they had their own income and assets and were fully responsible for managing their own resources.
However, NFOP failed to show that it received the branch rebate payments as agent for the branches. The full subscription, including the branch rebate, was set by NFOP. NFOP’s regulations defined the ‘branch rebate’ as an amount paid to branches ‘from the subscriptions’ received by NFOP; and the Branch Guide equally described the branch rebate as an amount paid to assist in the running of branches. These arrangements and descriptions were only consistent with the payments being made by NFOP from its own resources rather than agency. Accordingly, the part of the membership subscription which funded branch rebate payments to branches was received by NFOP for supplies of membership benefits.
Why it matters
Cases concerning single supplies and tripartite arrangements are essentially fact specific. However, their VAT treatment can certainly be affected by advance identification of the issues. Highlighting where particular individual membership benefits are significant and can be enjoyed in themselves will make it more likely that those benefits will attract separate VAT treatment. The NFOP decision fits into a long-running series of cases dealing with tripartite arrangements, which depend heavily on the particular contractual arrangements. As such, proper contractual recognition of the branch rebates as amounts due to the branches and merely collected by NFOP in the organisational documentation may, in principle, have achieved a better VAT result, provided it also accorded with economic reality.
