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Employees' fuel
A change to the rules governing the recovery of VAT by employers on road fuel, following a European Court judgment in March 2005, has been announced; see also 'VAT: Not a total write off' by Dave Jordan and Update, Taxation, 5 May 2005, page 133 and 27 January 2005, page 392 respectively. This new secondary legislation allows employers to recover the VAT on fuel purchased by their employees, which is explicitly for use in their business in the making of taxable supplies, as they could previously, as long as they hold a valid VAT invoice in support of the claims.
Up to now, the recovery of VAT on fuel by businesses, purchased by employees from their own funds, was approved through existing UK legislation. However, the European Court found that this legislation was not compatible with the relevant provisions of the Sixth VAT Directive. This was because it did not ensure that the VAT recovered related solely to fuel used for the purpose of the employer's business in making taxable supplies, and did not require the employer to hold a VAT invoice.
The new secondary legislation meets the terms of the Court's findings, and the only additional requirement, for businesses that do not already do so, is that VAT invoices must be retained in support of their claims.
HMRC have been 'remarkably kind', says Dave Jordan, as this means that businesses will still be able to recover the VAT on employees' mileage expenses, as long as they have a VAT invoice for the fuel.
HMRC press release and Business Brief 22/2005 dated 1 December 2005
Forex
HMRC have decided not to appeal the tribunal's decision regarding forex transactions in Willis Pension Fund Trustees Ltd (19183).
In order to hedge or minimise the pension scheme's exposure to adverse exchange rate fluctuations, Willis entered into foreign exchange deals with various UK banks, using the services of a third party to conduct the transactions. Willis did not offer a spread or charge a separate fee or commission, but relied on the movements in exchange rates in order to minimise their losses and, where possible, make a profit.
The tribunal had to decide whether Willis provided any service to the counterparty when it entered into a foreign exchange transaction. It decided that any profit retained by Willis from the forex transactions was not the consideration for a supply because it resulted from fluctuations in market rates.
HMRC accepts this decision and says that it will apply to any business entering forex transactions on the same basis as Willis. Further HMRC guidance will be issued in due course as to whether this decision has wider application.
With regard to input tax, HMRC accept that any VAT paid on associated costs of forex hedging transactions such as those carried out by Willis relates to the business as a whole. It is residual input tax, which can be recovered subject to the partial exemption method used.
Claims for input tax in respect of past forex transactions can be made subject to the three-year capping rules. Businesses that have recovered the associated input tax because they have entered into forex transactions in a similar way to Willis with non-EU counterparties, may need to consider whether all or part of that input tax should now be restricted following this decision.
Business Brief 21/2005 dated 23 November 2005
Bookit
Customers wishing to purchase tickets to a see a film at an Odeon cinema are able to book by telephone or Internet paying an additional fee. Bookit deals with such bookings. The tribunal found that Bookit was providing a taxable ticket booking service to Odeon as part of its agency, and a taxable credit card handling service to the customer in return for the additional fee. Bookit appealed against the decision concerning the liability of the credit card handling service.
The High Court, in overturning the tribunal's decision, found that Bookit was carrying out an essential preliminary service prior to a remote payment being effected which was exempt under European legislation as a transaction concerning transfers of money and exempt under UK legislation as the provision of financial intermediary services.
HMRC have been granted leave to appeal this decision to the Court of Appeal.
It remains HMRC's view that the additional amount charged by Bookit to the cinema-goer is properly subject to VAT at the standard rate.
The High Court found that services, such as the provision of technical or electronic assistance, or card handling services as an agent or a subcontractor to one of the parties to the transaction, did not fall within the exemption. Such services, therefore, remain standard rated.
Until the liability of the supply made by Bookit to the cinema goer is finally settled, businesses making identical supplies to those of Bookit will not have to account for VAT in respect of these fees. Where businesses apply the exemption, HMRC may issue assessments for the tax they believe is due to protect their position. No action will be taken to enforce payment of such assessments until the final outcome of the Bookit case is known.
Based on the High Court decision, businesses that have accounted for and paid VAT on similar supplies may submit claims for overpaid tax. HMRC will seek claimants' agreement that such claims be held over until the Court of Appeal's decision. Otherwise, HMRC will make a protective assessment for any amounts repaid.
Business Brief 21/2005 dated 23 November 2005
Kretztechnik
Business Brief 12/05 explained HMRC's position on the VAT treatment of share issues and subsequent input tax recovery, following the decision in Kretztechnik AG v Finanzamt Linz (Case C-465/03), see Taxation, 23 June 2005, page 317. In brief HMRC said that companies making a new issue of shares to raise capital for their business, in circumstances identical to those in Kretztechnik, were not making any supply but were entitled to treat the VAT on the costs of the issue as input tax. Companies that make both taxable and exempt supplies should recover a proportion of the input tax in accordance with their partial exemption method that applied at the time of the issue.
Business Brief 21 explains that HMRC now accepts that other types of share transactions are also not a supply for VAT purposes. These are as follows:
- transactions involving issues of other types of shares;
- transactions involving issues by different types of companies;
- transactions involving the issue of financial instruments or securities other than shares;
- share and other securities issued in other situations.
Companies can claim for unrecovered input tax in respect of past issues of shares and other securities.
Transfers of existing shares for a consideration will continue to be exempt supplies provided that the supplies occur in the course of business activity. In such cases, the input tax that relates to the transfer will be exempt input tax and only recoverable to the extent that the shares have been sold to purchasers outside the EU.
There are no changes to the exemption for financial services arising from the judgment. Transactions that are no longer supplies, such as issues of shares, will no longer have a corresponding VAT liability such as exemption. However, intermediary and underwriting services in relation to such transactions will continue to be exempt.
Following Kretztechnik, from 1 January 2006, only arranging an issue of shares or other securities on behalf of an issuer belonging outside the EU will be treated as specified supplies. This is because the underlying issue of shares by the intermediary's customer to the non-EU purchaser is no longer a supply. However, intermediary services to their own customers, as long as they belong outside the EU, is still a specified supply under the Specified Supplies Order.
There is no change to the position of intermediaries who arrange supplies of existing shares or other securities.
In Water Hall Group plc (18007), a VAT tribunal found that, when shares were issued to a UK company acting as nominee for purchasers belonging outside the EU, the input tax relating to those shares could not be reclaimed by the issuer because the supply was to the UK nominee rather than the non-EU purchasers. In Business Brief 02/05, see Taxation, 24 February 2005, page 499, HMRC announced that businesses should apply the Water Hall decision to issues of shares in the same circumstances. HMRC have reviewed this decision in the light of Kretztechnik, and concluded that Water Hall no longer applies as the question of who is making or receiving the supply no longer arises. HMRC consider that transactions involving sales of existing shares are fundamentally different from share issues because they are capable of constituting supplies. Such transactions were not considered in Water Hall and that decision does not therefore apply to them. Supplies of existing shares are to be regarded as being made to or by the person who actually makes the purchase or sale of the shares. Where the actual purchaser is not known to the seller, the place of belonging of a nominee account for the purchaser, if known, may be used to determine the place of supply.
Business Brief 21/2005 dated 23 November 2005
