INDIRECT TAX VOICE Issue 03 – August 2015

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Indirect Tax Voice | Issue 03 | August 2015 2

Chair’s view .............................................................................................................. 3

Peter Dylewski takes a metaphysical view of Tax.

Think again ............................................................................................................... 6

Angela Lang-Horgan examines new jurisdiction which will impact on the VAT treatment of chain transactions

between the UK and Germany

Your new Indirect Tax Voice...................................................................................... 9

We are changing how we will deliver ITV – we think you will like it.

What’s on ............................................................................................................... 10

An update on work in progress and your chance to contribute to the work of the CIOT.

What we have done ................................................................................................ 17

A summary of work done over the last few months with links to the submissions made.

Events ..................................................................................................................... 19

CIOT Indirect Taxes Sub-Committee meeting 18 September 2015 Indirect Taxes Conference 6 October 2015

Articles in Tax Adviser ............................................................................................. 20

A summary of, and links to, recent articles with an Indirect Taxes slant.

Contact us ............................................................................................................... 22

Indirect Tax Voice

Issue 03 – August 2015

CONTENTS

Indirect Tax Voice | Issue 03 | August 2015 3

CHAIR’S VIEW

A warm welcome to this edition of Indirect Tax Voice.

It has been a busy and exciting time of course for practitioners of late. The

questions thrown up by cases such as Skandia and Crédit Lyonnais mean

taxpayers across Europe now urgently need help to navigate a practical way

through a labyrinth of indirect tax uncertainty. In the past I have compared some

of the debates and battles over the financial services exemptions with the great

theological schisms of history. Over the years various heresies have arisen, been

challenged and either quelled or adopted. To an extent the interpretation of the

exemptions in many areas becomes a matter of personal faith until occasionally

the CJEU speaks ex cathedra on the issue.

It occurs to me though that with the level of uncertainty and debate now

reaching down to the most basic concepts, such as the nature of a taxable

person and the proper determination of use, religion should now give way to

science. Borrowing my eldest son’s New Scientist, I was interested to read

recently about the “new physics” – and various unifying theories which seek to

reconcile the competing ideas about the fundamental nature of the universe. As

with the European Union’s own Court of Justice, any new theory which seems to

work will not be creating rules, but simply discovering what has always been the

case…

At the same time though, as in the scientific world, it feels as though all

stakeholders should join forces and work together to find the right unifying

theory – or at least the best solution which seems to work based on the available

data. That is taxpayers’ best hope for arriving at a more certain position as soon

as possible. And I mean taxpayers in the broadest possible sense. Any fiscal

surprises which impact the government’s finances affect all of us as ordinary

taxpayers. To borrow a phrase from somewhere or other, “we are all in it

together”.

Peter Dylewski Chairman Indirect Taxes Sub-Committee

Indirect Tax Voice | Issue 03 | August 2015 4

The CIOT and you in your capacity as members have a

crucial role to play here. The point was brought home

to me whilst queuing for the CIOT’s Parliamentary

Reception in June. A smartly dressed official was

directing the crowds to the various events: “Pensions

– to the right”, “Taxes – to the left”. Whilst I waited

for him to call out “Death – straight ahead”, I struck

up a conversation with the lady next to me. When

asked whether she had any role in the Institute she

commented that she worked for “the Opposition”

(HMRC). Perhaps against the backdrop of the House of

Commons, that makes sense - two groups with similar

backgrounds working within a common framework

and there to challenge one another in the best

interests of the country. Sometimes the two sides may

even agree on an issue! The comment perhaps

accurately reflects the traditional adversarial view of

the profession and the tax authority. However

itequates the CIOT exclusively with the profession – a

misconception which needs to be strongly challenged.

The event programme pointed out that HMRC is the

8th largest UK employer of CTAs and Chris Jones, our

President, proudly emphasised that we have

maintained our quota of 2 MP CTAs. The Institute is a

non-partisan charity with the aim of working towards

improving the tax system for all stakeholders. It needs

input from members on all sides of “the House” to

achieve this – and we need to be speaking to all

relevant policymakers. To that end in the last few

months alone members of the Sub-Committee have

made representations to the Financial Secretary, HM

Treasury and the HMRC VAT Directorate on key

indirect tax issues. A meeting with the EU Commission

is planned for September and I am delighted to

confirm that Stéphane Buydens of the OECD will

Indirect Tax Voice | Issue 03 | August 2015 5

speak on their future indirect tax work plans at the

CIOT Indirect Tax Conference on 6 October 2015 at

the Park Lane Hilton in London (Early Bird Discount

still available!).

We are also in discussion with the Institute’s HMRC

Branch and the HMRC Tax Academy to explore

opportunities to ensure CTAs of all flavours can

collaborate more effectively. We intend to broaden

and deepen our engagement with all these key

stakeholders in the coming months. I am also very

pleased to welcome a number of new core and virtual

members to the Sub-Committee including

distinguished academics and practitioners from

commerce. I hope all members will continue to give as

much of their time and insight as they can to help the

Institute achieve its very laudable aims.

I wish you all a long hot summer!

Peter Dylewski

Chair

Indirect Tax Voice | Issue 03 | August 2015 6

THINK AGAIN

Angela Lang-Horgan examines new jurisdiction

which will impact on the VAT treatment of chain

transactions between the UK and Germany

On February 25th the highest German tax court, the

Bundesfinanzhof (BFH), decided on the VAT

implications of an EC chain transaction involving the

UK (XI R 30/13). Now you might think: Who cares

what a court in another country says! Well, bearing in

mind that Germany is the second most important

trade partner overall for the UK after the US and that,

according to the German Foreign Office, the imports

and exports between the two countries of goods

alone amounted to £96 billion in 2014 you might want

to think again.

THE CASE XI R 30/13

At first glance, the case seems to be rather simple and

will probably happen numerous times every day. But

this is exactly what constitutes its dangerously

contagious potential. A German company (A) sold cars

to a British company (B) which in turn sold it to

another British company (C). A freight forwarder

instructed and paid by C picked up the vehicles in

Germany and brought them to the UK. Both facts

could be documented. All three companies used their

national VAT Identification Numbers. A treated the

delivery to B as a zero-rated EC supply, B charged

British VAT to C. Everything seemed to be fine until

the German tax office (Finanzamt, FA) in charge of A

made a VAT inspection. The FA argued that the EC

supply took place between B and C as C had picked up

the goods. This assessment of the VAT situation would

have, maybe incomprehensible for a pragmatic British

mind, likely gone undisputed in the decades before

2010. However, then the European Court of Justice

started to gradually change the views of the German

courts on EC chain transactions. The German VAT

landscape is now in turmoil.

THE GERMAN HANDLING OF EC CHAIN

SUPPLIES

Germany (and also its “VAT twin” Austria) seems to

have always been “the odd one out” when it comes to

the VAT treatment of EC chain transactions. With a

specific set of rules it differentiates between so called

“ruhende Lieferungen” (roughly: local deliveries) and

“bewegte Lieferungen” (roughly: transport deliveries)

with a deeming rule for the allocation of the EC supply

to one of the deliveries where a supplier in the middle

of the chain transports or sends the goods. The

ultimately decisive criterion was the instruction of the

freight forwarder. In practice however, the

deficiencies of this tool set were apparent. For

instance, the role of the INCOTERMS, of immense

importance in a real life business relationship, was

unclear leaving THINK AGAIN supply chain managers

in frustrated confusion. The rigidity of the deeming

rule mentioned above also led and leads to clashes

with other VAT jurisdictions. Further, as Germany

does not have a unified “HMRC” but is split into local

tax offices, the VAT treatment of a specific EC chain

Indirect Tax Voice | Issue 03 | August 2015 7

transaction could be seen differently by each of the

tax offices in charge for each of the participants in the

supply chain. This could result in stand-offs between

tax offices and damage to the companies stuck in it.

BACKGROUND OF THE CASE

The British-German case discussed here (XI R 30/13)

has been decided on the same day and essentially

relying on the same grounds as XI R 15/14. The latter

judgement puts to an end the case Vogtländische

Straβen-, Tief- und Rohrleitungsbau GmbH Rodewisch

v Finanzamt Plauen (VSTR) as it was then named when

the ECJ decided about it on 27.12.2012 (C-587/10).

Therefore, the cases XI R 30/13 (British-German case)

and XI R 15/14 (VSTR) give the BFH’s interpretation of

the ECJ’s guidelines on EC chain transactions. The

wording especially of XI R 15/14 (VSTR) indicates

strongly that the opinion of the BFH is to be taken as a

sort of obiter dictum and meant as benchmark for the

foreseeable future of VAT jurisprudence on EC chain

transactions.

In XI R 15/14 (VSTR) and XI R 11/09 (the first referral

back from the ECJ to the BFH of the case VSTR) the

BFH also distances itself strongly from an earlier

judgement of the same court (V R 3/10, 11.8.2011),

but decided by a different (the 5th) chamber: For the

purpose of allocating the EC supply to one of the

supplies in the chain the 11th chamber says that it is

irrelevant whether before the transport of the goods

commenced the first customer disclosed to the first

supplier that the goods are subsequently sold. It was

the opinion of the 5th chamber of the BFH that the

first customer had a choice: If he did not disclose the

subsequent sale, the delivery of the goods from the

first supplier to him (the first customer) was to be

treated as EC supply. Otherwise the EC supply

occurred between him and the second customer. The

decision of the 5th chamber had been welcomed by

many as a way out of a dilemma the first customer

often faced: He did not want to reveal his customer to

the first supplier in order to protect his business

opportunities. Also, the first customer often simply

did not know who else was involved in the supply

chain. The jurisdiction of the 5th chamber seemed to

be a pragmatic way out of the Ifs and Buts of the VAT

treatment of EC chain transactions. Well, in a mighty

act XI R 15/14 has reminded the Germans of their

virtues of thoroughness and faithfulness to Europe.

THE OUTCOME

Although the BFH could not finally decide XI R 30/13

(the British-German case) due to missing facts, it

provided the First Tier Tribunal (Finanzgericht, FG)

with a strong framework of guidelines as to how the

case had to be resolved. The Court emphasizes that

“all circumstances of the individual case” had to be

examined carefully. It states that

it is not alone decisive who transported or

sent the goods (i.e. instructed the freight

forwarder). This goes expressively against the

opinion of the tax authorities as outlined in s

3.14 (7) et sqq. VAT manual

(Umsatzsteueranwendungserlass, UStAE).

it is instead crucial to determine [similarly to

the US-American approach in sales taxes]

when the power to dispose of the goods has

Indirect Tax Voice | Issue 03 | August 2015 8

been transferred: If it has been transferred

from A to B on German soil then the EC supply

takes place between those two parties; if C

however received the power to dispose of the

goods from B before they were shipped to the

UK then B makes the EC supply to C.

The latter situation is especially problematic for the

two British companies: B might be forced to VAT

register in Germany (retrospectively) in order to get a

refund of the German VAT charged by A to him, but

could also be obliged to charge British VAT to C,

leaving C with the challenge to declare the acquisition

of the goods as well as claim the British input VAT at

the same time.

AND WHAT DOES THIS MEAN FOR YOUR

CLIENTS?

For now, the German VAT world on EC chain

transactions is split. The opinion of the German tax

authorities as outlined in s 3.14 (7) et sqq. UStAE is

currently unchanged. It is unclear, if or how they will

amend their guidelines. I think however, that

assessing an EC chain transaction merely by looking at

the party who has instructed the freight forwarder or

to rely on the disclosure/ nondisclosure of the second

supplier’s customer is not a safe bet any more. It is

highly advisable to check upfront and, if necessary,

amend the contractual details together with shipping

arrangements and INCOTERMS carefully in order to

allow a watertight determination as to when and

where the power to dispose of the goods will be

transferred.

Additionally, there is still a whole host of other

obligations under German Laws to consider: The

proofs of dispatch (a saga on its own) (Belegnachweis)

and valid documentation of the EC supply in the books

(Buchnachweis) are essential formalities in order to be

allowed zero-rating under German VAT Laws.

OUTLOOK

All these endless discussions about EC chain supplies

in the EU really begs the question why we have clung

onto this VAT model since 1993 and put up with its

deficiencies. From a VAT perspective, it might be more

advisable to companies with more complex supply

chains to simply stay out of the EU and enjoy the

relatively plain VAT mechanisms of ex- and imports. At

least that was the rather surprising outcome of a case

study I once conducted for a multinational client who

was seeking the best location for his distribution hub

for worldwide deliveries. Let’s think again!

Indirect Tax Voice | Issue 03 | August 2015 9

Members will be able to access it at

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Publishing on the web will allow us to provide

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The taxadvisermagazine website has undergone a

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YOUR NEW INDIRECT TAX VOICE

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Indirect Tax Voice | Issue 03 | August 2015 10

WHAT’S ON

Action by members – We welcome all comment by

members. We cannot always respond personally to all

emails but do try to keep members informed. To

comment on any issue in ITV please email

indirecttax@ciot.org.uk.

ENGAGEMENT WITH HMRC, THE EU AND

OTHER POLICY MAKERS

We have had a number of recent interactions with

HMRC including:

A meeting with HMRC policymakers to discuss

proposed legislation that would potentially

restrict the amount of deductible UK VAT

attributable to the management of foreign

branches. This was in addition to a submission

made to HMRC on the subject. HMRC have

recently advised that as a result of feedback

received from respondents, the proposed

legislation will not be tabled in August as

originally planned and will now be re-

examined.

On 10 June, the Chairman, Vice Chairman and

technical officers met with a number of

people from HMRC led by Ian Stewart,

Director of Indirect Tax Directorate. We

agreed a number of actions ranging from

highlighting priority areas of HMRC’s guidance

that need improvement to working closer

with HMRC in our VAT educational activities.

Members of the Indirect Taxes Sub-

Committee have been provided with notes of

the meeting.

We have also agreed to provide additional

input into HMRC’s Joint VAT Consultative

Committee (JVCC) to ensure the agenda items

better reflects taxpayer-led issues. We are

working together with our representative on

the JVCC, Tony Jackson, to strengthen HMRC’s

understanding of the needs of taxpayers.

Our Vice Chairman, Alan McLintock, attended

a meeting of HM Treasury’s VAT Forum on 22

June 2015 discussing issues such as Skandia,

the standardised VAT return, the work of the

OECD, the future of VAT and the digital

economy.

Our representatives have also attended

HMRC’s Land and Property Liaison Group, The

Finance Liaison Group and other specialist

forums.

We are arranging discussions with the European

Commission on selected VAT topics and of course

continue to be represented by Tarlochan Lall and

Peter Mason on the VAT Expert Group set up by the

European Commission. We are expecting a number of

technical documents to be released within the next

month or so including coverage of Welmory, Skandia

and proof of export issues.

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 11

BUDGET – 8 JULY 2015

We prepared a Press Release on the removal of the

exemption from Climate Change Levy for certain

renewable energy supplies. Our call on the

Government to produce a ‘roadmap’ setting out its

plans for the future of environmental taxes was

mentioned in the Finance Bill debates on two

occasions. See below for further details of future work

in this area.

We will be making a submission to HMRC on Climate

Change Levy and the proposals to extend the “use and

enjoyment” provisions in VATA 1994. The latter is an

attempt to prevent perceived avoidance of VAT on

repairs undertaken under UK insurance contract. The

use and enjoyment provisions will be further

extended at a later date. Please send any comments

you may have to indirecttax@ciot.org.uk.

DEFAULT SURCHARGE – UPDATE

We have recently reported on on-going work with

HMRC regarding the default surcharge where we

commented on draft letters that HMRC intended to

use to warn taxpayers of impending action. Having

been brought into use in June, we have been

informed by HMRC that the new communications are

having a positive impact. We are continuing to liaise

with the Indirect Tax Process team to encourage

further improvement.

PROMPT PAYMENT DISCOUNTS

We surveyed members for comments on how the

changes to the default surcharge regime was affecting

them. We received 62 responses. We will be

reviewing the comments and will write to HMRC if

appropriate.

THE CIOT’S DISPUTE RESOLUTION AND

LITIGATION GROUP

Members have again expressed concern that

important opinions of the Advocate General are not

released in a timely manner in English (Skandia, Sveda

and Saudaçor being three recent examples of

important cases and there have been more cases

since). We are considering writing to the Court again

to suggest that they might consider prioritising cases

that are translated to reflect those most important to

the different countries but are undertaking further

research before doing so. A draft response has been

prepared for consideration.

Last month we mentioned a survey of members on

taking appeals to the First-tier Tribunal. The results

are currently being analysed in preparation for the

next meeting of the DRLG on 1 October. The results of

the survey questions that concern the charging of fees

in the FTT and UTT will be used to inform the

response to the current Ministry of Justice

consultation on Tribunal fees.

PROPERTY ISSUES

Draft Revenue & Customs Briefs

HMRC asked members of the JVCC for comments on

four draft revenue and customs briefs concerning

buildings that form dwellings, permitted

development, facades and annexes. See below for

details.

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 12

Option to Tax delays

We continue to receive reports from members of

excessive delays in the time it takes for the Option to

Tax National Unit to respond to options that have

been notified. With examples of it taking upwards of

40 working days and HMRC acknowledging a peak of

30-60 days, we are writing to HMRC to impress upon

them the impact this is having on, often, time critical

transactions.

Further details of this can be found in our article in

Tax Adviser. To assist with our submission, please

provide brief details of any delays experienced to

indirecttax@ciot.org.uk.

EXCISE DUTY

Alcohol Wholesaler Registration Scheme – action

required

The Alcohol Wholesaler Registration Scheme (AWRS)

is being introduced on 1 October 2015 by HMRC,

aimed at tackling alcohol fraud. This significant

legislative change will require most business-to-

business vendors of duty-paid alcohol to be approved

by HMRC as wholesalers of alcohol. Trading

“wholesale” in this context means trading in any

quantity of alcohol.

The new scheme will affect many businesses who

would not be classified as “traditional” wholesalers or

even consider their business to be “wholesale”. In

addition, retailers will have to check that their

suppliers are approved by HMRC. HMRC will start to

register existing wholesalers in a window from 1

October – 31 December 2015. We understand failure

to comply will lead to severe sanctions as HMRC gets

tougher in the fight against alcohol duty fraud. Alan

Powell explains this in further detail in September’s

edition of Tax Adviser.

Vapour Recovery Scheme: HMRC consultation

Affecting businesses in the petrol supply chain,

including oil producers and petrol retailers, the

Vapour Recovery Scheme is an extra-statutory

concession that enables producers to claim a credit of

duty already paid on petrol vapour that has escaped

when petrol is loaded and unloaded in the supply

chain. HMRC now acknowledge that this ESC is ultra-

vires and are consulting on two options to replace it.

The consultation can be accessed via this LINK.

In addition to excise duty, there are commercial

implications, tax neutrality and unjust enrichment

issues. We are currently preparing a submission on

this issue.

Warehouse approval delays

Following our recent submission (see below), we have

been invited to meet with HMRC to explore this

further and discuss action that HMRC have taken

recently to strike a balance between facilitating trade

and exercising effective control over these regimes.

ENVIRONMENTAL TAXES

The surprise announcement in the Summer Budget

that the Climate Change Levy (CCL) exemption for

renewable energy is to be removed poses questions

about the future of environmental taxation. We have

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 13

called on the Government to produce a ‘roadmap’

setting out its plans for the future of environmental

taxes, to help the renewable energy industry and

business in general take long-term investment

decisions.

CCL was introduced as an ‘environmental tax’ –

intended to change polluting behaviours and to assist

in meeting the UK’s obligations for reduced carbon

emissions. The exemption encouraged use of

renewable sources of energy over traditional carbon

fuels. The removal of the exemption effectively turns

CCL’s status from an environmental tax into a revenue

raising tax on energy – almost £4 billion over the life

of this Parliament. Affecting generators of renewable

source electricity, energy market participants and

suppliers of such electricity to business and public

sector consumers, the complexities arising for both

suppliers and business customers may be more than

suggested in the Budget announcement and

additional energy costs to businesses will either have

to be absorbed or, more likely, passed on through

higher prices.

There will be a transitional period from 1 August 2015,

during which electricity suppliers may be able to

continue to exempt renewable source energy

generated before that date. The length of the

transitional period will be discussed with interested

parties.

The announcement that the Government intends to

consult in the Autumn over business energy taxation

is welcomed by the CIOT, particularly where the focus

is on simplification and certainty. The CIOT’s

Environmental Taxes Working Group, led by John

Brewis, will continue to monitor developments in this

area and it is currently preparing a submission on the

impact of the CCL changes to the Public Bill

Committee Sittings stage of the Finance Bill. If you

would like to be involved in the Environmental Taxes

Working Group please email indirecttax@ciot.org.uk.

Footnote: We were pleased to note that our Press

Release (see under Budget – 8 July 2015), which called

for the publication of an environmental taxes

roadmap clearly struck a chord with some MPs – it

was referred to at least twice in the Parliamentary

debates on the Finance Bill.

THE OFFICE OF TAX SIMPLIFICATION

The OTS has issued a paper on areas for

simplification. We will be writing to them to suggest

further areas that merit examination including partial

exemption, the treatment of charities and issues

arising because of delays in the option to tax unit.

PRE-REGISTRATION INPUT TAX

HMRC used to allow a deduction in full for VAT

incurred on goods acquired before registration but ‘on

hand’ at the date of registration. However, members

have made us aware of a recent shift in HMRC policy

that appears to have been made without any public

announcement and without amending or publishing

new, clear guidance. It is taking some taxpayers and

their advisers by surprise that HMRC now require an

apportionment to be made to reflect use of the goods

prior to registration.

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 14

We see there are two issues to be addressed:

1. Communication & Guidance

Whilst there may be valid technical reasons to

apportion pre-registration input tax on goods on

hand at the date of registration, it has not been

the practice to do so until recently. There has

been no public announcement of a policy change

and it is only HMRC Internal manuals (VIT32000)

that refer to a use based apportionment. VAT

Notice 700 does not make this clear and has not

been updated to reflect the change. Taxpayers

looking at the guidance on the Gov.uk website are

given a simpler picture and can understandably

conclude that all pre-registration VAT is

recoverable subject to the 4 year cap for goods

and 6 month cap for services. This disparity in

practice and guidance is both confusing and

misleading for business.

Given the change in policy, the concept of

legitimate expectation could warrant the

introduction of a transitional period allowing

persons who planned the set-up of a business on

the assumption that the VAT would be deductible

under what was previous practice to have the

benefit of it.

2. The technical position and the interaction of

UK and EU Law The technical nuances of this

issue are complex. Whilst there may be valid

arguments that the correct position is to have

a use based apportionment, it raises the

question of whether this is authorised by the

current UK VAT legislation when read in

conjunction with Indirect Tax Voice | Issue 03

| August 2015 15 the relevant EU law?

The theoretical position under EU law is that a

person is a taxable person if they commence an

economic activity (as opposed to the UK

legislation "business"). However, the relief for

small businesses allows Member States to exempt

the turnover of a business where it does not

exceed a particular threshold. The actual wording

of Article 282, PVD is “The exemptions … provided

for in this section shall apply to the supply of

goods and services by small enterprises.”

(emphasis added). This means that the business is

a ‘taxable person’ but if its turnover is under the

registration threshold, its supplies are exempt. Art

289 states that if you are exempted from

registration by virtue of the special provisions for

small businesses you are seen by EU law as a

taxable person exempt from VAT who “shall not

be entitled to deduct VAT…”

However, UK law has not properly implemented

the PVD correctly as it treats a person who is not

registered (or required to be registered) by virtue

of VATA 1994 as not being a taxable person. The

deduction of VAT incurred prior to registration is

governed by reg 111, VAT Regulations 1995/2518.

This allows a person who has registered as a

taxable person under VATA 1994 to treat VAT

incurred on goods and services supplied prior to

registration as input tax. Under UK legislation it is

not in fact “input tax” but is treated as such at the

discretion of the Commissioners.

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 15

For services, the VAT can only be recovered if it

was incurred not more than six months prior to

registration. In respect of goods, the goods must

be on hand at the date of registration ie they must

not have been supplied or consumed.

Thus, if VAT is incurred before registration and is

wholly used for the purposes of taxable activity

occurring after registration, the whole of the VAT

is deductible. However, if VAT is incurred on

supplies before registration and is used wholly or

partly for what are supplies that are exempted

from VAT, then to that extent the VAT should not

be deductible because under UK law it is not input

tax as defined but VAT that is treated as input tax.

(Note: there was a tribunal case that said that the

de-minimis limits do not apply to preregistration

VAT)

HMRC now appear to have withdrawn from their

previous practice of allowing full deduction (which

they were allowed to apply) and are now

interpreting the UK law (regulation 111) in

accordance with EU law. Note that regulation

111(2)(a)(ii) prohibits a deduction for goods that

have been consumed unless HMRC otherwise

agree so it is arguable that they may well be

applying the correct policy (from an EU law

perspective).

In summary, the UK legislation appears to permit an

apportionment, but as HMRC’s previous policy was to

allow full deduction, there does appear to be an issue

with legitimate expectation. The change in policy

should arguably have been applied only after

reasonable notice was given to taxpayers. We shall be

writing to HMRC calling for a policy announcement to

be made along with updated, consistent guidance and

for a transitional period before the policy change is

implemented to allow businesses to adjust. We have

recently brought these issues to HMRC’s attention at

the Joint VAT Consultative Committee along with the

ATT. We welcome your comments on this issue.

Additional technical issues to note – pre registration

input tax:

The UK has not implemented the PVD

correctly in relation to the adjustment

mechanisms in articles 184 to 192 of the PVD.

These articles provide for the adjustment of

the deduction of VAT. There are two

circumstances: change in use of capital items

and change in use of other goods or services.

In the UK, the adjustments are provided for in

the capital items scheme and regulations 108

and 109 but, as noted, there are then

separate provisions in regulation 111 which

need to be read in the context of articles 184

et seq. In essence, they constitute partial

implementation of the change of use

provisions.

Regulation 111 potentially allows adjustments

that would not apply to a business that had

changes of use covered by regulations 108 or

109 or the capital items scheme; eg an asset

(that is below the capital items threshold)

used initially for exempt use but later used for

taxable use. Regulation 109 does not apply

because the initial use was for exempt

WHAT’S ON

Indirect Tax Voice | Issue 03 | August 2015 16

supplies and the fact that they are

subsequently used for taxable supplies does

not change that because regulation 109 only

applies if the change occurs between initial

attribution and first use of the supplies. There

is thus a distortion that should be examined if

HMRC now wish to apply the rules under EU

law correctly.

Separately, persons who are taxable persons

have an obligation under EU law to notify the

relevant tax authority (HMRC) that they have

become a taxable person (article 213 of the

PVD) but it should be noted that a taxable

person who is not entitled to a VAT deduction

does not have to be identified (article

214(1)(a) of the PVD). Therefore, a UK

business that is not VAT registered (entitled to

small business relief) is technically making

supplies that are exempt from VAT with no

entitlement to deduct VAT. Consequently the

business does not have to register for VAT but

contrary to what is said in UK law, he or she

nevertheless remains a taxable person.

This issue raises once again the problem of

how to deal with VAT on capital goods. The

effect of regulation 111 is to allow the use of

the capital items legislation for goods that are

not capital goods under the normal definition.

We have previously argued that the Capital

Items Scheme should allow small businesses a

choice as to whether or not to apply the

scheme in certain circumstances. We referred

to Chard Bowling Club to illustrate the issue

that can arise.

Indirect Tax Voice | Issue 03 | August 2015 17

WHAT WE HAVE DONE

We have made a number of submissions during the last few months and are working to finalise others.

They include:

PUBLIC CONSULTATIONS

SLfT Guidance for contaminated soil The Environmental Taxes Working Group assisted the Scottish Technical Committee to respond to the Scottish Government consultation on the Scottish Landfill Tax guidance on contaminated soil on 17 July 2015.

Welsh Landfill Disposals Tax This submission, in response to a Welsh Government consultation, was mentioned in issue 2/15 and was made on 19 May 2015.

NON-PUBLIC SUBMISSIONS – ONLY AVAILABLE TO MEMBERS OF SUB-COMMITTEES

Excise duty: warehouse approvals We have written to HMRC concerning certain problems relating to warehouse approvals.

Zero-Rating: Live work units We wrote to HMRC concerning the availability of zero-rating for live-work units on 22 May 2015 and received a prompt but disappointing response on 29 May 2015. We want to do a further follow up and to assist us in doing so we would appreciate it if members could provide some evidence on the impact of HMRC’s policy. Please provide details to indirecttax@ciot.org.uk.

Property issues – draft Revenue & Customs

Brief

On 3rd August we wrote to HMRC providing comments on draft RCBs covering buildings that form dwellings, permitted development, facades and annexes

HMRC Powers: Penalties, Compliance Checks

and Reviews

The CIOT & ATT recently published the results of their

member survey into HMRC Powers: Penalties,

Compliance Checks and Reviews. The survey ran

during February 2015 and asked questions about the

operation of HMRC’s powers in practice. The survey

revealed that the current system is not operating as

well as the CIOT & ATT had hoped it would be,

particularly with regard to how HMRC apply

behavioural penalties. Responses indicated that there

is an inconsistency of practice within HMRC in this

area, with many comments suggesting that there is

Indirect Tax Voice | Issue 03 | August 2015 18

too great a readiness by HMRC to assume failure to

take reasonable care rather than innocent error for

which there would be no penalty. The survey also

reveals concerns about how suspended penalties are

offered and suggests that HMRC practice can be

inconsistent in this area as well.

Many responses reflected concerns about the

proportionality and fairness of late filing and late

payment penalties, which supports the need for

HMRC’s current review of penalties. Responses also

indicated a high degree of scepticism of the

usefulness of the HMRC’s internal statutoryreview

process, whereas experiences of HMRC’s Alternative

Dispute Resolution service were generally very

positive.

A copy of the report, together with the full survey

results (which form an appendix to the report) can be

found here.

* Restricted access to submissions

Some of the work we do is confidential as HMRC may

want input from professional and other

representative bodies but do not want the material

published widely. We also prepare proactive

submissions and these are usually not published on

the public part of our website because it is only fair to

allow HMRC to respond to issues before doing so.

Confidential submissions are published on a part of

the CIOT website entitled “Non Public” which is

password protected. Please note that these

documents are confidential and should not be shared

with others unless authorised.

You need a user id and password to access this section

(different to the Members’ website) which you can

get by emailing helpdesk@ciot.org.uk

Indirect Tax Voice | Issue 03 | August 2015 19

Iect Taxes Annual Conferenc

Indirect Taxes Annual Conference The annual Indirect Taxes Conference will take place at the Hilton Hotel, London on 6 October 2015. Find further

details on the CIOT website. There is an exceptionally good line up of both speakers and topics.

There will be two concurrent morning conferences covering VAT and Customs duty with speakers prominent in their

fields speaking at each.

The VAT session will be dedicated to exploring practical concerns following Skandia, discussing Charity sector hot

topics and Barbara Farndell, HMRC policy will give an overview of recent VAT and IPT developments.

The Customs session will look at The Union Customs Code and the impact of first sale, royalties, AEO and e-filing.

All the delegates will come together for the afternoon session of speakers from the OECD, HM Treasury and HMRC

who have been selected for their expert knowledge on current issues . A case-law update led by Roger Thomas QC

will round off the day.

There is a discount for reservations made before 31 August 2015.

Meeting with the European Commission The European Commission has agreed to meet with us, probably in September, to discuss both the technical merits

and practical considerations of key issues.

Meeting with HM Treasury Ahead of our meeting with the Commission, we will meet with HMT in September to appraise the Treasury of the

items we plan to raise.

Indirect Taxes Sub-committee The Indirect Taxes Sub-Committee last met on 16 July 2015. The next meeting of the Sub-Committee will be on

Friday 18th September 2015

EVENTS

Indirect Tax Voice | Issue 03 | August 2015 20

ARTICLES IN TAX ADVISER

JUNE - AUGUST

The Future of VAT Maric Glaser highlights some of the

main points from the recent annual

CIOT European VAT conference.

An incoherent Outcome Michael Hunter reviews the SDLT case

Project Blue.

Caught Ashby, bowled Gordon Peter Ashby reflects on the efforts

required to overturn an unreasonable

penalty.

Risk and Reward Are we always clear on the difference

between good and services? Neil

Warren explores.

Goods or services Are we always clear on the difference

between good and services? Neil

Warren explores.

Adapting to new realities: Iona Brooks covers the key rules

regarding the business to business sale

of goods in the EU and common issue

that businesses may face

Indirect Tax Voice | Issue 03 | August 2015 21

JUNE - AUGUST

Deal or no deal Maric Glaser highlights some of the

main points from the recent annual

CIOT European VAT conference.

Proposed Welsh landfill disposals tax CIOT responds to the Welsh

Government consultation

Where can live-work units be zero rated? CIOT calls for members experience of

this issue.

Where EU policies collide Anne Fairpo reviews the recent ECJ

cases on the VAT treatment of

electronic books.

Special vs General Eile Gibson reviews a case which looked

at whether consideration is regarded as

inclusive or exclusive of VAT.

Uniformed VAT Neil Warren considers the VAT position

on staff benefits.

Indirect Tax Voice | Issue 03 | August 2015 22

CONTACT US

To contact the Indirect Taxes technical officers, Maric Glaser and Angela Fearnside, please

email: Indirecttax@ciot.org.uk.

Option to tax Have you experienced delays?

Suggestions? If anyone has suggestions for further

articles, please let us know:

indirecttax@ciot.org.uk