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News
Customs news
VAT and partnerships
Business Brief 21/2004 clarifies Customs' position on two issues arising from the decision of the European Court of Justice in the German case of KapHag Renditefonds v Finanzamt Charlottenburg (Case C-442/01):
whether the issue of shares constitutes a supply for VAT purposes; and
the VAT position of contributions to partnerships.
News
Customs news
VAT and partnerships
Business Brief 21/2004 clarifies Customs' position on two issues arising from the decision of the European Court of Justice in the German case of KapHag Renditefonds v Finanzamt Charlottenburg (Case C-442/01):
whether the issue of shares constitutes a supply for VAT purposes; and
the VAT position of contributions to partnerships.
KapHag concerned the admission of a new partner into a partnership on payment of a capital contribution. The European Court held that no supply was being made by either the individual partners or the partnership to the incoming partner in return for the capital contribution.
The KapHag decision has been cited as authority for the view that an issue of shares by a company is similarly not a supply for VAT purposes. It is claimed that an issue of shares therefore falls outside of the terms of Item 6 of Group 5 of Schedule 9 to the VAT Act 1994. That item exempts from VAT: 'The issue, transfer or receipt of, or any dealing with, any security or secondary security ...'.
It is Customs' view that the formation or variation of a partnership arrangement is wholly distinguishable from the position where a company issues shares in return for consideration. KapHag was concerned solely with the issues surrounding a partnership. The VAT treatment of share issues has been considered by the Court of Appeal in Trinity Mirror plc [2001] STC 192 where it was held that an issue of shares by a company did constitute a supply of services for VAT purposes and these fall to be exempt under Item 6 of Group 5 of Schedule 9 to the Act. In most circumstances there will then be a restriction of input tax under the partial exemption rules.
In KapHag, the incoming partner was contributing cash in return for admission into the partnership, but it will often be the case that the contribution is in the form of other assets. The European Court's decision tacitly accepted the Advocate-General's opinion that the same principles would apply whether the contribution consisted of cash or other assets. Whatever the nature of the assets comprising the contribution, there is no reciprocal supply from the partnership. However, where the assets are not cash, the making of the partnership contribution may have other VAT consequences.
The Advocate-General was satisfied that there was 'no doubt that the new partner is effecting an act of disposal of his assets, for which the admission to the partnership is not the consideration'. Such a disposal can thus have VAT consequences when the partner contributing the assets is a VAT registered person. These consequences will vary depending on the nature of the assets being contributed.
KapHag establishes that nothing is provided by the partnership in return for the assets contributed, therefore any such disposal by the incoming partner is made for no consideration. The VAT Act provides that certain things are subject to VAT even when they are provided or done for no consideration. Customs' view is that all those provisions will still apply where there is no consideration when there is a contribution to partnership assets. A VAT registered person may therefore have to account for tax if he contributes assets to the partnership in the circumstances described in the Act.
In the past, there was uncertainty as to whether it was section 45(1), VAT Act 1994 that led to there being no supply from a partnership to an incoming partner. That section provides for the registration of partnerships in the following terms:
'The registration under this Act of persons:
(a) carrying on a business in partnership; or
(b) carrying on in partnership any other activities in the course or furtherance of which they acquire goods from other Member States:
may be in the name of the firm; and no account shall be taken, in determining for any purpose of this Act whether goods or services are supplied to or by such persons or are acquired by such persons from another Member State, of any change in the partnership.'
Partnerships in England and Wales have no legal identity. A new partner joining a partnership, or an old one leaving it, would result in a new partnership rather than change the composition of the existing one. Without section 45(1), deregistration and registration would be necessary every time a partner joined or left. The situation addressed by section 45(1) is therefore entirely different from that considered in KapHag.
(Customs Business Brief 21/2004 dated 10 August 2004.)
Retail export scheme
Customs Business Brief 23/2004 explains changes to the VAT retail export scheme — commonly advertised in United Kingdom shops as 'Tax Free Shopping'. Under the scheme, overseas visitors to this country, i.e. those from outside the European Community, can receive VAT refunds on goods that they have personally exported from the European Community.
Following a review of the scheme procedures, changes are being made to counter misuse and fraud and these also affect: the timing of completion of the VAT refund forms; the description of goods on the form; and the use of the scheme by overseas students and migrant workers.
The change concerning the entitlement of students and migrant workers will be introduced from
1 October 2004. Customs intend to be more flexible regarding the timing of the other changes, in order to allow retailers reasonable time to agree and make changes to their procedures and paperwork.
Customs Notice 704, VAT Retail Export Scheme, is being revised to reflect these changes.
(Business Brief 23/2004, 20 August 2004.)
