July's round up of the latest tax investigation news and cases:
An ongoing Court of Appeal case with the Royal Opera House London has concluded that they could not include sales of food and drink when deducting VAT as they were not tied to any production costs.
The Upper Tribunal favoured HMRC and rejected the Opera House's claim of deducting a VAT totaling £532,069 paid on supplies.
This was over the time period of 1 June 2011 and 31 August 2012.
The Upper Tribunal rejected the Royal Opera House’s submission that a direct and immediate link was established because the production costs attracted customers to two different supplies of catering and performance.
There have been many appeals challenging HMRC’s decision to override VAT deductions saying that HMRC ‘acted unfairly and unreasonably in disallowing the recovery on input VAT,’ claiming that these should be seen as tax exemption production costs as there is a direct link to the foundation’s taxable revenue streams.
In April 2020, HMRC appealed to the Upper Tribunal when they agreed in May 2019 that supplies did create a link and that some of the VAT on the production costs was recoverable.
The case references the Principal VAT Directive, as interpreted by the Court of Justice of the European Union (CJEU) and by UK domestic courts.
It directly refers to art 1.2 of the Principle VAT Directive which states: ‘On each transaction, VAT, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of VAT borne directly by the various costs components’ with article 168 stating that ‘in so far as the goods or services are used, for the purposes, of the taxed transactions of a taxable person, the taxable person shall be entitled, in the member state in which he carries out these transactions, to deduct the following from the VAT he is liable to pay the VAT due’.
General terms are used by the CJEU such as ‘cost components’ and determined ‘purposes’ which may seem vague when applied to actual supplies.
However it is established that there must be a ‘direct and immediate link’ between an input supply to be made ‘for the purposes of ‘ and output supply.
The Royal Opera House have continued to argue that the production costs are functioned to attract customers to pay and consume catering supplies
They believe that the catering helps to improve the experience and the staging of high productions, in turn compliments the financial support for the productions. Thus creating a ‘direct link’ between production and consumable supplies.
HMRC argued that this resulted in an unfair level of VAT recovery and that there was no sufficient immediate and direct link between the two areas. HMRC stated clearly that where an exempt supply helps promote a taxable supply, there is direct link between the inputs for the exempt and the taxable supply.
It stated: ‘The fact that the production costs enabled the Royal Opera House to make the catering supplies by attracting customers who bought tickets to the opera or ballet [to] partake of the catering supplies is not sufficient to establish a direct and immediate link’.
Furthermore, the Royal Opera House has created an appeal against the Upper Tribunals decision, stating its case that the Upper Tribunal applied the wrong approach of the direct and immediate test.
The Upper Tribunal rejected HMRC’s argument and has favoured Unicorn Tankships Ltd’s claim that a balancing charge of £12.5m did not occur after the sale of a ship subject to the tonnage tax regime.
HMRC argued that the balancing charge of £12.5m was payable on the disposal of a boat made by the shipping company Unicorn Tankship. HMRC amended the shipping company’s corporation tax return to argue this.
Unicorn Tankship left the tonnage tax regime and disposed of a ship. Previously they were subject to the tonnage tax regime and whilst in the regime they could not benefit from capital allowances deductions.
Firstly, the appeal of Unicorn Tankship against HMRC’s decision, went to the FTT with the issue at the heart of the appeal being which of the parties’ competing interpretations of Schedule 22 Finance Act 2000 and the capital allowances legislation in Part 2 paragraph 85, of the Capital Allowances Act 2001 was correct.
Paragraph 85 details what happens when companies leave tonnage tax. Stating that the ‘amount of qualifying expenditure of each asset used by the company for the purposes of its tonnage tax activities and held by the company when it leaves tonnage tax shall be taken to be the market value of the asset at the time the company leaves tonnage tax, or if less, the amount of expenditure incurred on the provision of the asset that would have been qualifying expenditure if the company had not been subject to tonnage tax’.
Under the tonnage tax regime, maritime fleet companies that meet certain conditions, can elect more favourable taxation of their profits, but while in the regime, cannot benefit from capital allowances deductions. After leaving the tonnage tax regime on 21 June 2010 Unicorn Tankships sold the ship in December 2010 for $23m (£16.3m).
HMRC argued that the cap does not operate. On its interpretation of Schedule 22 paragraph 85, the ‘qualifying expenditure’ for the purposes of section 62 amounts to $25m (£17.6m), which was greater than the total disposal amount of $23m.
Section 62 claims that ‘the amount of any disposal value required to be brought into account by a person in respect of any plant or machinery is limited to the qualifying expenditure incurred by the person on its provision’.
Unicorn Tankships argument was that the cap of ‘qualifying expenditure’, once Schedule 22 paragraph 85 is worked through according to Unicorn’s interpretation, is $3.7m (£2.6m), the total of disposal receipts, so capped at $3.7m, did not exceed the unrelieved qualifying expenditure of $3.7m so no balancing charge therefore arose.
The issue when determining the disputed balancing charge was the figure regarded as the ‘qualifying expenditure’ for the purposes of the cap on ‘disposal value’ in section 62, once the exit provisions of Schedule 22 paragraph 85 were taken into account.
Under the Capital Allowances Act, a balancing charge arises where there is an excess of the disposal value, capped at ‘qualifying expenditure’, over the available qualifying expenditure.
The FTT ruled against HMRC, favouring Unicorn Tankship’s interpretation of paragraph 85, stating that it was the ‘correct one’ as it ‘better reflects the language and structure of paragraph 85’.
Poundland has won a £2.15m VAT case against HMRC regarding a stock adjustment dispute. The First Tribunal found no closing stock adjustment necessary from switching from the old bespoke retail scheme in 2017.
Previously, a scheme ran between December 2002 and March 2017, which resulted in the retailer switching to a ‘new scheme’ based on a ‘very accurate and reliable’ EPOS system (electronic point of sale) on 27 March 2017.
Businesses earning an annual turnover of at least £100m, including Poundland, need to have a bespoke retail scheme agreed with the tax body.
Judge Jonathan Cannan of the first-tier tribunal comments : “Essentially, the issue between the parties is whether in calculating Poundland’s VAT liability for the final accounting period of the old scheme, an adjustment ought to be made to recognise the closing stock held by Poundland in its retail stores at the end of that period.”
HMRC claimed that Poundland failed to adjust its figures for the closing stock of zero-rated items in their final financial return which falls under the “old scheme”.
The allegations stated that the zero-rated sales were double counted from when they were moved to the store, and when they were sold following the change in schemes.
Moreover, HMRC did not recognise the opening stock adjustment that Poundland had been required to make when adopting the “old scheme” in 2002, going hand-in-hand with any closing stock assessments.
Judge Cannan said: “It is not to prevent double counting, it is to ensure consistency in the final period of operation of the DC2 [old] scheme where there has been an opening stock adjustment and subsequent annual adjustments.
“I agree with Mr. Hitchmough that the closing stock adjustment on ceasing to use DC2 works together with any opening stock adjustment.”
The VAT assessment had previously been made in the sum of £2,349,471 in 2018, before being amended down to £2,150,177 upon appeal.
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